Surplus Fund Investing: A Profitable Venture?

Investing surplus funds is a great way to make your money work for you. Whether you're an individual or a business, having extra cash on hand presents a unique opportunity to either reinvest it or pay off existing debts. While it may be tempting to splurge on something frivolous, investing your surplus funds can help you outperform inflation and grow your wealth for the future. From stocks and mutual funds to alternative assets and cryptocurrencies, there are numerous investment options available to help you maximize your returns. However, it's important to carefully consider the risks and potential drawbacks of each investment vehicle before committing your capital.

Mutual funds

• Fund Management: Mutual funds are managed by fund managers who make decisions about buying and selling securities. This passive form of investing does not require you to have prior knowledge of the market, as all decisions are made on your behalf.
• Diversification: Mutual funds invest in various asset classes, providing diversification across your investment portfolio. This helps to mitigate market volatility and optimise return potential.
• Accessibility and Liquidity: Mutual funds offer accessibility and liquidity, making it easy to redeem your funds when needed. This is especially beneficial if you require funds for emergencies or short-term goals.
• Systematic Investment Plans (SIPs): SIPs allow you to invest a fixed amount regularly in mutual funds. This disciplined approach ensures you benefit from cost averaging and is suitable for individuals with surplus cash looking for a consistent investment strategy.
• Types of Mutual Funds: There are different types of mutual funds, such as equity mutual funds, debt mutual funds, and hybrid mutual funds, catering to various risk appetites and financial objectives. Choose the type of mutual fund that aligns with your financial goals and risk tolerance.
• Returns: Mutual funds can provide good returns depending on past performance, investment horizon, and type. However, it's important to note that returns may vary, and there is always a risk associated with investing.
• Flexibility: Mutual funds offer flexible investment modes, such as lump-sum investments or SIPs. The minimum SIP amount is usually low, making mutual funds accessible to most people.
• Ease of Investment: Investing in mutual funds is generally easy and quick. You can manage your mutual fund investments online from the comfort of your home.
• Consultation: When investing in mutual funds, it is advisable to consult a financial advisor to receive personalised advice on fund selection and risk management.
• Risk Management: While mutual funds offer diversification and professional management, it's important to remember that all investments carry some level of risk. Ensure you understand the risks associated with the specific mutual funds you choose and assess your risk tolerance before investing.

Stocks

Investing in stocks is one of the best ways to grow your surplus money over time. When you buy stocks, you're purchasing partial ownership of a company, and as the company grows, so does your money. Direct equity investments like stocks can offer great returns over a long investment horizon, making them ideal for young investors looking for long-term investment options.

However, investing in stocks requires time and patience, as well as a sound knowledge of the market. It's important to assess your risk appetite and invest accordingly in large, mid, or small-cap companies, aligning with your financial goals.

For instance, Indian investors can use apps like Cube to invest in US stocks like Apple, Amazon, Google, Microsoft, and Tesla. However, it's important to exercise caution when investing in direct stocks, regardless of the geography, as they are more prone to volatility than other investment options like mutual funds.

Consulting a financial advisor or wealth coach can be beneficial in making informed decisions about stock investments, helping you choose stocks based on your risk profile and investment goals.

Gold ETFs

• Gold ETFs are funds that invest in gold and are traded on major securities exchanges like shares of stock. One unit of a gold ETF is typically equivalent to one gram of physical gold, with a fixed purity of 99.5%.
• Gold ETFs offer two main advantages: inflation protection and growth potential. Gold has an intrinsic value that is not directly correlated to the financial markets, making it a natural hedge against inflation.
• There are two main types of gold ETFs: those that track the price of gold and those that invest in companies in the gold mining industry.
• When investing in a gold ETF, it is important to research the fund's performance, expense ratio, and liquidity. The average investor should exercise caution with leveraged gold ETFs and gold exchange-traded notes, as these are riskier investments.
• Some popular gold ETFs include SPDR Gold Shares (GLD), VanEck Gold Miners ETF (GDX), iShares Gold Trust Micro (IAUM), and VanEck Merk Gold Trust (OUNZ).
• Gold ETFs can be purchased through online brokers, and it is recommended to buy them regularly to take advantage of dollar-cost averaging.

Direct equity

However, investing in direct equity requires time and patience. It is also important to understand that investing in the stock market is an active form of investing, where all decisions about buying and selling are made by you. Therefore, you must have sound knowledge of the market. Moreover, you need to assess your risk appetite and invest in large, mid, or small-cap companies accordingly.

If you are a novice investor or do not have the time to actively manage your investments, direct equity may not be the best option for you. In such cases, you may want to consider investing in mutual funds or exchange-traded funds (ETFs), which are managed by fund managers who make investment decisions on your behalf.

• Time and patience: Direct equity investments may require a long time horizon to generate significant returns. It is important to be patient and withstand market volatility.
• Market knowledge: A good understanding of the stock market and financial metrics is crucial for making informed investment decisions.
• Risk assessment: Evaluating your risk tolerance is essential before investing in direct equity. Different companies have varying levels of risk associated with them, and you should invest according to your risk appetite.
• Company fundamentals: It is advisable to invest in companies with strong fundamentals, lower debt, consistent profit growth, and positive cash flows.
• Diversification: Diversifying your portfolio across different sectors and company sizes (large-cap, mid-cap, small-cap) can help mitigate risk and maximise returns. An ideal portfolio may consist of 10-15 stocks across sectors.
• Regular tracking: Monitoring the performance of your investments is crucial. It is recommended to track the performance of your direct equity investments at least twice a year.

Alternative assets

Alternative investments are those that fall outside the conventional categories of stocks, bonds, and cash. They are often referred to as alternative assets and are less liquid and more lightly regulated by the US Securities and Exchange Commission (SEC) than traditional investments. Here are some examples of alternative assets:

• Private equity and venture capital: Private equity involves investing in private companies or groups of companies, often providing capital, industry expertise, talent sourcing, and mentorship. Venture capital is a subset of private equity that focuses on startup and early-stage ventures.
• Hedge funds: These are exclusive investment funds that employ various strategies to trade relatively liquid assets and aim for high returns. They are typically only available to institutional investors and high-net-worth individuals.
• Real assets: These include tangible assets such as land, timberland, farmland, and intellectual property like artwork. Real estate is the most common type of real asset and is considered one of the world's biggest asset classes.
• Commodities: Commodities are tangible goods with real-world uses, such as gold, silver, oil, and agricultural products. They are considered a hedge against inflation and their value fluctuates with supply and demand.
• Art and collectibles: These include items such as sports memorabilia, entertainment memorabilia, high-end watches, vintage cars, coins, and stamps. They may increase in value over time or due to the historic significance of associated parties. However, they can be difficult to value and may not provide dividends or income until sold.
• Cryptocurrencies: Cryptocurrencies are a form of digital currency that fall outside the traditional scope of stocks and bonds. They offer the potential for capital appreciation or passive income through staking rewards.
• Private debt: Private debt refers to investments that are not financed by banks or traded on an open market. Private debt funds provide capital to companies that need additional funds to grow their businesses and typically earn returns through interest payments and loan repayments.

Frequently asked questions