Are your investments in tune with your needs? It is important that your money is invested in a way that is best suited to your circumstances. Also, other features of a product must also be in sync with your requirements for an investment to be truly suitable.

Get going

How easy is it to make the investment? Are there elaborate formalities specific for that product that need to be completed before you can invest? Or, can you invest with the standard requirements of know-your-customer (KYC), and permanent account number (PAN) formalities and make payments through your bank account? Some investments require a special account to be opened. For example, to invest in government securities, the investor has to open an account with a primary dealer to hold the securities in dematerialised (demat) form. The transactions can be done only through the primary dealer.

Easy availability of application forms, multiple submission points and payment options make an investment easy to execute. Facility to transact online is an additional advantage.

Costs, fees and taxes

The costs and taxes associated with an investment can eat into your investment returns, and must, therefore, be closely inspected before you make the investment decision. The costs may be at the time of making the investment in the form of commissions or brokerage, investment maintenance fee paid through the life of the investment, exit loads or other fees at the time of redemption or sale. These costs need to be considered even if you do not pay them directly. For example, the expenses charged to a mutual fund (MF) scheme go out of your returns, and are a cost even if you don’t pay these directly. Every year, the asset management company deducts a percentage from your corpus to meet its expenses, called total expense ratio.

Taxation can also eat into your returns, said Kartik Jhaveri, founder and director, Transcend Consulting India, a wealth planning firm. “It is good to consider products that are tax-free or even those that provide indexation benefits,” he added. Some popular investments that can be used to claim tax deduction under section 80C of the Income-tax Act, 1961, are life insurance premiums, contribution to unit-linked insurance plan, Public Provident Fund (PPF), Employees’ Provident Fund, purchase of specified MFs (also called equity-linked savings scheme), term deposit for a period of not less than 5 years, and payment of loan taken for purchase or construction of residential house property.

There are other products as well that give dual benefits.

Managing investment

Remember the trouble of getting National Savings Certificate (NSC) shifted when you moved houses? Familiarise yourself with the process and formalities of managing the investment.

Investments with clearly laid out and simple procedures for operations such as changes in name, address, status; making and changing nominations or even ease of transmission of investment to heirs in the event of death of investor, are preferred. Dematerialising or making the investments available in electronic form is something one should do. “Investments that can be held in your demat account with the rest of your investments can make it easy to manage,” said Jhaveri.

Flexibility in investing

The suitability of an investment may depend upon the convenience it offers in terms of availability. For example, investment in securities offered through an initial public offering (IPO) are issued and available only during the specified dates. But bank deposits, investments in secondary markets, open-ended MF schemes and post office savings schemes are typically available for investment at all times.

Some investments can be made only as a lump sum amount, such as a bank fixed deposit. Others can be made in smaller amounts over a fixed period, such as a recurring deposit or a systematic investment plan (SIP) in an MF scheme. Others, like the NSC, can be bought with small amounts whenever you have the funds without making any prior commitments.

The minimum investment that has to be made can also be an important criteria for investors who may not have large regular savings to invest.

Instruments that allow online investments are easier to start, track, manage and exit.

Structured returns

You can choose to receive the returns from your investment in a fixed deposit (FD) on maturity either as periodic interest payments or as a cumulative amount. Your PPF account or NSC, on the other hand, will not pay you any periodic interest. On maturity, the principal and interest is paid out to the investor in one go. MFs offer the choice of structuring the returns by offering growth or dividend options in their schemes.

Lack of flexibility will limit the use to which an investment can be put. Flexibility allows you to align the nature of the return to the stage of your goals—appreciation if there are many years to the goal, or income if the goal has to be paid for now.

Liquidity and its cost

How easy is it to get your money out if needed? Is there a lock-in period, as is with equity-linked savings schemes (ELSS) and other tax saving investments? Is there a penalty or load that you have to pay for premature withdrawal, like a bank FD? If the investment value is likely to fluctuate, then withdrawing when you need to may mean that you lose value.

“Liquidity of a product is one of the most important factors to consider. When choosing a product, you need to consider by when you need the money that you are investing,” said Arvind Rao, chief planner, Dreamz Infinite Financial Planner. For instance, MFs are much more liquid than, say, PPF or real estate, added Rao.

So, if you are investing with a time horizon of a year, investing in products such as the PPF or a five- or three-year FD will not make much sense.

The product provider may redeem or repay the investment or the investment may be traded on the stock exchange where you can sell the investment when you require the funds. Some investments, such as MF holdings, can be redeemed to the extent of your need for funds. Investments such as bank FDs or post office savings instruments may allow early withdrawals but for the whole amount and not partially, according to your requirements. For instance, upon premature withdrawal from bank FDs, one will be charged a penalty of up to 1%. In PPF, if you withdraw partially, you lose some of the long-term benefits of the product.

The facility of taking loans against the investment also provides an option to generate liquidity without having to sell the investment.

Are you being served?

As an investor you have rights, and how easily and efficiently you can enforce these rights will give you the confidence to invest. You are entitled to information about your investment and its performance. The extent of information available and its frequency is important for you to be able to monitor performance. You should also consider the availability of unbiased information and expert analysis from other sources. Apart from this, the product manufacturer or provider should clearly define the services and rights of the investor.

You should also know the remedies available, both through the investment provider and the regulator, in case you do not receive what you are entitled to. The ease with which you can register complaints and receive resolution is an important investment feature to consider.

Not all features are equally important to all investors. If your income and savings are strong, then features like minimum investment level or availability of periodic investments may not matter much.

“Many times people invest in a product by just looking at the returns and taxation aspects. They do not consider other things such as costs or flexibility. This leads to one holding products that are misfits in their financial portfolios,” said Rao.

Make sure you go through all the features of an investment and understand what they mean before you commit to it. You will then be better able to align the investment to your needs.


- by Tania Kishore Jaleel

Source :- LiveMint