Here I am going to List down Different Classes of Investments & Their Returns. You should definitely get few action items on these.
First I put down the Core Motivation behind your Investment as:
- Wealth Creation
- Income Generation
In the Wealth Creation, the Investment has Appreciate above Inflation. Taking India Average Inflation as 4.5% the Real Wealth Creation happens only above this.
This is another Fundamental Purpose of Investment but Less Investors look over here. The goal of Income Creation is to generate Passive Income or Cash Flow to take care of the expenses. In this way the Investor can lead a Financially Free life.
Classes of Investments
Fixed Deposits provides Easy Investment with Usual Returns of 8% (Inflation + 3%).
Economic Activity: Under the hood Fixed Deposits of Customers will be used by the Bank for Giving Loans.
Advantages: Safety, Online Opening Flexibility, Easy Liquidation
Disadvantages: Low Returns of 3-5%
Corporate Deposits gives Higher Returns than Fixed Deposits. They can provide up to 12% (Inflation + 7%) per annum.
The trouble here is Research needed to Find Credible Companies.
Advantages: Safety, Higher Returns
Disadvantages: Lock-in Period, Research Overheads
Real Estate Investment includes Buying a Plot, House or Apartment. Here Wealth & Income creation is possible.
Real Estate can give Returns like Inflation (4) + Interest Rate (8%) + Utility Value constituting around 15%+ in a growth economy. During Economic downturns the returns can go south too.
The trouble with Real Estate is that Long Documentation & Research Work is required to Identify a Good Investment.
Advantages: Low Fluctuations,Safety in Long Run, Higher Returns if Themed
Disadvantages: Research Overheads, Liquidation Delays
Gold is a Preferred Investment option by Old Investors since it has been used for Backing Currencies, Mining Limitations, Utility Value etc.
The Returns is not clearly defined and it fluctuates during Economic up/down times. If you take the 30-Year Returns on Gold from 1990 to 2020 the Returns is 400% which is Just Around Inflation Returns (4%) per annum. Link
However, Gold Prices move up during Economic down turns where a Holding of 1-2 years can give 50% returns. Preferred: Gold ETFs as No Storage overheads.
Advantages: Safety, Hedge Advantage during Recessions
Disadvantages: No Clear Returns, Storage Overheads, No Economic Activity
Stocks have an Attraction from Surplus Income Class & Youth. Stock provides opportunity to buy a company during an early stage, hold for wealth creation, generate income from dividends etc.
Stock Provides higher Returns of 20-30% after Inflation. This is because Stocks have an Underlying Company which is Performing Growth. At the same time, It requires Heavy Research & Monitoring to ensure the company is not loosing the Growth track.
The complexities are high research, monitoring is required.
Advantages: Massive Wealth Creation, Easy Liquidation
Disadvantages: High Fluctuations, High Risk, Heavy Research & Monitoring
Hybrid Investing is the Most Preferred way of Investing & Usually it is called Diversification.
We recommend the following level of Diversification:
- Fixed Deposits + Gold ETF equal to the Amount of your 12 Month Expense to Cover Risk of Economic Downturns, Job Loss etc.
- Stocks + Mutual Fund up to 50% of your Investments
- Real Estate + REIT up to 50% of your Investments including your Home.
Following would be the Financial Protection Circle:
Advantages of Financial Protection Circle
At Futurecaps we encourage our Clients to have a Financial Protection Circle like above.
The advantages of having 1 Year Liquid Fund (FD, Gold etc.) are:
- It will Save you during a Job Loss
- It will Ensure your Long Term Investments are not Interrupted
In this post you have encountered the various Asset Classes, Advantages & Disadvantages of them & How to Strategize the Financial Protection Circle.
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Futurecaps is a SEBI Registered Research Analyst providing Multibagger service to Indian Stock Market.