Generally speaking, when we talk of investments there is just one thing most people want. They want to know what the best investment is that will maximise returns. In other words, there is a perpetual search for the perfect investment. But is there such a thing like a perfect investment?
Before we answer that let us understand what a perfect investment should be like. There are many attributes or characteristics to an investment decision. Our eluding perfect investment also may have a combination of one or many characteristics.
First, it is important to know the characteristics of various investment decisions. Second, only when one applies a suitable combination of the characteristics and creates an investment strategy one will be able to determine whether or not he has been a successful investor. Here are those characteristics:
Complete Safety: The original investment must remain intact, no matter what. Bank FDs, government bonds, other bonds and similar fixed interest type investments offer this benefit but then you have to compromise on higher rates of return. You also have to compromise to the extent that these investments may not even meet the inflation rate and as a result you are making no real gain.
High rate of return: The returns on the investment should be such that it beats inflation by at least 5-10 per cent, and thus we are able to create real wealth for ourselves. An investment that is such that returns overcome all expenses, loads, taxes and still there is much more left. Perhaps 12-15 per cent is what we are asking for. Hence it is real estate, stocks, equity mutual funds that qualify in this category but then safety is capital may be compromised for the early years of such investment.
High Liquidity: The investment must be such that we can exit anytime we like without having to worry about associated penalties. Bank FDs, PPF, Insurance policies and bonds do not fit the bill then.
No transactions costs: An investment that does not have entry cost or has minimal associated transaction costs can have a huge impact on the ongoing profitability of that investment. For example mutual funds may qualify here while ULIPs may not qualify considering they broadly do the same thing. Equities and ETFs are serious low-cost options. For real estate this was at a controlled level, however, now even such transaction and associated cost have multiplied many fold.
No taxes or minimal