The best investment lesson is to be cautious and avoid making mistakes and losing capital. However, too many investors are lured by the image of big financial brands or glib talk of sales staff hawking their products. In order to get to there, Debashis Basu, editor and publisher of Moneylife magazine started by explaining various asset classes and the risks that they carry. These included stocks, mutual funds, gold and realty. He explained the difference between investment products and speculative investments and then took the audience through a clear understanding of the impact of inflation on their savings and how it erodes the value of their nest egg.
Planning one’s long term investment requires you to select smartly and find products that will give positive returns, adjusted for inflation. In order to do that, investors need to understand the best and worst returns that a chosen asset class has given over an extended period of time. This requires a little work to obtain historical date spanning over a decade or access to the kind of analysis that is done at Moneylife. For instance, Mr Basu pointed out that capital markets and gold are both investment classes where price data is available for an extended period; on the other hand, there is no proper data available for the realty sector and the little that is collated by housing institutions already shows glaring inaccuracies. This makes the assessment of risk very difficult. Mr Basu said that one you are clear about how much you can possibly expect from a certain asset class, it was important to work out a mix of investment that would be safe, but beat inflation and give you a positive return.
A key to smart investment is to “start early and save as much as possible” said Mr Basu, explaining how the magic of compounding helps multiply the savings and wealth for early birds who have the benefit of financial literacy.
On gold, Mr Basu said that the metal is a precious but speculative investment and it cannot be valued since it does not pay interest or dividend. The price of gold is only derived by what others are willing to pay for it on a given day. If you buy gold betting on guaranteed returns based on previous price trends, you may be in for a nasty surprise. This has been Moneylife’s stand for over three years and the recent crash in gold prices demonstrated the risk it carries.
Mr Basu spoke at length about real estate and how easy it was to extrapolate the price experience in a certain area to the entire country. He also pointed out that all talk about realty returns were based on anecdotes rather than hard data, which is simply not available in a uniform, standardised form over a long period. Mr Basu said that people must differentiate between a house that one buys to live in (which can also appreciate significantly) and realty as an investment, which will be bought and sold. Realty carries high transaction costs in terms of stamp duty, transfer charges and taxes. This leads to significant erosion in returns. And most important of all, there is no regulator.
On insurance, Mr Basu said, it should be used primarily for its main purpose—to guard against risk. He warned against mixing investment with insurance through products like unit linked insurance plans (ULIPs). These investments involve huge costs and there is no long-term data readily available on the fund management performance. However, there are better investment products available at lower costs that can be used for investment.
Stocks and equity funds are the best assets available for creating long-term wealth. The best way to invest in stocks is through equity funds. Stocks and mutual funds are risky. However, he cautioned the participants on the hoards of different funds available and how one should pick and choose the right fund. One should focus on defined goals and invest in limited products. As these investments are volatile one should invest systematically to use the volatility to his/her benefit.
Before ending the session Mr Basu gave the participants a list of investment products which one should avoid as these products require deep research and understanding. This was followed by an interactive question and answer session.