Welcome to another new post, folks. In this post we will have a look at Asset Diversification.
A couple of months ago, I had a lengthy conversation with my economics professor regarding the golden rule to diversify assets, in order to get maximum profit. At the end of the conversation he said “I work from 7:30 am in the morning to 8:00 pm in the night and I would prefer to have my funds in a safe place, rather than blowing it all by investing in one single place.”
After coming home, I worked out a lot of permutations and combinations and the following were some of the results that I found out to lower risk and maximise profit.
Real Estate, Equity and Fixed Deposit all have their own pros and cons.
Short Term Fixed Deposit : Your money will be safe to a great extent in this form of investment and you also get returns. But the question is, ‘Can you beat inflation ?’. Most of the posts I’ve read never had much affinity towards this form of investment but I feel this is still a cool mode because if you invest only the returns you receive from FD into equity and if your equity portfolio moves in the right direction, you can make profit and your principle is still safe since you invested only returns.
However, before investing you should ask the bank officials regarding the insurance amount that you get for your investment (just in case the bank goes bankrupt). I made the aforementioned statement because the newspaper is often filled with news related to non performing assets, bad loans, loan defaulters etc.
Real Estate : It needs huge capital and it too has pros and cons. I have a post coming up related to real estate in couple of days. In this post I’ll talk only about investment. Real estate moves in two directions. One is the monthly returns one receives if she/he owns a commercial property and the second is rise in land value.
Some negative aspects are depreciation of construction value in the long run, tenant vacancy etc. (more coming up in another post).
With respect to returns, the returns one receives depends on the location and the type of property. Returns from commercial property could be used to buy new property (EMI) or invest in equity. However, I feel equity is better and the reason is one can go for a monthly systematic investment plan by allocating a small proportion of the monthly return to SIP.
When a person buys real estate she/he has to buy the entire property. There is no option to buy just one square feet or ten square feet. However, in equity one can buy just one stock or ten stocks. There is also option to buy small chunks of multiple companies in the form of Index Funds and ETFs.
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Stocks : They are volatile. But, if they were not so and remained stagnant then people would neither have made profit nor loss. Volatility is the beauty of stocks. If one learns how to play them then returns would be pretty cool. Some things you need to know before heading are,
You should only take such risk that you can handle. For example, if I save 100 bucks a day. I can invest INR 3000 every month. Looking at the other side even if I lose the entire INR 3000, it wouldn’t make my life miserable because I’ve got more money (“lol, not too much”). On the bright side if the companies that I invest today happens to be the next Amazon or the next Apple, few years down the line, then the returns would be pretty high.
Never borrow money for the sake of investment, because you never know what happens. I say this because, many people may talk about fundamental investing and then they might place a bet based on exit poll results, if the volume sold and bought is high due to such bets then it will change the technical indicators and this causes market fluctuation. But the truth is nothing would have changed in the intrinsic value.
Imagine it is recession and I had stock in FMCG stocks like tooth paste, chocochip cookies and nachos. Even during the recession people used tooth paste to brush their teeth. My favourite brand of choco chip cookies has survived a decade and half and has gone through the economic cycle that included recession. But if I had borrowed the money from someone and if the stock tumbled due to pop up notification from business news app, then it would scare the beep out of me, since I had to return back the money to the lender. Sometimes there can be more number of factors than just the balance sheet, that determines market movement.
The experience is similar to flunking in first semester of the exam but as one moves towards the last semester one would have caught hold of the pulse of examination and would ace it without any difficulty.
The most important thing that matters is the magnitude. If a person fails in just one subject he might still be able to get back on track but if the number of subjects is half a dozen, then it could be game over or the person should have some extra ordinary talent to make it back.
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Final Verdict : If you don’t own real estate you could save money in FD and then invest small amount of the return in quality stocks to get a better overall return. If you own real estate even then the procedure remains as already mentioned. If you prefer arithmetic returns there is no necessity to go into stocks. If you want the returns to move in partial exponential manner, you should show some love even towards stocks. At the end of the day all that matters is a peaceful sleep, so do not dump all funds in one place or one segment. Diversification is a function of magnitude. It can minimize losses if loss magnitude is less, it can maximise profit if profit magnitude is high. When both profit and loss is taken into account the one which has the bigger magnitude decides the sign (positive or negative) of the overall asset worth. Capital gain and taxes weren’t taken too seriously while arriving at the deduction. The recent tax benefits mentioned by the G.O.I. do help lot of middle class people, because you need not worry unless you make six digit profits.
Well folks, it’s a wrap for this post. See you next time, have a great day 🙂
Disclaimer : In the due course of time this information may change or become irrelevant. Candidcanblog.com doesn’t hold any responsibility to any loss or gain caused to the readers of this post.
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