Often a person’s investment is driven by his risk appetite. Conservative persons cannot stand to lose money and so prefer safe investments like bank deposits. Risk loving persons, on the other hand, avoid safe investments because they like the feeling of risking money to make stupendous returns.
Actually, it is probably a bad idea to choose an investment based on how much risk you like. It is far more intelligent to consider what you want to achieve through the investment. I am sure you would agree that it is intelligent to use a hammer to drive a nail and to use scissors to cut paper. In the world of investments, however, there are many persons who would use a hammer to cut paper because they ‘like’ a hammer.
The safest, simplest instrument is a Bank Fixed Deposit. You put money for a fixed duration of time and get a fixed amount of money at the end of that period. It is useful for short term requirements such as putting aside money for kids’ school fees or even buying that expensive iPhone for Diwali. These deposits provide anywhere from 5% to 9% return depending on interest rates and duration of investment.
The Short Term Debt Mutual Fund offers 5% to 9% returns and is a little riskier than the Bank Fixed Deposit. It is the preferred choice of sophisticated investors such as companies and rich individuals because it is ‘liquid’, which means you can invest and withdraw money from a Short Term Debt Mutual Fund easily at any time, and because these Funds attract lower tax rates if held for three years or more.
So the Fixed Deposit and Short Term Debt Mutual Fund is useful to keep money parked for a year. They are products investors 'like.' Both the Bank Fixed Deposit and the Short Term Debt Mutual Fund are harmful, however, if you want to save for retirement, or for your Children’s college education, or their marriage.
When dealing with investments that have to last for twenty or thirty or forty years, you need to look at Equity Mutual Funds. These are risky but offer great long term returns and they are essential if you want to build wealth for the long term. The Bank Fixed Deposit or Short Term Debt fund are worse than useless for these durations.
A person investing his January Bonus in Equity Mutual Funds so as to buy a Car at Diwali in October is like a person using a hammer to cut paper. Similarly, a person saving in a Bank Fixed Deposit for his retirement is like a person using scissors to drive a nail. Yet, investors often invest only in Bank Fixed Deposits for ALL purposes because they believe that these instruments are safe. Some others put all their savings into share trading in the vain hope that it would mushroom into a massive sum that would make them rich overnight.
A good investor studies all instruments and astutely uses the one that best suits his purpose. The correct application of an investment to a purpose is financial wisdom.
The safest, simplest instrument is a Bank Fixed Deposit. You put money for a fixed duration of time and get a fixed amount of money at the end of that period. It is useful for short term requirements such as putting aside money for kids’ school fees or even buying that expensive iPhone for Diwali. These deposits provide anywhere from 5% to 9% return depending on interest rates and duration of investment.
The Short Term Debt Mutual Fund offers 5% to 9% returns and is a little riskier than the Bank Fixed Deposit. It is the preferred choice of sophisticated investors such as companies and rich individuals because it is ‘liquid’, which means you can invest and withdraw money from a Short Term Debt Mutual Fund easily at any time, and because these Funds attract lower tax rates if held for three years or more.
So the Fixed Deposit and Short Term Debt Mutual Fund is useful to keep money parked for a year. They are products investors 'like.' Both the Bank Fixed Deposit and the Short Term Debt Mutual Fund are harmful, however, if you want to save for retirement, or for your Children’s college education, or their marriage.
When dealing with investments that have to last for twenty or thirty or forty years, you need to look at Equity Mutual Funds. These are risky but offer great long term returns and they are essential if you want to build wealth for the long term. The Bank Fixed Deposit or Short Term Debt fund are worse than useless for these durations.
A person investing his January Bonus in Equity Mutual Funds so as to buy a Car at Diwali in October is like a person using a hammer to cut paper. Similarly, a person saving in a Bank Fixed Deposit for his retirement is like a person using scissors to drive a nail. Yet, investors often invest only in Bank Fixed Deposits for ALL purposes because they believe that these instruments are safe. Some others put all their savings into share trading in the vain hope that it would mushroom into a massive sum that would make them rich overnight.
A good investor studies all instruments and astutely uses the one that best suits his purpose. The correct application of an investment to a purpose is financial wisdom.
