How To Use Money To Make More Money

By BankBazaar | January 2, 2018

So, you make good money. But did you know you can use your money to make more money? We tell you how you can do this.

How To Use Money To Make More Money

So, you are making good money and are steadily accumulating a corpus for your goals. But, is there any way you can make more money? Yes! Just a few tweaks here and there and you can make much more than what you are making right now.  These pointers can help you make much more in the long-run. No shortcuts here!

  • Invest, invest and invest some more

The first step to making your money grow is to invest the money in various avenues such as Fixed Deposits, Mutual Funds, stock market, post office schemes, gold and ULIPs. Try to set up a portfolio of investments. Invest across asset classes to minimize your risks. If you don’t have much knowledge about financial products, get the help of a financial planner. Now, that you have your portfolio in place, how can you make your money grow some more? Here’s how.

  • Exit Investments

Choosing the right investments and investing at the right time are not the only important points to make money. You also need to exit investments at the right time. Capital preservation should be the most important goal, especially if you have a huge corpus.

In order to preserve capital and earn more at the same time, you should exit your investments at the right time. Ideally, you should reinvest the maturity proceeds in the right securities. You can migrate to other investments avenues that give you better returns. How can you do all this?

Keep track of your investments. Make this a regular habit. This way, you can exit loss-making investments at the right time. It is best that you redeem investments when you feel that the investment has shown consistent under-performance for more than 4-6 quarters.

You must do this for all investments that are market linked including stocks and Mutual Funds. You can do this even sooner for investments in which you have parked huge amounts. Is there a more effective way? Yes! Consider setting loss limits for your investments.

For example, if you are comfortable with only losses of up to 10%, then you should redeem your investments once they have fallen by more than 10% from their peaks or highs. By doing this, you can ensure that your loss is limited and your portfolio value is also not affected.

Additional Reading: Market Crash! Should You Invest In Mutual Funds?

You should follow the same method for your profit-making investments. Ideally, you should be booking profits on your investments when they exceed your expectations. This is very important for stock investments as stock markets tend to be volatile and if you don’t exit at the right time, you might lose your profits.

You can set limits here too. Suppose you expect a 15% return on your stock investment and it has given you 20%, you should book the profits. This way, you have made good profits and are also taking a step towards keeping your capital intact. You can, of course, look at investing the profit in safer avenues such as Fixed Deposits so that you earn more money on your profits.

But remember to take the tax implications of such a sale into consideration when you decide to redeem any investments. You should make redemptions in such a manner that they are tax-efficient. If exiting the investment is going to result in a tax outflow and will reduce your returns significantly, you can consider holding on to the investment. This should be followed only for profit-making investments. Note that you might make more losses by holding on to investments that are under-performing.

  • Reinvest

When you redeem investments, what should you do with the proceeds? Re-invest it, of course! If you want to maximise your returns, you should consider reinvesting all your interest income, redemptions proceeds and profits made on investments. Note that you should make these reinvestments carefully. They must be done based on the kind of investments you made those profits on.

For instance, returns from equity or shares, should be ideally reinvested in fixed-income investments so that the equity portion of your portfolio is not increased and vice versa. This will help improve the overall returns from your portfolio while keeping your capital safe. In some cases, when you redeem investments, it is better to invest in the same asset class so that your portfolio’s asset allocation remains the same. When reinvesting, you should also consider the tax bracket you fall under. Investing in non-tax friendly investments can reduce your returns especially if you are in the highest tax bracket.

Those in the highest tax bracket can look at Government schemes. Public Provident Fund (PPF) and National Savings Certificate (NSC) are sovereign schemes that can provide huge tax advantages. You can consider reinvesting income from arising from other investments like equities. The taxes you incur due to a sale of property can also be smartly managed.

Capital gains tax arising out of the profits generated by selling real estate can be done away with by investing the gains in capital gain bonds within the time frame prescribed.

Additional Reading: PPF Withdrawal Rules, Loans And Premature Closure

When it comes to Mutual Funds, you can choose the dividend or dividend reinvestment option based on your tax bracket and the type of fund you have chosen. Note that there is a Dividend Distribution Tax (DDT) of 28.33% applicable on dividends from non-equity Mutual Funds such as debt funds, Monthly Income Plan (MIP) and liquid funds. Even though you needn’t pay this tax, the Fund house will deduct this tax from the dividend and only then credit it to your account. However, dividends from equity Mutual Funds are tax-free.

Another strategy is using reinvestment to gain exposure to other asset classes. For example, the income received from fixed-income investments such as Fixed Deposits, can be used to do Systematic Investment Plans (SIP) in equity Mutual Funds. This way, you can gain gradual exposure to equities. Another way is to reinvest dividends from equity Mutual Funds in recurring deposits and other such fixed-income investments.

  • Migrate

You already have a huge lump sum and your goals are years away. What should you do now? You can leverage these investments to fetch you higher returns. However, you can earn high returns only if you invest in high-risk products. But note that when you invest in high-risk products you need to ensure that it is aligned with your risk appetite and doesn’t affect your asset allocation.

For this, you need to migrate between investments. You should migrate between investments such that you move to better-performing investments without such migration affecting the asset-allocation and industry weight of your portfolio. There are many equity products including Sector Mutual Funds, available if you want to make high returns. There are also other products such as Portfolio Management Services (PMS) and derivatives which someone with a high-risk appetite can consider.

However, these products could come at a high cost. You need to do a cost analysis and suitability exercise before going for these products. You need to check for expenses such as brokerage fees, entry or exit loads and taxability of the investment before going for them.

