“The Markets are getting riskier every day. I am really confused where to invest my money. I want to invest my money where there is no risk.” Said Anurag, 31 year old Dentist, to his friend Niraj.
Niraj Smiled, “Before answering that, I would just like to share a small story with you. Here it goes:
‘A Philosopher was lying under the tree with his feet towards west. One Priest passing by stopped at him and commented, “Dear Friend, you are committing a sin by keeping your feet towards a direction where there is God.”
The Philosopher answered, “Am Sorry Dear Sir, I am pretty unaware of all these things. Why don’t you turn my feet to the direction where there is no God?” The Priest left unanswered.’
“Nice Story Niraj. I totally agree with the Philosopher, but I am yet to get my answer.” Asked curious Anurag.
Niraj Said, “This story not only gives a sense of the omnipresence of God, but also gives me a laugh when someone is too worried about “Market Risks” and wants to park his money, where there is no risk.
The fact is, there cannot exist an avenue where there is no risk. If you are worried about market risks, you would generally keep away from shares, MFs etc and go for fixed income type of products, you still have some risks. What all could be these risks? Lets have a look:
Fixed Income/ “Guaranteed Return” Products: It is not uncommon to see people getting lured by high “guaranteed return” products offered by NBFCs, Real Estate Companies, Co-operative Banks etc. What they tend to believe is that the return being promised to them is not linked to the market movements and thus, they are unaffected by the market risk.
The question is, “What about Credit Risk? What about the credibility of the person who is making this lucrative offer to you?” There have been numerous cases, wherein an NBFC has issued Bonds with a “Fixed” interest rate of 14-15% p.a. and then got vanished. So for all those, who are worried about “Return on Capital”, it is a sincere advise to also think about “Return OF Capital”. The 15% return will be of no use when someone disappears with your principle.
“You are right!!” Agreed Anurag, “But how about real estate? I have seldom seen real estate prices going down!!”
Niraj said, “Again, real estate comes with its own risks, explained below:
Real Estate: Undoubtedly, real estate had been a hot favourite and strong tool for wealth creation throughout. But does that mean, there is no risk associated with real estate? Let’s have a look at few examples to understand the risks associated with real estate.
Example 1: My neighbour, Mr. Dayal, age 76, retired, had purchased a 5-Acre land during his working life in 1984 for his retirement. He retired in 1995 and thought that he will sell the land and park the proceeds in a bank FD so that he can live his retired life with the interest income. The good part was, the land had appreciated by almost 4 times during this tenure and looked like a perfect investment for retirement. However, there was a twist in the tail.
When Mr. Dayal visited his land along with the prospective buyers, he was shocked to see a few slums “established” on his land. He spoke to the slum dwellers and told them that the land belongs to him. However, the dwellers grossly refused to vacate the land as they “Didn’t have any other place to live!!”
Mr. Dayal then approached the court and fought the case for nearly 10 years. In 2005, the court awarded a judgment in favour of Mr. Dayal and ordered that the land be vacated. By this time Mr. Dayal had already turned 70 years old. He again went to the slum dwellers along with the court order. By this time, the slums had almost doubled in his land. Also, the older one and now converted into pucca houses. Mr. Dayal told the slum dwellers that the court judgment is in his favour and now they should vacate the land. The slum dwellers approached a local politician who again filed a petition in the court obtaining a stay order.
Now, the current situation is that, the land has a market value more than 7-times its purchase price. So, it has been a true wealth creator for Mr. Dayal. But the question is, whether he can sell the land. Due to illegal occupation, buyers are not willing to buy a disputed property.”
“Oh My God!! That’s really sad and indeed a great risk associated with land investments. But how about investment in flat?” asked Anurag.
Niraj smiled, “Nice thought, but don’t expect it to come without risk. Lets discuss example 2:
Example 2: My friend Dinesh booked a flat with a builder. After making the entire payment, when he went to take possession of the flat, he was shocked to know that the same flat has been sold to four different buyers. All four had the sale deed signed by the builder and the builder had vanished.
