When I interact with people many times I come across a question/request “what is the best investment product? please suggest to me”. How I wish I could answer that question or give away the advice spontaneously. Trust me if I tell you there exists no investment product which is best for all. It is all about the financial equation in which you are trying to fit in an investment product. Let us get to an understanding on this 🙂
What is this financial equation and how relevant it is while choosing investment products?
The financial equation is your personal financial situation ie, your earning capacity, the objective of investment, how much time you can give for this investment to grow, your risk-taking ability based on your financial situation, etc. Let us understand this with three different scenarios given below.
Scenario – 1
An young person started his career recently wants to save some money to take-up a professional course in a year.
As he is young, he has a great many years to earn in future. He might have a luxury or an attitude to take the risk. But, in the given situation he has just a year time to meet his objective of paying college fees. Hence, he must choose an investment product which keeps his money safe and flexible enough to withdraw immediately when he needs it.
Here the best investment product for this young man’s need would be a recurring deposit or a liquid mutual fund or a short term mutual fund. All these products allow him to invest every month and withdraw in one go after a year.
Scenario – 2
A 42 years man who is in his prime career stage wants to accumulate money for his son’s higher education in the next 10 years.
This man has a long term of 10 years to meet his objective. His investments need to grow and help him reach the target amount. In this situation the safety of investments is important, at the same time the growth (return on investments) is also equally important to sustain the inflation.
Here, the best investment products for him would be investments in fundamentally strong companies through shares (If he has enough knowledge about the share market) or a combination of large-cap, balanced mutual funds and equity-linked saving schemes. Despite these products having market risk, they generate better returns in log-term. He can invest in these products regularly through a systematic investment plan (SIP) and withdraw after 10 years.
Scenario – 3
A 60-year man retired from his job received his retirement benefits in a lump sum. He wants to invest this amount and get a regular income from his investments.
This elderly man has the money he saved for his retirement period for many years and his earning capacity now might be very low or negligible or even zero. So, he must not be adventuring his money and the priority is the safety of the investment. For his monthly expenses, he needs regular income from the investment in the form of interest or otherwise and also have the flexibility to pull back the money in case of any medical emergency for him or his spouse.
Here, the best investment products are a combination of bank fixed deposit, Post office senior citizen saving scheme, Post office monthly income scheme, monthly income plans, debt mutual funds and a very small portion in balanced mutual funds for a little better return. A one-time investment can be made in all these products and these are relatively safe investments and generate regular income. He can get monthly income from his mutual fund investments through a systematic withdrawal plan (SWP). Any of these investments can be completely withdrawn in case of emergency.
In all the above three scenarios, the financial equations are different. That is their objectives, time frames and earning capacities are different and that is the only thing mattered while choosing the investment product/ products.
What is the best investment product ?
From the above scenarios, we understand that the best investment products are the ones which suit your requirement and one product which is best for someone might not be the best choice or may turn out to be a wrong choice for your requirement. Hence, there exists no investment product which is best for all and it is all about suitability.
Also read other topics on financial planning