Where to Invest 10 lakh rupees in India without high Risk of loss?

There will always be a threat of loosing money associated with investments. But there is a way to manage this risk.

The trick lies in selecting the right options. This becomes even more important if one has to invest 10 lakhs or more.

It is a fact that, people who have bigger appetite for investment does so by managing the associated risks wisely. People who invest bigger amounts are often doing so to earn good returns, but not at the cost of large risk-exposure.

“Low risk and high return” options are preferable when one wants to invest amounts like 10 lakhs.

But a common man will ever have 10 lakhs to invest at a time?

The answer to this question will be NO in majority cases. Hence, this question is very valid.

So why I am writing an article on such a subject?

The point here is not that “when one has spare 10 lakhs, then how it should be invested”; here the focus is on the approach towards investment.

Even if one has Rs.500 to invest, but if it is done with a mindset as if the person is investing 10 lakhs, makes a difference.

When amount is small, we often invest our money casually. Why? Even if there is a loss, the quantum will remain small.

But when the amount is big like (10 lakhs), person will never invest casually.

Are you able to see the logic?

Important is to develop a frame of mind of a big investor. Even if we are investing smaller amounts, if it is done with the right approach, profits will follow.

Hypothetical case of Inheriting 10 lakhs

Why I am talking about inheriting as an example and not something else?

Inheriting is a very apt example of people receiving unexpected funds and not knowing what to do about it, right?

Though inheriting is an exaggeration, more practical cases can be like: gifts from parents/relatives/friends, bonus from company, sudden surge in profits/investment etc.

What people do in such cases, generally?

The sudden influx of money makes us mad and we start thinking about how to spend the money, right?

We are neither thinking about savings, nor about investment, or loan prepayment; nothing, just spending.

Why we behave like this? Because we do not know how to handle unexpected fund inflow.

As a result, we rather prefer spending the whole lot instead of investing.

See, how confused we get when unexpected funds arrive.

We are not able to decide where to spend it (which is our strong point  ), leave aside the possibility of investing (which is our weak area).

Learning how to invest 10 lakhs is a case of training our mind to think like a professional investor.

If we can map our brains like this, half the battle is won.

The ultimate goal of investing money is to build wealth and achieve financial independence.

The better we can invest our hard earned money, the sooner we reach our goal.

How to invest in a better way?

So, you inherited Rs 10 lakhs from your forefather. Inheriting money is good, but difficult is to use it wisely.

Wise utilization of money can be done by investing it in right options.

So, Where to invest 10 lakh in India?

A wise investment is one that generates good return even in difficult times.

When stock market is bull (like in 2009-10) earning good returns is easy.

But such bullish stock market continues only for a short time. Mostly, the stock market is either bearish or sluggish.

If one knows how to manage investment in bearish market, he will do well in all situations.

Now you can ask, I have 10 lakhs to invest (which you inherited) how to do it wisely?

World learned a tough lesson during 2008-09 financial crisis. After suffering heavy losses, people have become resistant to equity investing.

In those tough times, people found solace in keeping their monies locked in bank deposits or other debt plans.

People bought less of direct equity (stocks). Even indirect equity exposure through mutual fund fell dramatically.

When people become averse to risk-taking, market becomes bearish or remain sluggish.

There is one important lesson to learn here. Always remain risk averse when it comes to investing.

Risk aversion does not mean “take no risk”. To become risk averse, investment know-how of the investor must increase.

Professional investors invest a lot in risky options. But the difference is, they do it after lot of deliberations and research. This way, they take calculated risk and not blind risk.

Riding a car at 325Km/hr is a huge risk. But when the driver is Michael Schumacher, the same risky option converts itself into a billion dollar sport like Formula 1.

#1. Risk Free Investments

Regardless of the type of investment vehicles, there is always certain level of associated risk-of-loss attached to it.

Even our so called risk free options pose some risk for its investors.

But its true that this risk is bare minimum.

How safe are our risk free investment vehicles?

#1.1 Savings Account & Term Deposits

These options can generate risk free returns in range of 3.5% to 7.5% per annum.

Though being a savings account, it still pose some risk of loss. Recently we have seen how much Indian Rupee has devalued. At one time it was trading at Rs 45/$. Now Indian Rupee is close to Rs 65/$.

Such devaluation of currency drastically reduces our purchasing power.

It also leads to higher inflation. This further complicates the situation for common men.

Banks keep providing the same interest rates on savings deposits (which is already low).

Our deposited money keeps getting devalued as returns of result of forex valuation and inflation.

Though our savings account give a fixed interest, but it is too low. Here our money is depreciating instead of appreciating.

So to invest 10 lakhs in India, one must look for alternatives giving higher returns.

#1.2 Bonds

Bonds can generate yields in range of 7.0% to 8.5% per annum.

Bonds are traditionally one of the safer investment option. The risk associated with bonds is inherited from its issuer.

Government issued bonds will yield slightly less, but are very safe. The are not safer than bank deposits.

Corporate bonds yield are higher. But are less safe than government bonds (G-Sec).

One day I heard one of my friend saying that government bonds can never fail. This is not true. Even government bonds can fail.

Consider the example of Eurozone crisis (like Greece). Generally government issues bonds to public to raise money.

The raised money is then used to fund economic growth. Increased economic growth means more taxes for Government.

A part of those taxes are used to pay returns to bond holders.

In Greece the expected growth could not be reached. The result was, bonds failed to give its expected returns.

This situation was not limited only to Greece. Neighbouring countries like Italy, Portugal, Spain etc faced the same problems.

This is also true that G-sec failure happens rarely. So investing in them is advisable.

Corporate bonds are not as safe but G-secs but a AA+ bonds are good enough.

