For most of us, when it comes to investing, Mutual Funds are the first thing that pops up in our minds. But irrespective of the asset class, the best investment plan with high returns is the one thing that we as Indians love to chase!
However, the fact remains – High Risk always accompanies Higher Returns and eventually, it depends on an investor’s risk appetite – How much risk you’re willing to take for a given percentage point return?
But since we’re discussing Mutual Funds and alternative asset classes that have the potential to generate even higher returns than mutual funds, the point we should be making is ‘Diversification’ and how well can you place your funds so you can minimize the ‘degree of risk’ undertaken while bettering your returns. Right?
The Right Way of Investing
When it comes to investing in India, while there are a lot of investment options, the three best investment options that come to my mind are Real Estate, Stocks and P2P Lending that can potentially fetch you returns better than the best-selling mutual fund.
Remember all three asset classes are very different in nature and the factors driving the returns for each asset class can vary significantly. So now that we’ve established the significance of asset class, risk, and returns, let’s dig deeper into how you can better your investments with higher returns!
Investments and Asset Classes
While narrowing down to an investment avenue, you ought to consider among various factors the following:
- Your risk profile
- Your existing investment portfolio
- Your investment tenure
- Expected Returns
Along with the above factors you also need to get a clear picture of the economy as to which side the wind is blowing. This can help you bring one step closer to your goal. Let’s further discuss the individual asset classes and factors driving the returns for each:
- Real Estate:
One of the fastest-growing sectors in India, real estate continues to be the first love among NRIs when it comes to investments. As per IBEF1, the Indian real estate market is expected to be valued at Rs. 65,000 crores by 2040 as compared to Rs. 12,000 crore at present. Registering historical returns of 20% annually (1991-2014)2, it is poised to grow at 19.50% CAGR3 in the upcoming years. (Well, there goes your better than mutual fund investment option ain’t it!)
Well, investments in real estate can drive returns in two ways – Rentals and Price Appreciation. While rentals are just like an icing on the cake (ability to generate around 7% – 8% annually), to build wealth, you should essentially focus on capital appreciation and that happens only if you have invested in a good property. The location of the property is the single most important factor that drives property price appreciation. Although external factors such as government policies and the overall economic scenario could significantly impact the sector. Demonetisation and implementation of RERA on real estate are the most recent examples of such external factors that have dented the pace and led to the slowdown in the industry.
So, if you’re looking at investments in real estate, you should have a very long investment horizon as unlike many other asset classes, you might not see steady appreciation. Additionally, the regulatory approvals, annual maintenance, and other investment costs could shoot your overall cost of acquisition. So invest only if you’re confident and have a good knowledge of the sector.
While mutual funds and stocks both belong to the ‘Equity’ asset class, direct equity investments with the right stocks can generate much better returns than mutual funds. Similar to real estate, with stocks you again make money in two ways – Dividends and Price Appreciation. With your focus being on the latter, direct investments can be a risky affair since there are instances where shares of even sound companies have seen a fall of 35% or even more in a single trading day.
High volatility is a norm for equities and investors should exercise caution when engaging in stock markets directly. While equity markets tend to perform well during the phase of economic growth, individual stocks could react sharply to any form of negative news. A number of factors ranging from external, geo-political, global, economic, or stock-specific news could be responsible for the down-turn inequities. A wrong investment holds the potential to wipe off a significant chunk of your capital. But on the contrary, the right mix of stocks holds the potential to make you wealthy in enormous amounts.
So highlighting the importance of asset allocation, diversification and long-term horizon form an essential strategy when it comes to direct investing inequities. While the individual stock portfolio can vary, the benchmark index SENSEX has delivered a stellar 16.09% CAGR4 (from 1979 – 2019). That works out to a value of Rs. 3.90 crore5 for every 1 lakh invested in 1979. But again patience is the key for direct stock investing and along with that you need a deep understanding of the overall economic picture, pick out the best companies, understand the balance sheet and stick with your portfolio till the best performance shines out of it!
- P2P Lending:
Although a recent phenomenon, P2P or peer to peer lending is making news in the alternative asset class with short term investments that have the potential to generate net average returns of up to 17%. An advanced form of crowd-funding based model, P2P Lending platforms such as LenDenClub have been generating waves among the investor community with its ability to generate a top-of-the-line return in short durations.
Fundamentally, such platforms allow borrowers to raise unsecured loans at high rates of interest. Investors on the platform provide funding to the borrowers seeking to raise funds and in turn receive interest for such investment proposition. P2P Lending is regulated by RBI in India, and at present, as per the regulations, an individual can invest maximum up to Rs. 50 lakhs through the P2P route. However, the unsecured loans can pose a default risk and that’s where diversification comes into the picture. Investors can invest in a pool of various borrowers with different risk-profiles that helps them bring down their overall default risk, eventually earning them better returns on their investment. You can read all about P2P Lending in detail here.
With these investments offering top-of-the-line returns, it is essential to understand the risk associated with such investment options. While for short-term goals, P2P lending is the best option available there is, an investor should consider a mix of various asset classes to generate wealth appreciation over long term prospects.