Why people invest money? People mainly invest their hard earned money to earn capital appreciation.
Majority take investing to earn double digit capital appreciation.
In India, one can expect to earn capital appreciation, in long term, at growth rate of about 16% per annum.
But there are people who do not invest money only for capital appreciation.
For these people, capital appreciation is not the only priority.
These are those people who give equal importance to capital protection and income generation.
In fact for some people, income generation is the only priority with which they entered the investment world.
[Please note: When I talk about capital protection, I mean protecting capital against wrath of inflation]
In this blog post we will see how one can invest money for capital protection and income generation.
We will talk about benefits and drawbacks of this approach.
We will also discuss my personal investment options that I practice for income generation from investment.
#1 Capital appreciation, capital protection, income generation…
When one can earn high returns from following capital appreciation approach, why to opt for capital protection or income generation?
Capital appreciation is a preferred alternative for everyone.
But in order for capital appreciation to happen, money has to stay invested for long term.
Till this money stays invested (not redeemed), it does nothing for its investors.
The only solace available for the investor is to ‘feel happy’ by observing the ‘virtual gains’.
Consider a case where an investment options is yielding fast growth (virtual gain) of the invested capital and also pays regular income.
Would you not prefer this option? Majority will love to buy such an investment.
But in real world a combination of fast growth and high income generating investment vehicle is almost impossible to find.
When people desires fast growth, they are like looking north.
When people desires income generation, they are looking south.
Realisation of both requires a different kind of approach.
What we mean by different approach?
Fast growth requires a very equity focused investing.
Income generation requires most debt/equity approach.
Basically, to understand the nuances of income generating approach, one must be clear about their financial goals.
Before investing, people must choose their investment goals very cleverly.
This is one reason why experts ask everyone to practice goal based investing.
I personally follow goal based investing to its core.
I am a big fan of income investing.
But I also follow capital protection based investing as necessary.
I mainly invest my money to generate streams of passive income.
But for some future/distant goals, I generally opt for capital protection.
But in case my goal are too far in future (more than 7 years), I got for capital appreciation/growth.
Frankly speaking, I am not much of a growth investor.
But when I can give large holding time to my investments, I opt for capital appreciation approach.
I know many people like to practice income investing.
They save very judiciously , but as they are not so aware about income generating options, they go for capital appreciation.
In this article we will explain all points related to investing which focus on income generation and capital appreciation.
But having said that, I would also like to emphasize on keeping a balanced portfolio.
It is always advisable to maintain a balanced portfolio.
It is advisable to keep a clever balance between capital appreciation, capital protection and income generation.
#1.1 Why invest money for capital protection
Capital protection is an investment philosophy which is an excellent compromise between capital appreciation and income generation.
Investment yield in case of capital appreciation is maximum.
But along with this yield comes high risk of loss.
This also poses the disadvantage of low-fund-liquidity.
As there is a risk of loss if the money is redeemed in short term, hence redeeming the invested money in short term is not advisable.
Investment yield in case of fixed income generation is minimum.
But along with the low yield, comes the advantage of assured earnings.
Liquidity of the invested fund is reasonably good as income keeps flowing in and capital is also safe.
Investment yield in case of capital protection is moderate.
It is higher than income generating sources, but lower than capital appreciation.
But this yield is high enough to beat inflation in long term.
The risk factor is present, but not as high as the capital appreciation option.
I personally consider that, even if we can protect our accumulated capital (against inflation), in long term, we can call ourselves a winner.
For sure growth (inflation + extra) will be perfect.
But not everyone can generate such high returns.
To generate such high returns one has to resort to riskier investment options.
This is not advisable for people who know less about the nuances of investments.
#1.2 Why invest money for income generation
I know there are people who depend on their investment portfolio to manage their livelihood.
The income generated from their portfolio is used for this purpose.
It may sound surprising to many, but this is possible to create a income generating portfolio which gives you assured earnings.
One can use this earning to manage their day to day chores.
I know people who live their lives in this way.
Here I am not necessarily talking about jobless people who have no other option but to be dependent on their income from portfolio.
I am talking about very affluent individuals who have willingly opted to depend on their investment-income.
It took them years to build their portfolio so rich. But today they are reaping the benefits.
These are the people who are really financially independent.
In addition to the paycheck, these people also earn investment income.
The portion of this investment income is so big that they are not dependent on their paycheck to maintain their standard of living.
