Options for an investor


Director, Banyan Tree Advisors

December 18, 2011

As someone who needs to save, you essentially have a choice of three asset classes to invest in – bonds, real estate and equities. All other products are a combination of these three forms of assets. Each of these assets has different characteristics:

Bonds (bank deposits, fixed deposits, liquid funds, etc) are traditionally considered safe investments and give you a stable, but low rate of return. In India, however, bonds have historically struggled to beat inflation and therefore this asset class cannot be your main path to achieving your long term financials goals.

Real Estate has historically tended to perform in line with inflation, provided the return from rental income is included in the calculation for total returns. While real estate should give you long term returns that beat inflation, this asset class suffers from two disadvantages – it is not liquid (you can’t liquidate the assets quickly if you need money urgently), and it requires large upfront capital commitments (the problem of ‘chunkiness’ – you cannot invest in real estate with Rs.1000 of capital).

Equities have been one of the better performing asset class over time, not just in India but in many other economies. It has tended to beat inflation and provide a reasonable rate on return. It is also a liquid asset that can be converted to cash easily and quickly. The concern with equities is its volatility. However, as long are you are willing to live with the volatility, and ready to take advantage of it, then equities can become a powerful tool in achieving your long term financial goals.

Ideally, if one can ride the equity asset class, but at the same time limit the impact of volatility, we believe the ride can be more pleasurable. We try to walk on this path.