7 Essential Investing Principles

Investing is not too difficult if you keep these investing principles in mind.
Avoid these 15 products
Life Insurance - Traditional

All traditional products like endowment and money back policies come with high costs and deliver low returns. You don't know where your money is invested. These products promise guaranteed returns and/or bonuses, but, finally returns are paltry - maybe around 4-6%.
Life Insurance - ULIPs

Unit-linked Insurance Plans (ULIPs) too charge high commissions that reduce your returns. ULIPs that invest in equities should offer better returns but very few actually do. ULIPs that invest in debt products are the worst of both - high charges and and poor returns

National Pension System

If you invest in National Pension System, you can exit only at 60 years or later. Even after 60, you do not get the entire corpus in hand. You have to use up 40% of the corpus in buying annuity, a taxable product with poor returns. The remaining 60% can be withdrawn in a phased manner, between 60-70. This portion is tax-free. Stay away from NPS.

Portfolio Management Schemes

Portfolio Management Schemes or PMS, run by stockbrokers and mutual funds, claim to move in and out of stocks or mutual funds or commodities and, often, exotic structured products and derivatives. Our analyses show that the reality is quite different. Churning and poor timing lead to high costs and taxes, which combined with poor stock selections, destroy returns


Intial Public Offerings or IPOs are a bad deal for retail investors. This is because you have no control over when to buy and what price to buy. These two factors are decided by the promoters. They fix the time and price to benefit themselves

Art Funds

Art and collectibles are supposed to be an independent asset class and to benefit from "un-correlated" risks. Like all market-linked investments, not only as the gains are volatile, but there is no way even to know how the price is determined. Art does not have a calculable intrinsic value. Real estate pays rent, bonds pay an interest and stocks earn profits and pay dividends. The intrinsic value of such investments can be easily calculated. Price of art is entirely based on expectations that someone will buy it at a higher price in future. That is pure speculation. Buy art for enjoyment, not for investmet

Futures Trading

Unlike stocks, which pay dividend, or a piece of property that earns you rent, futures of stocks, commodities and foreign exchange do not have any earnings attached to them. You make money only if somebody wants to pay you more for it than you had paid when you purchased it. It is not investment, pure speculation. Futures trading is done on margin money and so it magnifies profits and losses. Many complex factors drive short-term price movements: specific data from companies, economic data such as inflation, balance of trade, stock inflows from foreign investors, remittances, movement of dollar, intervention by central banks, import of gold... Sudden change in any of this data can lead to a sharp price movement. This makes trading in futures extremely risky.
Gold ETF

We are against "investing" in gold. Gold hasn't delivered better returns than fixed deposits over the long term. Also, it is impossible to value gold that is, know when it is cheap and when expensive. Gold prices are driven by six major factors including movement of dollar, value of rupee, inflation, buying and selling by central banks etc. and we know nothing about them. Gold Exchange-traded Funds have their own negatives, mainly continuous price discovery that may induce you to buy and sell at the wrong time. Moreover, ETFs in India are illiquid. The bid-ask spread is wide. You could end up buying it at a premium and selling it at a discount.
Private Equity

Often wealth managers of banks and brokers offer you a chance to invest in private equity funds that invest in listed and unlisted companies for high returns. The risk is extremely high and there is no exit for years, often due to unfavourable market conditions. There is no reliable record of successful private equity funds in India.
Real Estate Investment Trusts

REITs would have been a good way to get exposure to real estate with a smaller investment but the real estate market in India is marred with disputes, title issues and corruption. There is little regulation. This makes REITs riskier. Plus REITs have no track record in India.
REITs Coming: Is it the right product for you?
Structured Products

They have a fixed maturity and are designed give customised risk-return based on an index, commodity, debt issue or a foreign currency. Capital-protected structures promise to protect capital even if the market falls. From these you will gain too little after taxes. For unprotected capital structures you will often make a loss.
High Yield Corporate FDs

Corporate FDs that promise 3-4% more than banks FDs are extremely risky. Chasing high returns of company FDs can expose you to the risk of losing your principal. A high interest is a warning bell since it implies that the company is unable to raise resources from anywhere at lower rates, because its finances are weak.The higher the interest rate, the greater the risk. Before investing check the credibility of the company and the rating of the instrument.
Corporate fixed deposits offer higher rates than Banks
Corporate fixed deposite holders facing tough time.

Timeshare is an investment in future vacations, where you get rights to lease a property, generally one to two weeks a year. Lack of transparency in offerings and hidden charges are some of the pitfalls of timeshare investments. There is high risk of rejection when you actually need the holidays, say during the peak season. These investments are not inflation-proof, as claimed in marketing communications, as annual subscription fees and the price of utilities keep on rising over the years. These investments are highly illiquid as trying to sell the membership is difficult and cumbersome.
Timeshares Are Bad Deal

Bitcoins are speculative and unregulated virtual instruments. Transactions using bitcoins are made with no intermediaries like banks or regulatory agencies. The intrinsic value of bit coins cannot be calculated. There is also no reliable record of past returns.
Close-ended Mutual Funds

Close-ended schemes feature a lock-in period of several months to several years to do the same thing what an Open-ended scheme does, without such lock-in period. Their charges are high and performance has been poor. For a detailed analysis read:
Invest to beat inflation
Low returns + high inflation = Capital loss
Most popular investments of Indians are FDs, gold and insurance. They usually don't beat inflation.
Equity mutual fund and high quality stocks are able to beat inflation but carry risks
Safety + Volatility
Invest as per Safety + Volatility
Low volatility means low returns
High returns bring higher volatility
Stocks and equity funds are the best for creating long-term wealth.
But they are volatile in the short-term
Volatility may reduce with time
Volatility may reduce with time
Invest as per timeframe
Goal of 0-3 years: Capital has to be protected. Value should not fluctuate.
Goals of 3-5 years: Mix of risky + safe products
Goals of 5+ years: Use more of higher return (risky) products
Product feature
Invest as per product feature
At Moneylife we group products into three categories, which immediately explains their essential features.
a. Market-linked
Equity Mutual Funds
Portfolio Management Services
Hybrid Mutual Funds
Gold/Gold Exchange Traded Funds
Unit Linked Insurance Plans
National Pension System

Capital fluctuates a lot. Scope of losses and higher gains
b. Other Market-linked
Corporate Bonds
Debt Mutual Funds
Monthly Income Plan (Mutual Fund)
Capital Protection (Mutual Fund)
Government Bonds
Tax-free Bonds
Fixed Maturity PlansFixed Maturity Plans
Corporate Fixed deposits

Capital Fluctuates Less, but There is still some risk of capital loss
c. Fixed Capital Income
Tax-saver Bank FDs
Bank Fixed Deposits
Post Office Deposits
National Savings Certificate
Infrastructure bonds
Traditional Insurance Products

Capital is fixed but returns will be low
Post-tax returns
Invest as per post-tax returns
Invest in a manner that your returns are not eaten up by taxes.

5% Tax Bracket:Can invest more in taxable products like bank FD that are liquid and guaranteed

20% Tax Bracket: Must invest more in Bonds, Equity

30% Tax Bracket: Must invest more in tax-free bonds and equity

Fixed Income
Fixed Income
Safety of Principal.

The safest option is FDs of scheduled banks. Within that, older private banks will give you a slightly higher return.
Safety of principal + slightly higher return.

FDs of high quality companies (AAA rating) are also relatively safe.
Higher returns with higher risk.

Listed bonds are less safe because they fluctuate with interest rates and other factors. You need to buy them when interest rates are high are expected to head lower.

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