I get a lot of questions on how to double the investments. Obviously, people are looking for quick tips and fixes (instead of using the power of delayed gratification). One of my earlier responses was that doubling your money is simple: Just fold it into two and keep it in you pocket. The questioner often looks at me very angrily for that answer J
Here’s the question: If I have Rs 1 lakh, where should I invest to make it double soon? Please bear with my long winded answer.
Just like there are multiple ways of taking a journey from point A to point B, there are a lot of ways to take the journey of Rs 1 lakh to Rs 2 lakh. In going from A to B, you have a choice of walking, 2 wheeler, four wheeler, bus, train and flight. Similarly you have different vehicles for your investments too.
Another issue is that the question has not really defined the “how soon” part.
The other issue is how comfortable are you with driving those vehicles or hiring a driver for yourself that comes at a cost. To train yourself to be a good driver, you must know the basic principles of money, asset allocation and financial planning.
Some of the popular vehicles available for investments are Real Estate, Mutual Funds (MFs), Bonds, Stocks, Unit Linked Insurance Policies (ULIP) and (not at all popular option) Exchange Traded Funds (ETF).
And let’s try to rate them on four parameters of investing. i.e. 1) Growth, 2) Liquidity, 3) Security and 4) Expenses
Growth: Stocks, MFs and ETFs top the rankings here. Over a period of over 15-20 years, the Compounded Annual Growth Rate (CAGR) is above 15% in comparison to 8% in Bonds. ULIPs begin to give a good growth only after 5 years or so because initially they are very expensive. Real estate is not really on a good run these days.
Liquidity: Again, Stocks, MFs and ETFs score heavily while Bonds and ULIPs have a lock-in period or have substantial surrender charges. Real estate scores low here (You have to be lucky to get good buyers at the right time).
Security: Most financial products that we are discussing are secure over a long-term of over 5 years. But you may get into a bad stock or real estate which is unsecured. Otherwise also, stocks and real estate are very volatile and can affect your blood pressure too!
Expenses: ETF is the least expensive with charges of around 0.5% compared to 2% from MFs and much more in ULIPs (especially in the initial years). Stocks too, are the least expensive, provided you get into the right stocks at the right time.
One man’s meat could be another man’s poison. Moreover, the diversification rule says that one should not keep all our eggs/ apples (for the vegetarians) in one basket.
So let us take a briefly look at the various options, one at a time.
Shares: Investing in the equity market directly is exciting and sexy. You are in the thick of things and learn a lot in the process. Though the volatility and the information overload makes it a daunting task, investing in stocks is not rocket science. One should start with identifying a list of 10-15 companies out of 3-5 sectors which you know about and interests you. You can then keep a tab on their management team, financials, and future outlook and over a period of time, and will be able to take a call on them.
Real Estate: I feel that one has to be plain lucky to get into a good deal and be able to get the right buyer at the right price and time. I can’t think of any other factor other than luck. So if you feel you are blessed and have the right tip, go for it. Also, a lot of black money has been invested in real estate, which really scares the good guys.
Mutual Funds: One should allocate their time to investment decisions in proportion to their income generation goals. Also, convenience and hassle free investing should be a major factor. Mutual Funds fit the bill where Fund Managers are into it full time. If you can identify fund managers who have consistently performed over last 3-5 years, nothing like it. The fund manager also has the muscle power of crores of Rupees and is able to take entry and exit decisions impartially. MFs continuously churn their portfolio. When MFs buy and sell stocks, they don’t have to pay capital gains as you would do when you churn. With Systematic Investment plans (SIP), you can start investing with as low as Rs 500 per month. But MFs have its own loading and administrative charges and the fund managers make merry on your hard earned money.
Exchange Traded Funds: More than 70% of the mutual fund schemes underperform the markets returns. Also, diversified equity funds usually have larger expense ratios compared to index funds. For example, the expense ratio of IDFC Nifty Fund, an index fund, is only 0.25%, while it is anywhere between 2-2.50% for diversified equity schemes. This means that while you pay extra for active fund management, more often than not, it does not give you a better return.
ULIPs: Unit linked insurance policies combine two products, i.e. Insurance and Mutual Funds. In the initial few years, ULIPs are very expensive. But only in case you don’t want any hassles of investing, and you have a tried and tested Insurance agent who is almost part of your family, then ULIPs are for you.
Bonds: Bonds are for those of you who are risk averse and want fixed returns