When money makes money from investments

Standard Chartered Bank

An average wage earner today works towards a home, a car and his children’s education. He is wise enough to take a comprehensive insurance plan as a safety net for his family but more often than not, is unsure of where to invest for the future.

Should he leave cash savings in a fixed deposit? Should he waddle in real estate, buy more insurance, try his hand in equity shares or invest in unit trust? Or should he try to work out a strategy of a combination of investment alternatives? Uncertainty will only cause him to make decisions that he may regret later.

Taking the time to understand each investment and examining each of its risk factors in relation to historical returns associated with each option will help him make that informed decision.

Being liquid in cash is by far the greatest form of security. But with current low interest rate environment, leaving the entire nest egg in cash is not wise over the medium to long term. With the inflation rate bordering two to three per cent per annum, inflation alone will eat away at cash deposits. The logical thing to do is to apportion an amount for investment, giving money a chance to grow.

Making the right decision on real estate would require a look at numerous factors – location, surrounding facilities and amenities and credibility of the developer. It is important to consider if the property in question is for personal use or for investment returns. Property investments should only be made if the investor is confident of not putting a strain on cash flow throughout the loan duration. If more than 35 per cent of one’s income goes towards servicing loan repayments, an individual may be highly geared and hence, having an unhealthy financial portfolio.

Rather than just investment, insurance is most effective in its basic fundamentals; to provide a cushion in the event of an unforeseen mishap. The interests and security needs of loved ones should remain protected. Policies like the critical illness plan and hospitalisation plans are becoming absolutely necessary with the escalating cost of private medical care.

Investment-linked insurance is aimed towards long-term investment and allows the individual to make his own choices including deciding how much insurance coverage is needed, type of policies preferred, how much of the balance amount is to be invested and in which fund. High growth funds are attributed to the willingness to take higher risks. By following set guidelines, insurance companies are generally more cautious with their stock market exposure.

Those who are looking for long-term investments should look closely at unit trusts and bonds that give money a chance to grow.

Most financial planners would advise that equities offer the best average annual compounded rate of returns. Take into consideration a fund house that will help manage the finances of an investor. Investors must be in touch with the market and look closely at the fundamentals. Your money management and investment need the accessibility of licensed financial planners. It will be wise to make a decision to approach qualified experts from a licensed financial institution that can help you better manage, grow and protect your finances.

Keeping an emergency fund, having real estate assets with good annual returns, purchasing a combination of life and general insurance and having some left over for investments is the ideal scenario.

The general rule of thumb with investments is diversification. It is also important to evaluate your investment goals, time horizon, age and risk appetite before deciding on an investment plan.

Obtaining as much information as possible before making investment decisions can help highlight the downside that you may need to consider. Financial literacy will help make the right choices.

Start with a sum that you’re comfortable with and understand your risk appetite. Setting goals and limits is just as critical. Discipline is another critical factor when investing. Avoid acting on impulse and emotions. Hot tips often end up as burnt fingers.

After an investment is made, it is imperative to monitor its performance regularly. Checking the current market price of property assets, unit trust or equity shares helps keep investors abreast with the current market situation.

This article is for general information purposes only and while the information in it is believed to be reliable, it has not been independently verified by us. You are advised to exercise your own independent judgement with the contents in this article.