Before we answer that let us understand what a perfect investment should be like. There are many attributes or characteristics to an investment decision. Our eluding perfect investment also may have a combination of one or many characteristics.
First, it is important to know the characteristics of various investment decisions. Second, only when one applies a suitable combination of the characteristics and creates an investment strategy one will be able to determine whether or not he has been a successful investor. Here are those characteristics:
Complete Safety: The original investment must remain intact, no matter what. Bank FDs, government bonds, other bonds and similar fixed interest type investments offer this benefit but then you have to compromise on higher rates of return. You also have to compromise to the extent that these investments may not even meet the inflation rate and as a result you are making no real gain.
High rate of return: The returns on the investment should be such that it beats inflation by at least 5-10 per cent, and thus we are able to create real wealth for ourselves. An investment that is such that returns overcome all expenses, loads, taxes and still there is much more left. Perhaps 12-15 per cent is what we are asking for. Hence it is real estate, stocks, equity mutual funds that qualify in this category but then safety is capital may be compromised for the early years of such investment.
High Liquidity: The investment must be such that we can exit anytime we like without having to worry about associated penalties. Bank FDs, PPF, Insurance policies and bonds do not fit the bill then.
No transactions costs: An investment that does not have entry cost or has minimal associated transaction costs can have a huge impact on the ongoing profitability of that investment. For example mutual funds may qualify here while ULIPs may not qualify considering they broadly do the same thing. Equities and ETFs are serious low-cost options. For real estate this was at a controlled level, however, now even such transaction and associated cost have multiplied many fold.
No taxes or minimal taxes: Ideally, the returns from our investments must be completely free of any tax liability. Alternatively, your tax situation should be such that you can absorb high yielding fixed rate instruments and still have little to pay as tax. This aspect is influenced regularly by the law of the land and each investment must be assessed from time to time in terms of its tax advantage.
No need for knowledge: The investment must be completely easy to understand and should not require special knowledge. You could buy it and forget about it. Tree plantations qualify here but it is not practical to think of growing trees at home unless you have land in native places. Trusting external companies is fraught with risk. Bullion is an option that qualifies here but then high rates of returns may have to be compromised with as it does not necessarily give high returns all the time.
Completely passive: Such an investment does not need active management. Real estate qualifies here but then liquidity has to be compromised with and transactions cost can be exceedingly high. Depending on your outlook equities also can fit the bill here.
Shortest time frame: An investment that moves like a rocket and makes you rich really fast like “double in a year” type. You could be a trader in derivatives but then safety of capital is out of the question.
There can be many more aspects to the above discussion. However, to begin with, we may decide which one of the above or combinations is best for us. I reckon there are no short cuts in life and there is an opportunity cost for everything we do in life. The above characteristics are illustrative of what may be possible. A perfect investment just may never exist but it is still a good idea to align your needs with the right combinations of the above aspects. Quite likely you may find yourself close to your perfect investment.
Author is Director – Transcend Consulting
Hey Karthik, Nice to see you back after long gap here. Good artcile. Nothing is perfect in this world.Even Buffets and Jhunjhunwallas have their mixed asset allocations!
Can someone please tell the writer that Bank FDs no longer have penalties? Anyway this write-up doesn't tell much beyond what an ordinary investor already knows. Appreciate the effort but lets have some new insights in the next attempt.