So what they do with their paycheck?
Hundred percent of their income from job/business gets invested.
It means, every month their investment portfolio gets bigger and bigger.
It means higher income every month.
Lets me ask you a question, do you get your paycheck increment every month?
I am sure 99.9% will give no for an answer.
There is nothing wrong.
In a corporate world monthly-paycheck-increments are not standard.
People get increments only once a year or maximum twice a year.
But when it comes to income generation from ones investment portfolio, it is possible to give self “monthly increments”.
You know how?
Keep growing your investment portfolio each month.
Keep adding funds to its each month.
This will in turn generate higher income every passing month.
But the catch here is, one must buy income generating assets.
We cannot buy growth stocks and growth funds, and expect to generate fixed income.
If one starts accumulating income generating assets, financial independence will no longer be only a dream.
If this concept of income generation is so inviting, why everyone is behind capital appreciation and not income generation?
I told you, the problem of income generation is that, its yields are very low.
People fail to see the bigger picture and continue their rat-race behind high return investments.
But don’t worry, there is a hope.
But we will discuss about this, later in this article. The only hint we can have here is, yields are low initially but it gradually grows over time.
Lets not forget the bigger picture. Money is not invested only for high returns.
It is also essential to keep the capital safe.
This is where the concept of portfolio diversification becomes extremely important.
Wise men must keep a balance between capital appreciation, capital protection and income generation.
People who are younger can keep their capital appreciation component heavier.
People who are closer to retirement age or beyond, must keep their income generation component heavier.
We can take a wise clue from our corporate world.
Profits are of paramount importance to any company.
But wise leaders never make a mistake of undermining the importance of cash flow in their business.
Profits are like ‘capital appreciation’ in investment.
Profit is the main objective of doing a business.
Majority invest money for fast capital appreciation.
Focusing on cash flow in business is similar to focusing on ‘income generation’ in investment.
Cash flow is like blood running in the veins of any business.
When cash flow will stop, business will die.
In investment analogy as well, income generated from investment portfolio is as important.
In fact some experts even claim that cash flow management is more important profit management.
Company can be least profitable, but still it will survive if it is able to manage its cash flow.
But company will not survive prolonged negative cash flow even if it is extremely profitable.
Perhaps, some experts of investment has taken a clue from this analogy, and has based their investment theory on “income generation” in totality.
It is not a surprise to see that almost all successful investors of this world, rely more on income generation than on capital appreciation.
My observation says that professional investors maintains a balance between capital protection and income generation.
“And when they get opportunity, only then they go for capital appreciation”.
Ninety percent time, market does not offer good capital appreciation opportunities.
Hence experts divert their attention towards income generation and capital protection.
#2 Limitations of capital protection and income generation
2.1 The Wrath of Inflation:
If given a change all wise investors will only save money and keep it safe in their bank accounts.
But there is one hindrance that keeps us from practicing this philosophy.
The hindrance is posed by “inflation”.
Inflation is something which is not evil.
The good side of inflation keeps the future growth of business possible.
But while the business is growing, it posses a disadvantage to its end customer.
Good business, having good products and services, would like to make more profits.
One way of doing this is by increasing sales.
Other way of doing it is by increasing their profitability.
This is done by increasing the price of their products and services.
When price of goods and services in the market increases, it creates an inflationary pressure.
End users (customers) have to pay more price for the same things.
How does this effect us?
The same one litres of cow’s milk will cost more in year 2017 than it was in year 2016.
Though we are buying the same things, but we still have to pay more.
Why this happens, because companies like Amul decided to increase their sales price. This is business.
This is the way all business operates in the world. Price rise is something which is imminent. In economies like India and China, price rise cannot be avoided.
So inflation has two sides to it.
On one side it enables companies to make more money.
On other side it makes customers (who work in those companies) to spend more money.
But the problem is, in long term, the rate of inflation (price rise) completely overshadows the grown of income of an individual.
Why this happens? Not necessarily because the individual didn’t get the necessary pay hike.
This happens because people often start saving & investing much later in their life.
So how to make-up for this loss of time?
Invest in options that gives fast capital appreciation and can beat inflation.
This hurry-worry is understandable, but this is not the way to manage inflation.
In the process of managing inflation we cannot forget to manage our near-distant needs.
We cannot continue living in future and keep compromising all present needs and dreams.
