Every investor wants to earn a highest possible return out of their investments. We are easily attracted to schemes like double or triple your money in 1 year. But, as knowledgeable investor, you must know that it is not practically possible to earn those ROI (return on investment) in short period of time. If you are investing your money then you must remember this equation –
High return = Risk free rate + Risk premium
Risk premium is the risk that you are ready to take in return for higher ROI. It can work in both ways, A risk free rate is the rate that is offered by government backed securities like T-Bills, Government bond etc. Usually, these returns are between 4% and 8%. Let us see different mode through which we can earn higher ROI –
- Invest in balanced fund – To earn return of around 15% you should remain invested in a balanced fund for a period of at least 5 to 10 years.
- Small and Mid cap mutual funds – Small cap funds invest in smaller companies of market capitalization between 50 Cr to 500 Cr. These companies have given a return in the past which are greater than returns generated by index. You should stay away from investing in small companies on your own and invest in these companies only through mutual fund route. You should select a small cap fund that has good track record for returns. Mid cap funds would invest your money in mid sized companies and would generate ROI that would be greater than index over a 3 to 5 years time frame.
- Buy real estate property before launch – You can buy a property before launch at much cheaper rates compared to rates after launch. You should always look for projects in under construction in your city and grab it before launch as after launch, marketing cost may increase the cost to the double.
- Peer to peer lending – A peer to peer lending platform is a great medium to invest your money for great ROI. Peer to peer lending platforms are based on social lending concept in which a group of lenders fund a borrower. But, it is very important to pre screen the borrowers before investing your money in peer to peer lending. Modern peer to peer lending platforms would pre-screen the borrowers for you. Peer to peer lending can provide you a post tax return of around 12% to 18%.
- Index funds – Index funds are index linked funds that invest investing in 30 companies at a time. These funds invest in blue chip companies of their individual sectors and hence act as a perfect diversification option to earn a great ROI.
- Build a high risk portfolio – A portfolio is set of securities that individually exhibit different risk and return. You can build a portfolio by adding securities that have a higher risk. You should not add more than 15 securities in a portfolio to earn highest ROI.
As discussed above earning a higher ROI is a high risk game. If you want to earn a return that is greater than market returns then you must be more than willing to pay higher risk.