Immaterial of whether you are in your 20’s or in your 50’s and you are looking at an investment you should know some of the basics of investing, so here it is.

By and large at some stage you must have been approached by some investment advisor. He (increasingly she) must have offered you mutual funds, ppf, unit linked plans, and thrown a lot of jargon.

Throwing jargon is one of the easiest (and impressive) ways of getting the fees that the advisor earns. ALL industries do that. Take a simple English word and give it a different meaning, and then go about explaining it. Take a mouse, for example!

But what is an investment, shorn of all its jargon?

It is a sum of money that you outlay hoping to get a higher amount back. This can take two forms:

1. Investment like a lender
2. Investment like an owner

1. Investment like a lender means you are giving your money to an organisation for them to use so that they can grow their business. As a compensation for using the money, they pay you interest. If you invest in PPF, NSC, Kisan vikas patra, RBI bonds, etc. you are lending money to the government of India. However, if you keep money in a fixed deposit in, say HDFC, you are lending to a private sector body. Bank deposits also fall in the category of `investing like a lender.

` What are the advantages and shortcomings of such an investment?

– Certainty of interest, when it will be paid and when the capital will come back
– Convenient to handle
– Simple to understand ? the only thing you need to know is the amount of interest, and will the original amount that you put in, comeback.


– Inflation may erode the amount, substantially. For e.g. if the inflation rate is 6%, the value falls by 44% in 10 years time. So if you get the SAME amount (back) that you put 10 years ago, inflation has eroded its value.

` Default risk ` the person taking the money does not repay. Many co-operative banks, some nbfcs, some small business owners, may fall in this category.

` Delay risk ` if the government of India decides to postpone your PPF payment by 10 years what will you do? Looks odd, but remember some politicians may decide that all amounts above Rs 0.5 milllion should be paid in installments you may have to grin and bear it.

– You take the risk, but if the company does well your rewards do not increase.

– Debt is not risky in the short run, but it is risky in the LONG RUN.

2a. To invest like an owner means you are joining a company as its partner. This obviously means you get a portion of the company, you get the accounts of the company, they report to you on a quarterly basis, they allow you to participate in the well being of the company, ….all the perks of ownership.Advantages:

1. You get to participate in the well being and in the ill being of the company.
2. When the company does well, you get a fantastic hedge against inflation
3. You get dividends and price appreciation as rewards for holding shares


– Stock picking is not just watching TV and buying the `hottest stocks.` It takes a lot of effort to pick a good stock, to structure a portfolio and keep allocating resources to the correct companies.

– It is very risky in the short run
– You require a good head, and a greater stomach to make money with shares

2b. Not enough attention is paid by people to investment in real estate (I mean actual, active investing, not buying a house and hope it will appreciate). If you can keep buying properties, rent it out, sell when appropriate, real estate will also give you an excellent inflation adjusted return. The advantages are that in a worst case scenario, you can use the assets, however it requires a lot of expertise. Also individual real estate calls are complicated (Real estate mutual funds – we have been hearing about it for long, hope it happens fast). A very unstructured, unsupervised market. If you find a good advisor, you are blessed. My real estate portfolio is with a veteran who gives me stunning returns.

2c. Starting / Partnering a small business! Small business is big business. Most of the world economy is supported by the small business owner. Most of the jobs are created by them. Their media share is much less than the market share that the small guys have!

I hope I kept is simple. My wealth creation has some formulae. One of them is to do all four:

– Invest in a good portfolio (mutual fund or unit linked insurance with a small recurring charge)
– Select a good fund manager (I mean fund house)
– Do an SIP
– Think long term ? I mean 10+ years

If you do all four, I daresay you can look at Warren Buffet and say, “Sir I listened to your rule number 1. I have not made losses.“ That is great!

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  1. Dear Sir,

    You have brought out the differences between the Debt and the Equity asset class in a very clear manner. Though what you have spelt out above is a known matter, yet your unique style of writing highlights the unique roles of both equity and debt in any portfolio in very unambigous manner.

  2. A basic question… I personally feel, one should give up endowment policies. This is one the basic that one should do as clean up before going for Investing.

    In addition to “selecting a good fund house” , one should not get carried away by fancy fund names. Stick to basic equity. Many a times names like ” SOOO Natural Fund”, etc etc are not great. People think they might give great returns. Unfortunately they are thematic or secotral fund.

    Article did justice as the name says. Rest things can be covered in comments section. Hope i am not wrong in what i am saying

  3. No Financial advisor tells about Darling and Dump syndrome. Be it Stocks or Real Estate, hype is created around some companies or properties during their launch that they are going to be next Apple/Infosys or Manhattan/Malabar. Your returns are spectacular if you catch these ‘would be darlings’. Buying equity of Infosys or Apple today is like investing in FDs. For an ordinary & small investor, FD/RD could be better than SIP/ULIP

  4. For each his own. What one feels comfortable and understands, is what one should go ahead. Investing thru asset allocation is an easy thing to say, but when combined with human behaviour, it becomes dificult to follow. Investing is a boring exercise – my take .
    As Subra says , indentify the modes, have patience , have courage to change mid-course, if reqd, and more times than not, you should make your monies.

  5. “My real estate portfolio is with a veteran who gives me stunning returns.”

    Never heard about this in any of your posts????

  6. hi subra, my husband wants to get into ‘call’ and ‘put’ options. i read it is very risky. could you write an article on this and give your recommendations?

  7. As usual Brilliant piece of advise,yet so simple
    The fifth formulae is to have Adequate term insurance.

  8. Concerned wife, there is no law against SUICIDE. However, attempted suicide is punishable with a prison term.

    Options trading is for professionals. Instant road to poverty for the uneducated, God bless.

  9. Hi Subra, adventurous husband wanting to know how/where to get trained to become an expert in Derivatives? My situation is like this: serving a jail term is better than living dead. I like your terrific sense of humor and direct connect with people.

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