This is the reason why maintaining a diversified investment portfolio is a must.
To maintain diversity, one must cleverly include different asset classes in ones investment portfolio.
Some asset class will help in income generation. Some asset will help in capital protection.
And some assets will give fast capital appreciation.
Investment portfolio generating income, meets ones immediate needs.
But yield from ‘income generating assets’ is low.
Moreover, due to inflation ones purchasing power also reduces with time.
Hence an income which is already low today, may become irrelevant after few years.
This is one reason why focusing only on income generation is not advisable.
Investment portfolio must be kept fully diversified.
We will see later in this article how to effectively practice capital protection and income generation effectively.
2.2 Government will tax you
In general, all debt linked investment options are taxable.
Most of the capital protection and income generating investing options are debt linked.
Hence the investor has to pay income tax to the government if they practice debt linked investments.
One of the reasons why people stay away from capital protecting investments and income generating investments is because, they are taxable.
So what is the way out?
As far as capital protection schemes are concerned there are options available which can bring ones tax liability to minimum or even zero.
If one invests their savings in retirement linked options, no income tax will be levied.
But problem with such options is that, these retirement linked plans have a lock-in period (like 15 years).
So if ones objective is to invest for short term, for capital protection and income generation, then retirement linked plans are not suitable.
So what we can do?
It is not possible to avoid taxes if we are investing in debt linked plans.
But do not worry, the tax is imposed only on the interest and not on the full invested amount.
Hence, even though one has to pay tax, the tax liability is very small.
Suppose you had invested Rs.100,000 for a year in a fixed deposit that gave you interest @8% per annum.
Your capital at the end of one year will be Rs.108,000. In this case the interest earned is Rs.8,000.
Suppose you come under income tax slab of 20%.
It means, you will be asked to pay income tax @ 20% of Rs.8000 = Rs.1,600.
It means, out of your total appreciated amount (Rs.108,000), tax component is only 1.48%.
So my suggestion is, do not worry too much about the tax burden.
The hype about the debt-plan being bad just because they attract tax is not fully right.
This hype has been wrongly supported by few ignorant people.
The advantages of investing for income and capital protection is so big that at the end of the day you will not regret paying those 1.48% as tax.
I recommend you to take consultation an income tax expert if your investment portfolio is heavy weighted on debt-linked side.
Here you may consider transferring some funds to equity-side as well.
2.3 Long term goals can be exposed to riskier & faster growth rates
What are long term goals? Goals which will take more than 5 years to realize can be termed as long term goals.
When goals are so far away in future, it is only wise to opt for investment options which can offer fast capital appreciation.
Selecting capital protection and income generating options here is not advisable.
Why growth investing is necessary for long hauls?
Over a period of time, the wrath of inflation becomes even worse.
The humble growth provided by capital protection and income generating options are not enough.
Lets look at it from a different perspective.
I have some funds in my hand which I want to invest.
I will need these funds only after 10 years.
In this time period, growth linked investment options can give at least 16% per annum returns.
Why should I go for debt linked options which cannot give me ore than 7.5% in next 10 years?
The idea is, when one can allow their investments a longer holding period, going for faster capital appreciation options like stocks, equity mutual funds etc are good.
#3 Investment options suitable for capital protection and income generation
I will list here those investment options which I have personally tired and found to be a decent income generator.
I will also list down some options that I have not used but have read about its authenticity as an income generator.
Basically, all investments that assures fast capital appreciation can be treated as a “capital protector”.
But the problem comes when we have to keep the capital protected for short term. Here we cannot opt for growth options.
The risk of loss is high here when holding time is short.
There are investment options which offers decent growth and also generates regular income.
These are the investment options that I love to invest in.
Lets see which options are more suitable for capital protection and income generation…
#3.1 Blue Chip Stocks
Blue chip stocks are such options that can offer both capital protection and short term income.
As these stocks represent established and highly profitable companies, their growth in long term is nearly assured.
Their growth rate may not be fast enough, but it will beat inflation.
Blue chip stocks are also characterized by the predictability of their future income.
This is what makes them such a reliable dividend payer.
Lets take an example of a typical blue chip stock in India, HDFC Bank.
In last 10 years, the stock of HDFC Bank has been able to increase its dividend per share payout at rate of 3.1% per annum.
In addition to this, the stock price of HDFC Bank has grown at rate of 22% per annum.
Lets take another example of a blue chip stock in India, ITC.
