Where to invest money for retirement

In the previous article we figured the reason why to invest, the next obvious question is, where should one invest? and what are the returns can expect by making these investments?


The first thing when it comes to investing is to choose an appropriate asset that matches your risk profile. We will know later about risk profile but here are the most popular assets one can invest in :


  • Fixed income instruments
  • Equity 
  • Real estate
  • Gold 


Whichever way you look at it, these are the only 4 viable investment options available. 


The trick is to make sure we invest wisely, to ensure our investment results in a reasonable rate of return for every unit of risk undertaken, the risk and reward of investments go hand in hand.


For example, If an investment is considered risky, then it most likely offers a high return. If an asset is considered safe, then the returns will be moderate too. So risk and reward are like two sides of the same coin.


Fixed income Instruments

Traditionally Fixed Income instruments are assets with limited downside risk and limited return. The returns in fixed income instruments are in the form of interest payment. Based on the FI instrument, the interest payment could be quarterly, half-yearly, or annually.


Typically Fixed-income investment includes: 


  • Bank Fixed deposits
  • Bonds issued by the Govt of India
  • Bonds issued by Gov agencies such as HUDCO, NHAI, NTPC, etc.
  • Bonds issued by private companies like Mahindra Finance, Sriram Transport, Muthoot, etc.

As of March 2021, the typical return from a fixed income instrument varies between 7% and 10%. Investment in the fixed deposit is best suited if you want to protect your capital and at the same time earn a moderate return.



Equity



Investment in Equities involves buying shares of publicly listed companies. The shares are available on exchanges such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).


When an investor invests in equity, unlike a fixed income instrument there is no capital guarantee. However, as a tradeoff, the returns from equity investment can be extremely attractive. Indian Equities have generated returns close to 14%-15% CAGR(compound annual growth rate) over the past 15 years.


Investing in some of the best and well-run Indian companies has yielded over 20% CAGR in the long term. Identifying such investment opportunities requires skill, hard work, and patience.


Real Estate


Real Estate Investment involves transacting commercial and non-commercial land. Typical examples would include transacting in sites, Apartments, Farmland, and Commercial buildings. There are two sources of income from real estate investments namely - the rental income, and the capital appreciation of the property itself.


Gold

Investment in gold and silver is perceived as the safest investment option ever. This perception is widespread across the world.


Gold and silver over a long-term period have been appreciated. Investments in these metals have generally resulted in a return of approximately 7 to 8% over the last 20years. 


Asset Allocation



Your investments should have a strong mix of all asset classes. It is prudent to diversify your investment among the various assets to create an investment portfolio. The technique of allocating money across assets is referred to as Asset Allocation.


For instance, a young professional can take a higher amount of risk given his age and the number of years to retirement. Typically, such investors should allocate at least 70% of the investable amount in Equity, 20% in fixed income, and the rest in gold or silver.


By the same logic, a retired person could invest 70% of his savings in fixed income, 20% in equity markets, and 10% in gold and silver.


As you can imagine, the ratio in which one allocates investments across assets is dependent on the risk appetite of the investor.

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