You have to invest your money wisely so that your assets grow and generate good returns, well above rate of inflation.
People choose different investment options like Equity, Debt, Real Estate, Diamonds, Gold, Silver, Commodities, Antiques, Paintings, Carbon Credits, Forex, Derivatives etc.
‘Equity’ is a cat amongst the pigeons and best investment plan. Equity gives best returns if invested with knowledge, logic, and expertise.
10 Best Investment Options in India
There are many other investment options based on various conditions and situations. Some are simply speculations. Let us start with ‘Equity’.
1. Equity: – A cat amongst the pigeons
Buying a share of a company means buying the smallest unit of ownership in a company or an enterprise.
Out of the more than 5000 Companies listed on BSE & NSE, there are always literally hundreds of good companies growing at a Compounded Annual Growth Rate (CAGR) of more than 18 percent.
This means their Net Profits (N.P.), Earning per Share (EPS) are doubling in every 3 to 4 years.
Consequently, their book values (B.V.) and real worth are also growing & doubling every three to four years. Let us take some examples of companies which have given outstanding returns.
Infosys is a software giant. If you had invested Rs. 10,000/- in Infosys (INFI) IPO in 1993, your shares would have been worth of Rs. 3 Crores today. i.e. growth of 3000 times.
The shares are adjusted for all the bonuses and stock splits. This tremendous growth in share holding works out to be at a CAGR of 40 % means the stock doubled in value every 1.80 years.
In 2007-08 INFI Earning per Share (EPS) of Face Value (FV) Rs. 5 was Rs. 78. It got doubled to Rs. 165 in 2012-13. Dividend of Rs. 13.25 per share was paid in the year 2007-8.
Almost, three times dividend of Rs. 37 per share was paid in 2011-12. The Book Value (B.V.) of Rs. 5 share increased from Rs. 236 in 2007-8 to more than double to Rs. 600 per share in 2012-13.
The share capital remained the same.
ii. IPCA Labs
It grew at more than 17% CAGR between 2009-10 and 2013-14. Its EPS of Face Value Rs. 2 grew more than double from Rs. 16.75 in 2009-10 to Rs. 37.83 in 2013-14.
Book Value also increased more than double from Rs. 69.86 in 2009-10 to Rs. 157 in 2013-14. Net worth doubled from Rs. 874 Crores in 2009-10 to Rs. 1980 Crores in 2013-14.
Net profit doubled from Rs. 209 Crores in 2009-10 to Rs. 477 Crores in 2013-14. The share capital remained unchanged at Rs. 25 Crores.
This means that in every sense of the word and the world the true values, intrinsic values of Infosys and IPCA shares got more than double during these respective periods around CAGR of more than 18%.
The true value, real worth of these shares increased, doubled on their own in 3 to 4 years. There are always hundreds of such examples.
This clearly shows that shares of good growing companies are always growing in real-intrinsic values-EPS, the book values. Hence, they are truly growing Active, Dynamic asset.
So, investment in good, growing equity is investment in an active, growing dynamic asset, always increasing in real value.
When the true- intrinsic- real value of the asset is growing, the market value of the asset is bound to go up sooner than later.
Buying and selling of shares is subject matter of another article.
Let us discuss some more investment options.
2. DEBT as Investment Option: ‘It has a very important point to prove’
Generally the interest rates lead the rates of inflation. This worm of inflation eats into your purchasing power. Hence Debt hardly gives you any returns and if you are a Tax payer, the Returns may be negative.
a. If you choose Debt as your investment option, You should prefer
- Liquid Mutual Funds
- Public Provident Funds ( PPF)
- Govt. Bonds
- Post Office Deposits, and
- Fixed Deposits (FDs) of Nationalized Banks
b. You should avoid Lending to :
- Private companies,
- Small listed companies
- Private and Co-operative banks,
Risk in lending to Govt Post Offices, Nationalized Banks is apparently very little. But, there is 100% risk of getting very little or no real returns.
In this era of falling interest rates, scenario is very grim for those retired people who depend 100% on debt for their livelihood.
So, Debt should not be a real main principal long term investment option. You can invest in if you want safe investment.
3. Real Estate (R.E.): ‘Always the safest, Best Investment option, Is it?”
Land is real in Real Estate (R.E.) and not manufactured. Our very existence is on it and largely because of it. It is tangible, indestructible, can’t be stolen physically.
Indian population has doubled in last 50 years and so has the urbanization from 20 percent to 40 percent resulting in great demand for limited urban land.
This has set the prices upwards in almost all urban areas.
In place like US where land per capita is ten times more than India, land prices have been stagnant.
It is a myth that R.E. is always safest investment option and has given great returns. It is a subject matter of another article.
a. Hurdles in R.E. Investment –
- You need minimum Rs. 15 -20 Lakhs to buy a single bed room flat or 1000 sq. ft. land in a reasonable locality of even 2 Tier or 3 Tier Cities in India.
