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How to Balance Risk and Returns on Investment!

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balance Risk and Returns

Risks and returns are two elements of investment. Every asset class – fixed deposit (FD), mutual funds, real estate – serves a different purpose with varying rate of returns along with risks. While making investments in any of these assets, it’s essential to consider not only the returns but also the risks. For instance, while the returns on FDs may not be the highest, it gives a sense of comfort by keeping market volatility at bay.

Being a fixed-return instrument, FDs have been one of the most preferred modes of investment among majority of Indians. On the other hand, equity mutual funds may offer higher returns than FDs, but the returns aren’t guaranteed, and the corpus might dip because of market volatility. Read on to know the returns and risk associated with some of the popular investment avenues.

FDs
Though FD interest rates have declined lately, the fact that they offer guaranteed returns latent to market volatility make them ideal instruments to park your money for short-term needs. FD returns by leading banks are generally around 6.5% for those below 60 years. The interest rates are slightly higher for senior citizens.

However, today you can also open Fixed Deposits from non-banking finance companies (NBFCs) which offer slightly higher returns than the market average. Through an online FD calculator, you can determine the maturity amount at the end of the tenor. Though the interest earned on FDs are taxable, for senior citizens the Government has increased the tax exemption limit on the interest income from Rs.10,000 to Rs.50,000 in the Union Budget 2018.

FDs not only offer assured returns but are easy to understand and book. You can simply walk into a branch of any bank or financial organisation, fill up the form and if you hold an account with the bank, your FD is opened within minutes. You get a document outlining the principal amount, the maturity amount and the rate of interest offered along with your name, FD number and the name of the nominee (if any). You can also open an FD online with net banking facility.

Mutual funds
The mutual fund landscape in India has undergone a sea change over the last few years, thanks to several innovative campaigns such as ‘Mutual Funds sahi hai’. According to the Association of Mutual Funds in India, the industry added 32 lakh new investors last year and industry experts believe mutual funds to be the part of the monthly wallet for a majority of Indians in the coming days.

Mutual funds, particularly equities, have the potential to generate higher returns than any other asset class. The markets have had a bull run last year and the rally is expected to continue even this year. It is essential to note that though equity-oriented mutual funds can deliver double-digit returns, it’s not guaranteed since their performance is market-linked.

Apart from systematic risk such as inflation, the possibility of unsystematic risks such as sudden change in RBI policy, election result, Government decision, geopolitical event, etc., can have a direct impact on the returns. For instance, in the Union Budget 2018, the Government announced the imposition of long-term capital gains (LTCG) taxes on gains made above Rs.1 lakh on equity-oriented mutual funds held for a period of more than a year.

The imposition of LTCG tax might erode your gains a little. In fact, soon after the announcement of the imposition of LTCG tax, investors were a little jittery and the stock market went into a downward spiral. Investment in mutual funds is also dictated by the risk-appetite and investment horizon of the investor.

Only when you remain invested for a long period, you can reap the real benefits by bringing in the power of compounding that has a multiplier effect on your wealth. However, since the returns depend on numerous factors, you can’t vouch for assured returns through mutual funds.

Real estate
For long, investment in real estate was considered lucrative by most investors. They banked on the year-on-year (Y-o-Y) growth of a property purchased along with the rental income generated if rented. While earlier, value of real estate doubled in 3-4 years, today it takes around 7-8 years. Also, it depends on several other factors such as the property location, amenities, connectivity, etc.

A property’s location, the reputation of the developer, the facilities available within its vicinity and price are some essential factors driving its sale or rent. It must be noted that real estate is a non-liquid asset. It means it can’t be converted into cash easily.

Also, the number of unsold inventories will not only put pressure on the returns from real estate but also lock-in your money for a significantly high period. This makes investment in real estate a risky affair as you may not get the money when desired. As per the Economic Survey 2017-18, the unsold inventory levels in residential real estate stood at 8,07,903 units in October 2017.

Any investment, irrespective of how small or big it is, has an element of risk. Prior to investing it’s essential to look beyond returns and most importantly know what you are doing because in the words of investment sage Warren Buffet “risk comes from not knowing what you’re doing.”

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