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Home > India > Business > Business Headline > Personal Finance

5 common investment dilemmas | June 30, 2008 09:19 IST

We receive several queries from investors on investment-related dilemmas. Irrespective of the nature of these queries, they help us understand the investor's perception on investments. Typically, such queries highlight the conflicts that investors face while making investments.

Getting into a dilemma while investing is a common phenomenon. It usually happens when investors are indecisive about two seemingly similar situations or investment avenues. If the dilemmas are not tackled early on, it could lead to a flawed investment decision, which can be disastrous for your finances.

These dilemmas are usually a result of the lack of knowledge among investors about various investment options. This leads to confusion about which investment option is most suitable in a given situation. In a bid to simplify things, investors look for answers that may have worked for their friend or colleague in the past.

However, since the situation varies across investors, there is no clear-cut answer or standard solution that will hold good for all investors. In this article we bring out 5 common investment dilemmas that investors grapple with regularly while investing.

Stocks vs Equity funds
This is undoubtedly the most common investment dilemma faced by several investors, regardless of their investment expertise. This dilemma is rooted in the investor's belief that investing in stocks and equity funds is one and the same thing. In reality they are quite different and suit investors with distinct profiles, although for a category of investors both options may prove viable.

While investing in stocks, investors are required to do their homework (read research) pre-investment and post-investment. This involves understanding not just the company, but also the underlying sector. This is in addition to grasping the macro economic implications and its impact on the company under review. Having conducted the research pre-investment, the investor must continue doing so post-investment to ensure he is invested with the right company.

With mutual funds it's a little less complicated. You still have to do the basic research to select the right equity fund. But having done that, the rest of the research (that the investor in stocks has to do on an ongoing basis) is done by a team of experts (read fund managers).

Hold vs redeem
This is the dilemma that a lot of investors grapple with. In fact, it won't be wrong to term it as one of the most difficult investment decisions. Of course, in many cases, the investors are cornered in this situation because they are uncertain of their investment objectives. If there is clarity on that front, then the decision to redeem/stay invested is a relatively easy one.

Investments are usually made to achieve a specific investment objective. Hence, ideally investments should be held until the set objective is reached. However, there could be situations where investors are left with no choice but to redeem their investments mid way. Usually, such situations arise if a particular investment fails to perform according to expectations making the redemption an obvious option.

Although this dilemma sounds surprising, yet it's true. Many investors find it difficult to choose between ELSS (equity linked savings scheme) and ULIPs (unit linked insurance plans). It is obvious that they fail to appreciate that while both are tax-saving avenues, they are two very different investment options and cater to different investor needs and objectives. The best way to resolve this dilemma is by understanding their respective features and the objectives that they fulfill.

FDs vs Liquid Funds
Investors who wish to invest their monies for a short-term (say 40-45 days) have (broadly) two options at their disposal - fixed deposits and liquid funds. Most investors are unable to discern which is the superior option. In terms of returns, both options are comparable. However, in terms of tax benefits, liquid funds are preferable for investors in the higher tax brackets, while FDs are favourable for investors in the lower tax bracket (as also for those who don't have taxable income).

Self-investing vs Financial Planner
Whether to opt for the services of a financial advisor or not is another dilemma faced by investors. This dilemma has been heightened after Securities and Exchange Board of India has allowed investors to invest directly in mutual funds without paying entry load.

Per se, investing on your own or through a financial planner is not a dilemma. It's a decision that can be made easily based on whether you have the ability and time to define your investment objectives clearly with a financial plan on how to achieve them.

Then you need access to research, which is necessary to help you select the right investment option in the right allocation. If you feel upto the task of making these decisions on your own and tracking them post-investment, then you can invest on your own. Else it is advisable to employ the services of a financial planner.

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