So, even an investment in a flat/shop wont come risk-free.
Apart from these, there are few limitations such as lack of liquidity, lack of divisibility and lack of transparent price discovery in real estate investments.”
Signs of worry had now started showing on Anurag’s face. He said, “I think noble metals like Gold and Silver are the only risk-free investment options left with me now.”
“Gold: Well, Gold and Silver are definitely a great investment option. But I still have a problem with the word ‘Risk-free’. How will you invest in Gold and Silver ?” asked Niraj.
“Simple, I will buy some gold jewellery from the nearby jeweller.” Said Anurag.
“Now, here starts the first problem. Buying GOLD in the form of jewellery, you first lose out a big chunk in the name of making charges. For example, if you buy a jewellery of Rs. 25,000 the actual gold you will get will be of around Rs.15,000-16,000. Balance will go as making charges (which you will not be able to recover when you plan to redeem the investments). So even when gold appreciates by say 25% from the current level, your “asset” will actually be of Rs. 20,000 (20% lower than the original investment of Rs. 25,000).
Secondly, if you plan to buy it in the form of coins/ bars etc, you still run a risk of authenticity of the purity of the Gold you are buying.
Lastly, lets assume that you are fortunate to get authentic Gold / Silver, you still run a risk of theft, if you are holding the same with you in physical form.” Explained Niraj.
“Now I am thoroughly confused. I think I would rather keep all my money with me and not invest it anywhere. I think that is the only way of keeping it ‘Risk-free’.” Sighed Anurag.
Niraj Smiled, “In that case, I have some bad news for you. Even if you keep your money in cash, you still run some risks.”
“What are you saying?? How could there be some risk in cash holding?” Anurag was surprised.
“Savings Account: Well a couple of them. First risk is the risk of theft. If you hold on to your cash at your place, you run a risk of it being stolen. Secondly, if you keep that cash in your savings account, the giant of inflation will continue eating it. The cash in your savings account will grow at an interest rate of 3.5% (taxable) while the inflation will reduce it by 7-8% every year. Suppose, you have Rs. 100 in your savings account today with which you can buy an object worth Rs. 100. Next Year, your money will grow to Rs. 103.50 whereas the object would then cost Rs. 107-108. So you are losing on the purchasing power of your money by parking it in the savings account. Thus, holding on to cash might not be risk-free.”
“Now I am exhausted. Why don’t you directly tell me, where should I invest rather than telling me risks in each asset class?” Asked disappointed Anurag.
“No, I am not suggesting you where to invest. I am just trying to tell you, that there does not exist, any asset class, which is totally risk-free. Also, there is NO asset class which is superior to all others in all aspects. Every asset class comes with its own merits and its own set of risks. So the best way would be:
- Have a diversified portfolio i.e. have investment across various asset classes than putting all your eggs in one basket.
- When investing in fixed income products, give due importance to the creditworthiness of the institution where you are investing your money. Don’t just get lured by the word “Guaranteed Returns”.
- While investing in real estate, ensure that the property is in your reach and you keep visiting it periodically so that there is no illegal encroachment on the same. Also, do your due diligence while buying a property. Hiring a professional lawyer might be of help.
- While investing in Gold, prefer the route of Paper Gold / Gold ETF / Gold Mutual Fund than physical gold so as to avoid making charges, authenticity and risk of theft.
- Do not think that market risk is the only risk your investment has. Equity investments prove to be one of the best wealth creators in the long run. Market risks nullify itself when you have a time-frame of more than 15 years. SIP could be a great tool to avoid the risk of bad timing.
- Sitting on cash or lower return avenues (ex savings account / endowment policies) would just deteriorate your wealth as they won’t be able to beat inflation.
- Invest for long term for wealth creation. But also keep sufficient options, in case you require money in the short term to fund the emergencies / contingencies.
“Now I have understood. Risk is everywhere. We just need to learn to protect our feet with slippers and not expect the earth be covered with carpet.” Said Anurag with a relieved smile.
(All the characters in the above article are hypothetical. There resemblance to any person, living or dead, will be purely coincidental)
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