Shares Or Fixed Deposits, Where To Put Money?
July 7, 2010 by Guest Author
Filed under Debt
Every retail investor wants to put his hard earned money to work to maximum potential. Investing in debt instruments, like fixed deposits or NSCs is what everyone knows about. But the problem is, no debt instruments can give you rock star returns. Inflation, aka “Rising costs” eat up most of the interest benefits that you get from these investments. Typically, interest rates on FDs, NSCs and other schemes are 6 to 8% and same is the rate of inflation.
Equity i.e. stocks i.e. shares is the only way that can give you much more returns than debt instruments over the long term. Obviously, there is a risk factor involved, and decision making becomes so much more important. Let us look at some examples -
1. Sensex has given around 16% per anum returns in last 10 years. So if you had invested 100,000 Rs. in Sensex companies when Sensex was 4000 (around 1998-2002) and sold now when it is around 18000 (2009-2010), you would have received a healthy sum of Rs. 4.5 Lakhs. The same amount, if invested in a 7% FD, would have given you only Rs. 1.90 Lakhs.
Of course, this is only “capital gain”. It doesn’t include the bonus that you get from “dividends”. Some companies offer a great “dividend yield”, sometimes as high as 3%. Most good quality stocks can give you dividends in the range of 0.2% to 0.5% on your stock price.
Of course, what matters is “Choice”. If you could pick an Infosys or a Bharti Airtel 10-15 years ago, you would be filthy rich even by investing smaller amounts in these scrips.
But, if you buy overvalued stocks at the peek of the bull cycle, you are bound to doom! e.g. Suzlon, which is quite a good company, was trading at around Rs. 400 levels (after adjusting for splits) and now (2010) languishes around Rs. 60 level.
For those, who don’t want to be hands on, mutual funds is a great investment option. You give away some “Exit load” (typically around 1% of your investment) as their fees, but you don’t need to monitor your investment every month. There is also an option to put monthly installments called SIP (Systematic Investment Plans) in MF units. The top performing mutual funds can outperform the benchmark indices (like Sensex or Nifty).
So the fact of the matter is that there are varying degrees of risk involved, as far as equity is involved. When you choose the right stock, you can get enormous returns, but only 5-10% of the listed companies are long term winners. So, it’s very important that you rely on a very sound stock advisor, who can show his performance track record as a proof, rather than marketing gimmicks that are very prevalent in India. That’s where tools like Moneyvidya come to picture where you can get Indian stock tips by analysts who have transparent track record of their performance.
If you prefer doing your own research, and are investing for long term, try to go through annual reports of the company, rather than relying on brokerage reports. If you want to make your own decision, I would say, only invest in the sectors that you understand. E.g. it is very difficult for a commoner to understand pharma companies. Their businesses typically rely critically on law suits and patents, which is a high risk proposition. So invest in them only if you understand the industry as a whole.
If you are looking to invest in mutual funds, research their historical returns. Also try to have different kinds of funds in your portfolio. Just like stocks, mutual funds that hold these stocks carry similar risks and rewards.
Sumedh is part of Moneyvidya, where you can find Indian stock tips by proven experts with a transparent track record. Moneyvidya has been integrated to both BSE and NSE, so you can find NSE tips as well as BSE tips here.