So to invest 10 lakhs in India, bonds can be one of the better alternatives. But its yield is not so high. Hence, investing only in bonds must be avoided.

Invest partly in bonds (30%), and put the balance in other high return options.

#1.3 Debt linked Retirement Plans

It can generate returns in range of 7.5% to 9.0% per annum.

Debt linked retirement plans are safe only if inflation remains at moderate levels.

Average inflation in India in last 5 years was 4.97%, 5.88%, 6.37% and 10.92% respectively. In year 2017, the inflation has remained weak at 2.07% (till Nov’17).

It means that the net of inflation returns of retirement plans has been low.

People contribute judiciously to their retirement funds. If inflation is high, it plays like a silent killer for the accumulated retirement funds.

In the past, debt linked retirement funds has not changed much. The returns are very much aligned to the “10 year government bond yield”.

Like corporate bonds, there is not much benefit of investing in debt linked retirement plan specially when ones objective is to park lump-sum amount.

To invest 10 lakhs, retirement plans can be considered. But allotting only 30% to retirement plans will be better.

The next step

When we opt for risk-free investment in India, zero risk is only a misnomer.

Till the inflation is kept under control, the invested money is actually decreasing in its buying power.

In a high-inflation environment, how to invest 10 lakhs in India?

The possible escape route for common man is to practice long term investment strategy.

In long term investment we are not obliged to invest only in risk free options.

Long term holding allows one to invest in Equity. It is risky, but long holding time will balance the odds. A decent investment horizon should be > 5 years.

But which investment to buy?

The right way to invest 10 Lakh in India is practice equity investing, and staying invested for >5 years.

#2. Check how much risk you can take?

Before buying equity, analysing ones risk profile will give an edge. This is a great idea.

#2.1 First know your Equity/share:

A person who has more knowledge about investment can manage higher risks comparatively with ease.

A novice is most likely to loose money in stocks because of lack of know-how. Lack of knowledge about equity enhances their risk.

Generally speaking, investing in options that we know increases our risk taking capability. When it comes to equity investing, proper skill is like compulsory.

Informed investors takes calculated risks. How?

Suppose you want to buy a share and you went ahead to take advice from your colleague . This colleague advised you against it.

But over internet and in newspapers, this same share is making a lot of buzz. Exerts seem to talk highly about it.

Who are these experts? These are people who know how to do fundamental analysis of stocks in detail.

Common men prefer fixed deposits because they know more about it. Though they also like equity, but bank deposits feels more understandable and known. We actually remember the current interest rates offered by banks on their deposits. We track it regularly.

But do we calculate fundamentals & valuation of stocks before buying it? No.

These two factors dictate return of stocks, and we know nothing about it.

If people will invest in options they do not know about, it is like aiming in the dark and then expecting to hit the bulls eye.

This is the reason why people must spend considerable time analyzing companies business fundamentals & their price valuations.

More awareness about the stock and its underlying business helps us to negate the associated risks.

#2.2 Quantify your Risk Taking Ability:

Quantifying ones risk taking ability is a very important step. This is a great tool to mitigate investment risk.

To understand your risk taking ability, ask a simple question to yourself.

How much money I can afford to donate without compromising my life style?

Answering this question should not be a tough task. Just imagine yourself flushing Rs.500 down the drain. This money will never come back to you. This loss will create problems to you in payment of upcoming bills, purchases, enjoyment etc?

If the answer is NO, probably Rs.500 is the amount which is you maximum risk taking capability.

Try quizzing yourself with higher amount (1,000, 2,000, 3,000, 5,000 etc). Do not stop till the answer is YES.

Repeat his exercise several times before arriving at a conclusion.

Few years back when I did this exercise for myself,  the value which I could arrive at was Rs.1,500/month.

This was the amount which I could like put in the drain without even noticing it. This was my maximum risk taking ability (Rs.1,500/month).

How ones maximum risk taking ability helps in investing?

It helps one to diversify his/her investment portfolio.

Suppose, you want to invest Rs 5,000/month. If your maximum risk taking ability is Rs.1,500/month, then you should diversify your funds like this:

1. Equity (Direct Stocks, Mutual Funds, ETF) = 1 x Maximum risk taking ability = Rs 1,500/month
2. Debt (bonds, retirement plans etc) = Rs 3,500/month

[P.Note: 1500+1750+1750 = Rs.5,000]

Final words on where to invest 10 Lakh in India?

A person who is interested to invest 10 lakh in lump-sum in India, can do so in bonds, retirement plans, equity and diversified schemes like mutual funds, ETF’s etc.

Bonds: Both Government Bonds and Corporate Bonds trad in secondary market.

The way people buy stocks from secondary market, bonds can also be bought in the same way.

But if one wants to invest a lump-sum amount like 10 lakh, allotting a maximum of 30% to bonds will be a better idea (mainly corporate bonds)…read more about bonds purchase.

Retirement Plans: I personally like retirement plans for several reasons. First of all they keep the money locked for long term.

Moreover, as majority of them are debt linked option, the surety of returns is always there. I personally like Annuity, PPF, NPS etc. Spreading money all over in these retirement schemes is a good idea.

Having said that, we must also be aware of the fact that retirement plans yields low returns. Hence allotting not more than 30% here will be better…

Read mode about how to invest retirement money here…

Equity: The balance what remains for equity investment is 40%. First check how comfortable you are in investing 40% of 10 lakhs in equity.

If the value needs some modification, do it. Idea is to get exposed to equity only within ones comfort zone. Next do what is most important, fundamental analysis of stocks.

And now buy stocks.

It will be better to distribute funds equally between direct stocks, equity mutual funds, and ETF’s…

Read more direct equity investments here.

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