- Diversification is out of Range for majority for want of more cash, over and above that for their residential purposes.
- Transactions of R.E. are always risky because of problems in title disputes. There are many frauds noticed.
- Transaction cost is high i.e. around 10% of the cost.
- You need expert’s guidance
- Social risk of encroachments.
- Out dated tenancy laws make it difficult to give on rent.
- R.E. has very little liquidity. You can sell 1 tons of Gold worth Rs. 300 Crores (September 2017) & realize the money in couple of days. But, when you are in dire needs, you may not get even 3/4th the price of a single bed room flat in a whole year.
- You need through knowledge, lot of Experience, perspective & lots of money to buy right type of real estate, at the right place at the right time & price.
- Over and above, this one needs holding power of 5 years to 10 years to make RE investment option safe & profitable. This is not easy proposition for most of us.
- Like a stock market or Gold markets, there is no market as such for RE where proper price discovery takes place.
- Every property buyer-seller is unique. Two identical, adjoining flats may fetch quite different prices depending upon needs, circumstances, backgrounds of buyers and sellers.
Of course Real Estate is tangible in real sense, has some important uses like constructing your home, houses, school colleges, factories, roads, shopping malls, offices and so on.
Thus, entrepreneurship can add great value to it.
Owning a house is lifelong ambition matter of sentimental- emotional satisfaction for almost every one.
So, you have to consider all the hurdles before considering Real Estate Investment Option.
4. DIAMONDS : “Diamonds Are Forever”, “They are a girls best friend”
Diamond is pure Carbon Crystal in Octahedrons. It is the hardest natural substance in the world, actually five times harder than the second hardest mineral corundum.
It is found in Botswana, US. and Russia etc. some of the biggest companies in Diamond business are Dee Beers, Alrosa.
Diamonds are defined by 4Cs, namely Colour, Clarity, Cut, and Carat.
- Best quality is blood red.
- The most brilliant cut is into 58 facets. A certain Company is supposed to have cut it into 73 Facets.
- 5 Carats are equivalent to 1 gram.
In India around 2015, a one carat average Diamond was costing Rs. 3 Lakhs (where as a 3 carat Diamond was costing Rs. 50 Lakhs.
A high quality Diamond of 10 to 15 carats = 2 to 3 grams could cost as much as 100 kgs of Gold worth Rs. 30 Crores (Rs. 300 Million).
Its extremely condensed value and portability bestow Diamond as a form of emergency funding for the dictators, Rulers, Super rich on a panic flight.
Largest Diamond ‘The cullinan’ of 3106 carats weighing 0.60 kg was found in South Africa.
It has no fungibility, every single Diamond is unique like every single human. Being brittle, it could be easily scratched, damaged.
Therefore, difficult to maintain.
Large number of variables in quality makes pricing difficult, subjective. Hence, no loan is given against Diamond as security. You should have complete knowledge to buy diamond.
Because of all this no terminal market for Diamonds, resulting in no liquidity.
As a matter of fact, expert says there is no natural shortage of Diamonds. Gem quality synthetic Diamonds are produced since 1970 which cost a fraction at Rs. 150 per carat approximately.
So Diamonds are not at all an investment option for anybody.
The super rich can buy Diamonds for prestige, showing off or on a panic flight in emergency.
5. Gold: “ Gold Always Glitters”
London Bullion Market Association (LBMA) is the biggest global Center for trading of gold. It controls 87% of global Trading of spot Gold Futures and options.
The Banks, trading firms in India like SBI, Nova Scotia, MMTC etc buy gold at LBMA rate, add import duty, taxes and sell to local jewelers.
a. In 2015 top Gold Mining Countries were
- China – 458 Tons
- Australia -276 Tons
- Russia – 252 Tons
- U.S. – 216 Tons
- World Total = 3158 Tons
b. Biggest Consumers of Gold in 2015 were
- China – 1040 Tons
- India – 850 Tons
- U.S. -193 Tons
- Germany -124 Tons
- Thailand -90 Tons
In 1980 Gold was trading at $850/ ounce while silver was trading at $50/ ounce. The ratio Gold: Silver was 1: 17 meaning Gold was 17 times costlier than Silver.
In 1990 Gold plummeted to $ 380/ ounce while Silver nose dived to $ 4 / ounce. The ratio Gold : Silver became 1 : 95. The average ratio for Gold: Silver for the 20th Century was 1 : 47.
c. Average rates as on 23rd March 2017 at Mumbai: The following prices rates prevailed:
- Gold- Rs. 29,000/ 10 grams,
- Silver- Rs. 41250/ Kg
- Gold : Silver – 1 : 70 on 23rd March 2017
- Sensex was at 29332
- Nifty – 9086.