In last 10 years, the stock of ITC has been able to increase its dividend per share payout at rate of 10.6% per annum.
In addition to this, the stock price of ITC has grown at rate of 19.4% per annum.
Lets take a look with another perspective about the growth rates provided by ITC.
Suppose, 10 years back the dividend yield of ITC was 2.7%.
If Dividend per share of ITC grows at rate of 10.6% per annum, it means today its dividend yield (for buyer who bought this stock 10 years back) will be 7.5% per annum.
This is fantastic.
Dividend income is also not taxable at hands of the investor.
Being tax free, return of 7.5% per annum is fantastic.
Dividend income alone is beating the inflation.
This is the power of investing in best blue chip stocks.
It provides both fast capital appreciation (22% by HDFC & 19.4% by ITC) and outstanding short term income (dividends).
But the control point lies in selection of the ‘best blue chip stock’ available at that moment of time.
I know critics might say that the idea of investing in blue chip stocks for the purpose of capital protection and income generation is misleading.
This is the reason why I have mentioned the limitation of selecting the ‘best blue chip stocks’ for this purpose.
Furthermore, selection of only good blue chip stocks is not sufficient.
The other control point is also the ‘holding time’.
Pick a best stocks and hold it for 10/15 years.
This strategy will not only give capital protection (adjusting inflation) but also fantastic short term income.
Read more about blue chip stocks
#3.2 Real Estate
After blue chip stocks, my second investment choice for capital protection and/or income generation is real estate.
Like blue chip stocks, this option can also offer amazing growth along with stable income.
In fact stability of income is more certain in case of real estate.
We saw a huge stock market debacle across the globe in year 2008/2009 due to real estate crisis in USA.
Post that tragedy, a huge chunk of investment has shifted from real estate sector to stock market and other investments (like gold).
But housing, commercial properties etc are something that people will need.
It is not a requirement which can be avoided for a long time.
No matter how negatively one may think about real estate sector, but even such thinkers needs shelters over their head.
Like people cannot survive without food, it is also not possible to survive without a decent shelter.
The point I am trying to make here is that, no matter what may come, demand for real estate properties will always be there.
This certainty of demand makes the real estate sector so special in terms of investment product.
Their certainty of being always in demand not only keeps its price always moving up, but it also generates very stable income in form of rent.
Historically, real estate sector has proved to be an excellent inflation hedge.
The prices of property has increased several folds in India in last couple of decades.
Some areas in Mumbai and Delhi has become so expensive that only ultra rich can afford a property in those areas.
One day I randomly Googled, “property prices in marine drive Mumbai”, the first result showed a price of Rs.9 Crore (USD $1.3 Million).
But my curiosity was not satisfied with this revelation.
I dig dipper and I came to know about a “NCPA Residential Complex” in Nariman Point, Mumbai.
A property in this complex was costing close to Rs.35 Crore (USD $5.3 Million).
The point I am trying to make here is that, people will always need homes.
Depending on ones affordability people will prefer to have a house even in places like New York, Paris, Nariman Point Mumbai etc.
Real estate sector serves everyone’s needs.
For business men they provide commercial property.
For individuals and families they offer residential properties.
People who can afford a house of only Rs.5 lakhs can have his suitable property.
People who can afford a house of million of dollars can have his suitable property.
Real estate sector is really diverse and has capability to meet anybody’s requirements.
When we have such a product available, shining in front of our eyes, why not invest in it?
Yes, this is one investment product, if handled properly, can convert common men into a billionaire.
In terms of capital protection and income generation, I will recommend this investment product to all my readers.
Again, what is the ‘control point’?
Investing in cities which are growing faster is preferable. Cities like south Mumbai & New Delhi probably have already matured.
Hence their rental yields have gown down considerably.
Preferably select other growing cities like Gurgaon, Navi Mumbai, Kolkata, Chennai, Bangalore, Hyderabad, Pune, Chandigarh, Indore etc.
Another control point is ‘builder and buying time’.
If possible, buy property of a good builder at their project launch stage.
At this stage the properties are available at a very undervalued price levels.
Buying a real estate property, in such prime cities, at an undervalued price levels, ensure faster capital growth and excellent rental yield.
In India, the real estate investment trust (REITS) is going to be lauched pretty soon.
