There are a couple of golden single word questions which are life’s best teachers. Some of these are What ? When ?, Why ?, Where ?, Who ? and How ?. Today we will discuss the “Why? and Where?” of Investments. We mostly do everything with a purpose and that is same with financial activities. All investment instruments serve some or the other purpose(s). But, there is probably no single instrument which is likely to serve all of them. Therefore, it is important to understand the various purposes that these different instruments serve. This will help us make a fair matching of our requirements and instruments. We should know why we invest where we do.
Why we Invest where we Do
We invest funds where we feel appropriate for the following primary objectives:-
(a) Growth. This is related to overall capital appreciation. For eg. I might be looking at growing Rs 1 lakh to about Rs 25 lakh over a period of time. And we generally refer to this growth as capital gains.
(b) Income. This is related to regular cash inflows from the asset, ie Debt/Equity/Real Estate/Commodity, in the form of interest/dividend/rent.
(c) Security. At times we are more interested in just keeping the capital safe. This concern is more for the funds which we need in the immediate and near time frame.
(d) Tax Planning. It is prudent to minimize tax outgo by efficient tax planning. Some instruments are attractive because they serve this purpose very well.
(e) Liquidity. It is important to keep a good bulk of funds in readily available form. Liquidity refers to the characteristic which measures how fast/easily we can convert the asset to cash.
Benefits and Shortcomings
Nowadays we all are health conscious and engage in some or the other physical activity. We measure the fitness in terms of endurance, strength and flexibility. We need to do different exercises to cater for each requirement. As no single exercise can probably address all the issues in the desired measure. Similarly, it is difficult to find a single financial avenue/instrument which can serve all purposes. We therefore need to have a balanced portfolio, which offers us the optimum levels of all objectives. We can further understand this with the benefits and shortcomings of some of the common financial instruments. These are listed in the following table.
| Instrument | Benefits | Shortcomings | Remarks |
| Real Estate | Growth, Income | Liquidity | Exception of Real Estate Investment Trusts (REIT) which offer good liquidity |
| Gold | Security, Growth, Liquidity | Income | Exception of Sovereign Gold Bonds which offer interest income |
| Equity (Mutual Funds, Stocks, ELSS) | Growth, Income, Liquidity, Tax efficiency | Security | Variety of instruments to customise as per requirements |
| Debt Funds | Security, Income, Liquidity, Tax efficiency (in comparison to FDs) | Growth | Corporate Bond Funds might carry some risk. Gilt Funds which invest in Govt Bonds are highly secure. |
| Fixed Deposits | Security, Income | Liquidity, Tax efficiency | Exception of FDs under Senior Citizen Schemes which give tax benefits |
| Provident Funds | Security, Growth, Tax efficiency | Liquidity |
Conclusion
Our Financial objectives would demand something of everything in varied measures. Further the requirements will also keep changing with age. In the initial years we would be more interested in Growth. While in the later years security of capital may be more important to preserve created wealth. We need a proper understanding of all instruments so that we can adequately allocate our capital to all asset classes. A proper asset diversification will help optimize benefits on all fronts. The primary objective should be Growth, without compromising on the short-term Liquidity, while minimizing tax outgo.