  • Derivatives

Financial derivatives are products whose value is derived from an underlying asset, which could be a commodity, currency or stock. Futures and options are called derivatives. Futures is a contract to buy or sell an asset at a pre-determined price, on a pre-determined date in future.

For example, let’s say you enter into a stock futures contract to buy 100 shares of Infosys at Rs. 1,100 per share next month. If Infosys shares have risen to Rs. 1,200 by that time, you would have made a profit of Rs. 100 per share. Options are contracts that give you an option to buy or sell an asset at a pre-determined price, on a pre-determined date in future.

Here’s an example. Let’s say you purchase an option to buy Infosys shares at Rs. 1,200 per share next month for Rs. 10. Next month, Infosys shares are at Rs. 1,150, which means you will incur a loss by choosing to exercise that option. So, you decide not to exercise the option and your loss is Rs. 10, which is the price of the option. Note that losses can be unlimited in case of futures while it is limited for options.

Additional Reading: Your First Steps To Investing In The Stock Market

Incorporating futures and options into your portfolio can help increase the efficiency of the portfolio. Since these products need technical expertise, you must take the help of a financial expert. Choose a trusted broker after a fair bit of research. It is best to start with a single product and single contract. Once you get the hang of it, you can move to executing more contracts.

For example, suppose you want to invest in the stock market only after it declines, you can sell put options. Never use this as a gambling or betting tool. You should consider these tools as a means of earning additional income. Even if your broker says they will take care of it, don’t go overboard. Remember that derivative products involve high risks and you need to use them wisely to profit from them.

  • Structured products or PMS

Structured products and PMS are two products that are very similar. What are structured products? These financial products are like Mutual Funds and will offer you a combination of equity investments, debt products and derivatives, made in such a way to match your risk appetite.

What about PMS? Apart from investments in equities and fixed-income, PMS will also invest in structured products. Structured products have two advantages; one, they allow you to direct your investment based on a particular view that you might have of the market, and two, you can change the way risks-rewards work as they are totally customised based on your needs.

Structured products involve high risks and might need huge surpluses and lump sums. If you are okay with something less exotic, you can look at PMS. You can, in fact, start with PMS before looking at futures and options. This is because PMS is the most basic alternative investment that one has to Mutual Funds.

You can customise the investment portfolio according to your needs. Now, you need to understand what PMS is exactly. PMS is a service offered by financial institutions such as banks and brokerages, based on your return requirement and risk profile. This is done for a fee. As we mentioned earlier, PMS involves investments in stocks, fixed-income instruments and structured products on your behalf.

Additional Reading: Avoid Portfolio Overlap While Investing In Mutual Funds

Within PMS, there are three types: discretionary, non-discretionary and advisory. Under discretionary, the portfolio manager will make the investment decisions for you. So, customisation is low. Under non-discretionary, the portfolio manager will suggest investment ideas. You are the one who will decide whether to execute them and also when to execute them. Under advisory PMS, the portfolio manager will suggest ideas and you need to implement them on your own. This means that the manager essentially provides you with advice and it is up to you to execute it.

Most PMS firms offer only discretionary PMS. The minimum amount that you might need to invest is often pegged at Rs. 25 lakhs. Big, reputed firms often look at only individuals with a surplus of Rs. 1 crore and above.

Unlike popular perception, this product is not totally customised. You might be shown model portfolios based on your risk appetite and return expectations and you need to choose which one to invest in. Since PMS involves some amount of risk, you need to keep certain points in mind.

First, you need to do a background check on the brokerage that is offering PMS. Then, check the performance of the model portfolio that you are shown, based on past data. Unlike performance of Mutual Funds, which are highly transparent, you can get the performance of the PMS only if you ask. Ask for the data before you decide to opt for a portfolio. Ideally, you should analyse the past performance of the PMS product on a risk-adjusted return basis. Also, choose a scheme based on consistency of performance.

Additional Reading: Turning 40 Soon? Here Is How You Need To Plan Your Investments

Note that charges for these products are pretty high. The cost structure for PMS is often ambiguous. This is because, unlike Mutual Funds, these charges are neither capped nor regulated. Since PMS involved heavy trading, trading costs can be significant. You need to enquire about the management fees, transaction charges, demat charges and other such charges before you invest in any PMS product. In many PMS products, profit-sharing is the fee. The portfolio manager will take a part of the profits when the returns exceed a certain limit.  That is why you need to understand the cost structure thoroughly.

The most important point that you need to keep in mind? PMS products most often do not give extraordinary returns. The best of PMS products generally give returns that are slightly higher than those from Mutual Funds. And don’t forget taxation. PMS can be taxed as either business income or capital gains.

Note that, usually, tax authorities tend to classify PMS as business income because of the high amount of trading involved. So, it will get taxed as per your tax slab and you may not be able to take advantage of long-term capital gain benefits.

Other financial products

If you have a huge lump sum that you want to invest, you could consider assets such as real estate and art. But note that taking a Home Loan for the purchase of a house will provide you with tax benefits as opposed to making purchases using cash. You can explore avenues like international Mutual Funds, Capital Protection funds and Realty funds.

Art is a new kind of investment that requires a fair bit of knowledge. If you want to invest in art but don’t have the know-how, consider Art funds. You can, of course, invest in gold. But invest only in coins and bars if you want your investment to have a good resale value. Or you can consider investing in gold Exchange Traded Funds (ETF). These are like Mutual Funds that invest in gold for you.

Additional Reading: Gold Vs Mutual Funds: The Big Fight

If you haven’t started investing, start now! Unlock the power of investing and see your money grow faster.

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