How much depends on two criteria: the risk profile of investor and the liquidity requirements of the investors.

Risk Profile

Equity investments are not free from risk. Let us take 35 years old Nagesh; has a long bright career ahead of him. He can afford to take greater exposure and risk in equities. On the other hand, Nagesh’s father is retired and has no source of income other than his savings. So he will be able to afford very little risk; looking at evergreen stocks to choose his investments.

Liquidity requirements

Liquidity requirements signify the need of cash to meet one’s payment obligations. Nagesh has an idea of his monthly expenses so he has a better fix on his monthly cash requirements. He also needs to maintain a certain amount of cash in liquid savings to spend in medical expenses or any unplanned tour. Beyond these requirements, he can look at investing in equities. On the other hand, Nagesh’s father has to meet his entire expenses from his savings and would have large requirements for immediate cash. Hence, he can allocate a smaller portion of his savings to invest in equities.

Moral

From above two examples, we realized that Risk profiles and Liquidity requirements vary with age, current financial position and one’s own personality. These two criteria will be different for different people, but one should not lose sight of one’s risk profile and liquidity requirement while investing in equities.

We normally play three roles saver, borrower and investor; keep on switching between these three.

Savers: the saved money is used in future for satisfying needs when the earnings get stop and rainy days starts.

Borrowers: spends more than his earnings. He hopes in future he will earn enough to fulfill his primary requirements and also repay his creditors.

Investors: have sparkles in their eyes. He invests in his business and figures out that he has taken up the biggest challenge and has to prove himself.

Let’s see the example to see the relationship between the borrower, saver and investor.

You have Rs 500; you have two options either buy shirt or buy it after six months. It’s true that the same shirt will cost you Rs. 550 after six months.  So, what to do? First answer will be to buy a shirt today; thereby you will save money by buying shirt of Rs. 500.

Now, assume that your friend needs that Rs 500 urgently and willing to return Rs 550 after six months. What will you do then? You will give him Rs. 500 and buy the same shirt when he returns money back.

Now, assume that your friend promises to return you Rs. 600 instead of Rs. 550 after six months. You will give him Rs. 500 without a second thought and buy same shirt after six months at Rs. 550 and save Rs. 50.

In the example, borrower is willing to repay higher sum to compensate lender for the loss of his purchasing power. Hence, from this we learnt that:

• Savings does not make any sense if it does not compensate inflation.
• You need to be compensated at least for the loss of your purchasing power to boost you saving instinct. Here you compensate for inflation.

Now, let’s have a look on simple arithmetic:

In first assumption, you lend Rs. 500 to your friend and he returns Rs. 550 after six months; thereby he gives you Rs. 50 extra when he returns your money. While in second assumption, he returns Rs. 100 extra. The money you lent him is “principle” which Rs. 500. And the extra is the “interest”. Interest paid on the principal is the percentage of the principal. In first assumption, interest rate is Rs. 10% and in second it is 20%.

Hence Interest Rate is the aid to the saver by compensating the damages caused by inflation. While borrower has to think twice before borrowing as he has to pay the cost.

Now, what is the relation of Investor with the borrower in inflation? Investor uses his money to invest in his business. In above example, we have seen that investing is uncertain as many things may go wrong. Hence investor will go ahead expecting rewards offset the risk. Hence he will opt to lend his money to borrower to make as much as profit out of interest.

Conclusion:

Borrower rush to borrow more to spend now; Investor finds higher profit from its business. Saver is at the receiving end and insists on higher Interest Rate reestablishing the balance. Borrower and Investor have a distinct advantage when Inflation rises and interest swings the balance of power back in Saver’s favor.

Now let us move to the worse side i.e. loss. From everywhere the frustrated sounds and full of depression words can be heard like:

“I lost all my savings in the stock market scam of 1992.”

“I lost all my savings in the panic that ensued after the nuclear tests in 1998.”

“I lost all my savings at the time of CRB Capital markets fall down.”

“I lost all my savings in the ‘New’ economy meltdown of 2000.”

Actually we were advised repeatedly and most of the time it remain sounding frequently in our ears that save money for bad period and we do so but some of us due to misfortune loosed it all.

In such situation we start the recap of advised given by our teachers, parents and well wishers during young age. My English teacher used to teach; even penny saved is equivalent to penny earned. But as we grow up forget such small things and this penny left after some period. Unfortunately, I was not taught about the Inflation who is the quiet enemy that can result to the waste of coin. My Mathematics teacher also taught how to calculate interest but I ignore and haven’t taken sincerely and seriously and now I am realizing that it is the best protection against that secret and silent enemy called inflation. And I didn’t save my penny and due to lack of understanding the importance of interest I am in bad position.

Realization dawns

What are basic fundamentals of world finance and economics and its miserable science was taught during my education. During inflation the safest way to save money is to store in your bank account or invest anywhere so that the money get secured and interest can be earned on it. This is to save penny in rainy day.

