In an earlier article, we had discussed how customised investment, depending on one’s present and future needs, could help tide over financial crises, for example one caused by a sudden job loss. But to secure an effective shield for the future, one needs to do his homework well and research the various short term, middle term and long term options available. Here is a brief guide to help you get started on your research on the instruments you could consider for your portfolio.

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Mutual Funds and ELSS

A mutual fund is typically an investment vehicle made up of a pool of funds collected from a group of investors for the purpose of investing in securities such as equities, bonds and money market instruments. (Money markets typically look at short-term financial needs of Corporate Entities.) These are operated by fund managers. The purpose of mutual funds is to ensure diversification of risk. It also gives an opportunity to retail investors to be able to invest in expensive stocks.

In the short term, open-ended equity, debt and balanced funds (having a mix of debt and equity) could be good options.  Open ended funds are collective mutual fund schemes, which can be bought and redeemed any time. Close ended schemes have a lock in period and can’t be redeemed before the lock in period.

ELSS (Equity Linked Savings Schemes) are close-ended mutual funds and have a lock in period of three years. These offer taxation benefits as well. This could be a medium term option along with a few Post Office schemes, which have a lock in period of five years.

In the case of mutual funds, there is an annual fund management charge (typically around 1.25%) which needs to be factored in. A few open ended funds also have an exit charge if the funds are withdrawn before a specified period (typically around 1%).


Investments in stock need to be backed by advice from a technical perspective. Technical analysis tells us when the price of a stock is likely to rise and fall. Investing with a contrarian approach would help us make quick gains. One needs to go long (buy) when the prices are falling and go short when the prices rise.

When one invests in stocks for long term gain, necessary due diligence needs to be done on the fundamental aspect of the business that the company is in. Most equity analysts conduct research on a fundamental basis with the use of EIC (Economy, Industry and Company) framework. A valuation exercise then tells us if the company is currently overvalued or undervalued. Investing in undervalued stocks is the best bet for good long term returns. The returns from equity in India have historically exceeded returns from real estate.

Real Estate Investment Trust (REIT)

The cost of owning commercial and residential real estate in prime locations across India is next to impossible for a salaried professional. A viable alternative would be to invest in an REIT or Real Estate Investment Trust, where the savings of retail investors are pooled together and invested in real estate.

REITs are companies that buy, sell, manage and develop real estate assets. Much like mutual funds do, REITs put together the investments of many individuals and institutions; and then deploy this money in real estate. The income then generated through real estate is shared among the investors.

There are Equity REITs (the enterprise concerned fully owns the revenue generating property), Mortgage REITs (the enterprises extend loans to real estate firms or property management groups, directly or indirectly) as well as Hybrid REIT (a combination of the two).

Life is uncertain- have adequate life insurance!

People need to invest in Insurance. No one ever knows what providence has in store for us. It always makes sense to have a life insurance cover of up to ten times of one’s annual income, in order to be able to provide for any emergency that might arise in the event of death of a person.

Are ULIPS a good option?

Financial experts have traditionally opined that it is not wise to use a hybrid instrument like ULIP (Unit Linked Investment Plan) for investments. I call it hybrid because it mixes insurance and returns. It is also fairly liquid and could be a good medium term option of three to five years. The returns from this are much higher than traditional instruments such as FD.

In the past, high costs and returns ate away a large portion of the return. The costs have been capped through IRDA regulations, which means that the returns have now improved.

In order to maximize returns from ULIP and also to secure your investment, it would make sense to move to balanced funds when markets are down and do the switch to equity when the market starts doing well. On an average, a total of four switches are free of cost in a year.

Debt funds have also done well in the past.  However, one needs to be invested for a minimum period of five years to obtain reasonable returns on ULIPS. A check on charges such as mortality charges for life insurance, premium allocation charge, fund management and administration charges are also necessary. These are well regulated by IRDA (Insurance Regulatory and Development Authority) but still investors need to factor in these costs while investing.

Investing in real estate, investing in an IPO (Initial Public Offer) and Infrastructure Bonds (Some provide tax relief) could be other good long term options.