REITS is one of the best way to generate stable investment income
Read more about real estate investment…
Gold is perhaps the oldest investment options in this list. Earth loves this precious metal
Nations, banks, investors, every one hoards golds. Individuals buy gold as Jewellery.
In India, buying gold is a custom and tradition.
Gold is another investment options whose demand will probably never fall.
One one hand gold is a rare metal.
Most of the gold deposits has already been mined and are in possession of Countries like USA, Germany etc.
It is speculated that around 31,000 tonnes of gold reserves (gold which has already been mined) are available in this world.
Out of these gold reserves:
- ~25% is in possession of United States of America.
- Next is Germany which has ~10% of the total reserves.
- International Monetary Fund (IMF) has around ~9% of total gold reserves.
- Italy & France has about ~8% each of the total gold reserves.
So combining gold reserves of USA, Germany, IMF, Italy and France, they are hoarding more than 60% of the total gold reserves of the world.
What the balance world shares is only 40% of the total gold reserves.
So what does it mean?
Gold is a rare metal available on this mother earth. On top of this, majority gold are already in possession of USA, Germany, IMF & Italy.
This makes the gold even a more scarce commodity.
To make the matter even more interesting for investors, the gold is always in demand.
This demand peaks whenever the financial markets of the world is in trouble.
These are some factors that makes Gold an excellent inflation hedge.
Hence, for the purpose of capital protection, gold is an excellent investment portfolio.
Though gold deposit cannot produce any income for its investors, but just for the fact that it is a rare metals, makes it a preferred investment vehicle.
Its price is increasing at decent growth rate.
And it is also speculated that, with passage of time, gold price will grow even faster.
Form the objective of maintaining a diversified portfolio as well, gold is an excellent choice.
This is one investment product that offers great diversification and also assures inflation hedge.
The control point for investors is only to buy gold during price falls.
Recently in India, Gold was trading at price levels of Rs.31,000 per ounce (2012).
But after year 2012, the gold price has seen some corrections, and its price has settled today at Rs.28,500 levels.
A good way to buy gold these days is through Gold ETF’s.
But I will not recommend gold ETF purchasing through SIP. Buying gold only during price correction is preferable.
Read more about gold investing…
#3.4 Regular income plans
These are one investment options which are tailor made for people who require regular monthly income.
These investment options does not provide any growth, but it keeps the principal amount intact (at least it does not decrease in value).
In addition to this, it generates regular income.
I have already written a blog post in past about the regular monthly income plan, so I will not go into too much detail about this topic here.
This is one investment option which are mainly liked by retired people.
But I have still not reached the retirement age and I still love such products.
I like to accumulate such investment products in my investment portfolio.
Though I do not aggressively buy them, but I make sure at at least 10% of my total funds are used in buying these income generating products.
Initially I used to feel very discouraged by seeing their yields, but today I thank myself million times that I stuck with this investment vehicle.
On one side my investment portfolio is full of blue chip stocks, real estate, gold etc.
But on other side I make sure that I maintain cash and regular income generating options as well.
Today most of my day to day chores are met by the dripping income from such investment options.
Read more about regular monthly income generation…
#3.5 Fixed Deposits (FD)
If you have no other investment option visible, and you want to invest your money for capital protection or income generation, then you can opt for bank deposits.
Fixed deposit is a great compromise if other investment options doesn’t look profitable.
For me, my fixed deposits can earn me regular income, keeping my principal amount intact.
My fixed deposits can also make my funds grow at a rate close to inflation.
As investing in fixed deposit can be done using our online banking account I consider it very useful.
I will suggest my readers to use the fixed deposits like this. Whenever you have any spare fund, lock it by making an FD.
Keep doing it every time you have any spare funds.
While you are continuously diverting your spare funds into FD, keep your eyes open for other capital protection and income generating options like blue chip stocks, real estate properties and gold.
When you see some investment options being available at good prices, redeem your FD and use this fund to buy a more profitable investment option.
This action will always keep your money invested.
The invested money will keep giving you capital protection or income generation.
If you want to invest money for capital protection and income generation you will have to see investing in totality.
Fix your financial goals. Select right assets and build a diversified portfolio.
Looking only at income generation is not sufficient. Looking at only capital protection is not good either.
It is essential to combine income generation, capital protection and capital appreciation all together is building a perfect investment portfolio.
A combination of stock, real estate, gold, regular income plans and bank’s fixed deposits can build a near perfect investment portfolio.