Life rolled on

At age of 22 I start working. The value of money I realize and habituate to save them too and the sound surrounding my head were prompting and mentioning me “-a penny saved….”.

I decide and became firm that I don’t allow to hit the unwarned enemy inflation on my savings. The small margins like Bank saving accounts and fixed deposits are not for me. To beat the hell of inflation and to make more profit from my savings in chooses the path of stock trading. I am confident for beating inflation with sound strategy. This wide margin will now overcome and break the rate of inflation. For conclusion of impeccable period the statement of Harshad Mehta case which was orchestrated boom should kept in mind. Here I was caught the total impact of the downdraught that followed the famous boom.

Some more…

The lessons which the teachers have taught me is now kept a side and new forth host of aphorisms included –No free Lunch, No pain-No gain….

It is important to save money for rainy day but to protect it from inflation it is necessary to invest in asset like shares, debentures, bonds, gold or even real estate.

At this stage the decisive point of issue arise and at back end of term investment many stories of poor to riches as well as riches to poor ones are the saved money now convert into risky business. Your expectation of higher return will put you in higher risk which you have to take. Your savings are now crossing the Rubicon threshold as soon as you decide to invest your savings and take form of risk capital.

By hearing the term Risk Capital there is nothing to get panic. The other type of investments where there is no risk and you remain relaxed. The investment like government bond or in a NSC but it is very different from the investments of equities in which risk is very high. But right now keep a side this discussion.

In month of August the Union Commerce Ministry decide the Foreign Trade Policy. The ministries decided and announce to include Gem and Jewelry sector in duty drawback rates. The duty drawback rates are likely to be announced in fortnight or month for Gem and Jewelry sector. The exporters of Gem and Jewelry sector will charge the duty according to duty drawback rates.

The Gem and Jewelry industry was down in financial year. But the industry has turnaround the export and rise up for 2.26% in month of September 2009. The decision likely to be announced at very right time, as the Gem and Jewelry industry is in recovery process.

As per recommendation of the Gem and Jewelry Export promotion Council (GJEPC) the duty drawback rates of gold is Rs. 20.6 per gm and Rs. 20600 per kilo of gold Jewelry  exported and for silver Jewelry exported the duty drawback rates are Rs. 1030 per kilo. The Government will decide the final rates.

The whole sector of Gem and Jewelry will make profit. According to GJEPC the decision of inclusion of the sector shall promote and help the small exporters in small cities. Now the small exporters from small cities can  purchase gold from the open market, export the final product and can claim duty charged as the gold as per duty drawback rates announced on the gold which they have purchased from the open market.

These rates will also recover and turnaround the diamond industry but they have to wait for some period. The western diamond industry will come into light after Christmas. The chances of recovery are likely to come up in coming months.

In fact, this can be hardly diversification as only $7 billion in fusion of Gold holds the portfolio out of total $285.5 billion of US treasuries. Nationalized banks of India and even other international investors are in hurry to stocking up gold as they are losing trust in the dollar.

US, with its easy monetary policy, weak dollar had even become weaker. This is right time to invest in Gold as world’s reserve currency is rapidly falling down in value.

The retail investor should purchase gold as it is the highest quality asset and  the best way of  investment  in gold through Exchange Traded Fund (ETF).

As the investor trades with shares and mutual funds  in stock market, in the same way gold ETF  can traded in the stock market.  Approximately one gram of gold is equal to price of one ETF unit. Basically this is well managed funds, NAV track the price of gold in open market. Presently UTI, Reliance, Kotak, Quantum, Benchmark and SBI offer gold ETFs.

The trading of gold under Gold ETF is around Rs. 1058 crore. While gold worth over Rs 70,000 crore annually is sold in form of jewelries, coins, biscuits and bars in India. Therefore in form of investment the investors don’t have enough knowledge of security aspect of investing gold in electronic form. There were days when people were holding physical cash under the land and storing physical (paper) share certificate which was having major risk factors. Today, banks are managing passbook for your cash and share certificates are dematerialized in electronic form. Similarly, now gold can be dematerialized in electronic form with safer way to own it.

For new gold investors, the purity of gold purchased is not guaranteed as they have to depend on human honesty. In case of buying gold in electronic form, the purity of gold with gold ETF is non- existent. As far as denomination is concern, you can buy 1 gm or with Quantum you can also buy 0.5 gm of gold ETF unit which is very affordable. In case of reselling, you can sell physical gold at the price after deducting jewelry making charges. With Gold ETF, you don’t have the bear any kind of loss. You can avail wealth tax benefit if you go for Gold ETF. Also you can gain long term capital tax gain of 10% in case of Gold ETF which is 20% in case of consuming physical gold.

This is all about to invest in the simplest and efficient way in most precious metal in the form of Gold ETFs.