Above relations between Gold & Silver are mere guidelines and not much to be read. Gold prices have been compared with many commodities just to give you some perspective nothing else.
We are concentrating on the Gold as on investment option simply because it is one of the best Asset and also investment option.
d. Reasons for importance and popularity of Gold
- Indians have worshiped God and Gold since Vedic times. In many countries it is an integral part of social and religious functions, customs.
- Superstitions about healing and other powers of Gold. Ayurved recommends it – Suvarna Bhasma.
- It is indestructible, not tarnished, unaffected by any climate & chemicals except Aqua Regia.
- It adheres firmly, easily to other metals, substances.
- Gold has great aesthetic appeal, beautiful colour and lustre which is an important reason for its use in Jewellery.
- Malleable- it can be beaten in to very thin sheets. 30 grams can form a sheet of 10 sqm.
- Ductile – a very thin wire can be drawn from it.
- Gold isotope 198 is used in treating cancer.
- It’s an excellent conductor of electricity, used in electronics.
- Do you know gold reflects infra red radiation.
- Gold is one of the densest, heaviest substances, approximately 2.5 times heavier than steel with density of 19.32 Grams / cubic cm.
- Quantity and quality of Gold can be easily measured and assessed making valuation easy.
- Because all these properties including valuation, indestructibility, liquidity it has been universally accepted and has become almost a medium of exchange.
The highest denomination Note of Rs. 2000 weighs around 1 gram / Note. But 1 gram of Gold on 23rd March 2017 was costing Rs. 2900/-, occupying much less space.
A person can carry roughly 10 Kg. Cash in Rs. 2000 Denomination Notes worth Rs.2 Crore only in a big Suitcase. But same weight 10Kg of Gold worth Rs. 3 Crores can be carried by person in pockets of his trousers.
During golden days when there were always battles and uncertainty. Gold was the perfect value- medium one could hide, carry and run.
One could also bury Gold during emergency without affecting it even for 100 years.
e. A Jeweler an entrepreneur adds value to Gold for himself by making Jewelry. But the same jewelry loses value for the customer while reselling it.
There are innumerable studies and statistics that have linked Gold prices to that of other materials like Silver and connected Business and overall environment.
Few of the observations like (mere simple guidelines nothing more)
i. Gold prices go up when there is recession, stocks are stumbling, uncertainty, lack of confidence and vice-versa.
Statistics regarding Gold prices over last 400 years have established that Gold has always preserved the purchasing power but have given very little real Returns.
Exceptional Returns in patches have been nullified by low or negative returns at other times.
But, because of many qualities of Gold as discussed above Gold continues to rule over the heart of masses and classes the world over.
In short Gold is like a beautiful, talented lady who never grows old, nor falls ill. That is why everybody loves and chases her. But is she worth marrying? Or just great for flirting?
6. Silver: “Every cloud has got silver lining”
It is poor cousin of Gold. Like value less impressive than gold in looks, properties, density, rarity, colour, luster, liquidity and so on.
It gets affected by climate, gets oxidized, more volatile and less liquid than gold. Generally the turnover of Silver is around 2% of Gold in value.
It is not a good investment option.
Given below are some investment options chosen by some people. But, I personally don’t find them as prudent investment options and find them very risky. I covering them below in brief.
7. Commodities : “Chita amongst Chitals”
Some traditional examples of commodities are grains, gold, oil and natural gas etc. Recently, it has included products like foreign currencies and indexes.
Commodities are traded on commodities exchange.
Some of the Problems associated with commodities are –
- Quality variables make valuations difficult.
It may be good for the Traders in the particular commodity. But, otherwise a risky investment option with little logic.
8. Painting/Antiques: “A thing of Beauty is joy forever”
These have lack of fungibility, affected by time, and climate. They do not have terminal Market and liquidity.
The interested and Super Rich can buy for showing off.
But, no real investment option.
9. Carbon Credit: “Technology on the Blocks”
Carbon credit is a credit received for preventing 1 ton of CO2, Green House Gases from going into the atmosphere by using green renewable energies.
It has little liquidity.
Perhaps ok for companies involved in Energy Business, but certainly not a best investment option for individuals at least now.
10. Forex: “Formula 1, fastest on the tracks”
It is not an asset, but a contract on exchange rates. It is speculative, not an asset, not an investment option.
11. Derivatives: “Forbidden Fruit ”
Not an asset but a contract on underlying asset. It is certainly not a prudent investment option.
Dilip Kelkar is a Civil Engineer from VNIT Nagpur and also holds an MBA Degree. He is an expert in Wealth Management. He has been delivering lectures on Wealth Management in premier Institutes like IIMs, ICAI, Chambers of Commerce, Persistent, L & T, and Siemens etc. He can be contacted at [email protected]