Most of us spend more than half of our lives working and saving money. However, most of us spend almost no time planning to make that hard-earned money work more effectively for us. Your success as an investor depends upon your ability to choose the right investment options. This, in turn, depends on your needs, wants and dreams.

I would like to discuss some investment basics that every investor should know while planning their investments. Investment planning isn’t a way to get rich quick, but is a disciplined execution of your lifetime plans.

Investment - Consumption Cycle

By making an investment, you are using money that could otherwise have been consumed. You are sacrificing the pleasures of buying a car, taking a vacation, renovating your home etc. There ought to be some reward for this sacrifice. The reward is that you expect to get back more than what you have put in. You can then consume the amount that you get back. Thus investment refers to a commitment of funds to one or more assets that will be held over some future time period. In simple words, anything not consumed today and saved for future use with some risk can be considered an investment. Thus future consumption is the main motivation of an investment made today. Investing creates wealth and wealth is a driver of consumption. More wealth means more consumption, while less wealth leads to less consumption. Thus all the three: investment, wealth, and consumption are interrelated. This is the investment consumption cycle.

Why do you invest?

You invest for your future well-being and to meet future financial requirements. Anticipated future cash outflows may be in different ways like: children’s education, children’s marriage, buying a home to retire in, etc. There can also be unanticipated cash outflows like: critical disease, accident, natural calamity etc. Thus, investments are made to protect the family against all these anticipated and unexpected cash outflows. The funds for investment comes from assets already owned or borrowed money or savings.

How do you invest?

If you make an investment decision today that will directly affect your future wealth, it would make sense that you make a plan to guide your decisions. Surprisingly, the majority of people do not have in place any type of formalized investment plan. Taking some time to put together an investment plan can reap tremendous benefits. You must have a strategy for your investments backed by a sound reason for investing.

Where do you invest?

Investment can be made into different financial and non-financial asset classes. Financial asset class includes paper assets like:

• Equity shares
• Mutual funds
• Bonds
• Cash equivalent, such as gold, or other precious metals

And the non-financial asset class includes investments in:

• Land and buildings
• Plant and machinery
• Business

And finally, “Be an investor, not a speculator!”…

Investors are defined as: Individuals who purchase assets for the conservation of wealth and the increase of wealth, with the emphasis on the conservation of wealth.

There is another breed of people, speculators, often mistaken as investors. Let us understand speculators - They are individuals who purchase assets for the conservation of wealth and the increase of wealth, with the emphasis on the increase of wealth.

In simple words, ‘Investment is safe speculation and speculation is hazardous investment’. There is a saying in equity markets that, “Those individuals, who invest, make money for themselves and those who speculate make money for their brokers.”

Priyesh Shah is Chief Financial Planner, working with SRE Financial Planners.

It is said that “If we all perform our duties meticulously then we are surely on the path of prosperity.” Every individual should be aware about his or her duties towards family members, relatives, friends, and society. In addition to social responsibilities, it is imperative that every individual should also have basic financial literacy.

To take the fist step towards financial literacy, following is a financial check list that you should prepare in consultation with your family members and professionals. This activity will make you more aware about your personal finance documents and will get you motivated towards knowing more about your finances.

Preparing this document will go a long way in enhancing your financial literacy. Do make a resolution to sit with your family members this weekend itself and prepare this important document.

Priyesh Shah is Chief Financial Planner, working with SRE Financial Planners.

Another question follows - Why?

The Indian debt market may be categorized into three - Government securities (G-Sec) consisting of central and state government securities, the bond market consisting of financial institutions (FI) bonds, public sector units (PSU) bonds, and corporate bonds/debentures.
Of these, the government securities segment is the most dominant category in the debt market. The most distinguishing feature of these instruments is that the return is fixed i.e. they are as close to being risk free as possible, if not totally risk free. The fixed return on the bond is known as the interest rate or the coupon rate.

Considering the scenario after independence, the immediate concern was to attract capital that would help the economy grow. This was the time when fixed deposits (FDs) in banks were considered safest form of investment that gave guaranteed returns and were risk free at the same time. But FDs have inherent disadvantages such as the amount always being fixed; and if interest rates dropped, investors tend to lose. At the time, the other option was the underdeveloped equity markets.

Thus the need arrived for instruments that could be traded on the market where the price discovery was far more realistic, favored the investor, and also offered liquidity.

This led to arrival of debt markets.

Cut to 1992 - Glasnost (liberalization) and perestroika (restructuring) swept through the financial markets as well. The country’s economy started changing tracks from a regulated one to a free market; it was then that interest rates became market forces-led rather than completely governed by the Reserve Bank of India (RBI).

India’s equity and debt market started walking in different directions charting their own course. The equity market survived its biggest scam in 1992, the result being the formation of the Securities and Exchange Board of India (SEBI). Badla was banned and the National Stock Exchange (NSE) was created.

Through all this, the debt market moved ahead, blocking fraud and improving systemic integrity, but there was no fresh vision on market design.

Moreover it lacked focus on retail investors, so much so that investors were not even aware about this avenue – where debt instruments could be traded just like equities. The risk is far lower in the case of bonds/debentures as compared to equities. Also, returns are better than those offered by fixed deposits in banks and they have high liquidity.

Another factor that has affected the growth of the debt market is the lack of infrastructure for price discovery and price information dissemination. Retail investors do not understand the mechanics of these markets in regard to instrument-pricing.

Therefore, the areas that need attention are investor education and creating a robust system that will allow this market to develop. The SEBI report on debt market recommends that concept of debt manager is quintessential to the development of the corporate debt market - who should be committed and sufficiently capitalized, who should subscribe, hold, and trade in debt.

Another jump, this time right up to the present, 2008: Inflation is at its peak – 7.8%. In such a scenario is it feasible to invest in G-Sec where the return is only 8%? Instead investors should consider balanced and equity diversified funds for higher returns than the inflation rate. Returns from equities are much higher.

The contrast between these two markets is for every one to see - the debt market does not cross a thousand trades a day, while the NSE has become the fifth largest exchange in the world, within striking reach of a million trades a day. The debt market probably has 20 dealers in one square kilometer of South Bombay whereas the equity market has vibrant presence right from Kashmir to Kanyakumari.

It is high time that the debt market takes lessons from the innovation-led equity market which has survived all odds and achieved a 180-degree turn around.

The author is Senior Editor at Apnaloan.com Services (P) Limited.