Which Tool Would You Choose?

Quick question that always raise every time I explained to others the importance of starting to make financial plan since early days is what types of investment should they choose. While choosing the right investment is as important as the goal itself, you could never define the most suitable investment choice without knowing first what are the goals you want to achieve.

Why? Because the investments that you will select are depend on how long do you want to receive the return, how big the return you want to receive and how big is the risk you willing to take. The period, the return rate and the risk can only be determined once you know what are the goals you want to achieve. That's why financial planner cannot determine what's the best investment options for each person if the goal itself is still unclear. You could read how to determining your financial goals in this post: What is Your Financial Goal? So, you should keep in mind that the investment product is only a tool to help you achieve your goal!

There are several investment options that you could choose, as follows:

1. Savings or Time Deposit

If your financial goal is short term goal, which you want to be achieved within 1 until 3 years, then probably you just save your money in savings or time deposit, especially if you have low risk investment profile. By keeping your money in savings or time deposit for short term, you protect your money from the risk of capital loss. One of the financial goal that is very suitable with this type of investment is Emergency Fund since you need to keep the money accessible whenever emergency condition is occurred.

2. Mutual Fund

The concept of mutual fund is collective investment, where many investors pool their money to purchase securities (debt or stocks). There are different type of mutual funds, which is classified based on the risk and type of securities invested. In consequence, each type of mutual funds will give different rate of return. Types of mutual funds can be divided into 4:

• Money market fund, it is suitable for short term investment (less than 5 years) since the risk is the lowest but the return also the smallest compared to others. The fund will be invested on money market instruments, such as savings, time deposit and obligation matured within 1 year. The average rate of return for this type of mutual fund is around 7% per annum.
• Fixed income fund, it is suitable for medium term investment within 5 to 10 years since the risk is slightly higher than money market fund, but the average rate of return is approximately 10% per annum. The fund will be invested in government and corporate bonds, which matured more than 1 year.
• Balanced fund, it is suitable for long term investment that is more than 10 years, especially for conservative investor. This fund is invested in stocks and bonds in balanced portion to minimize the risk of stock price fluctuation. The average rate of return for this type of fund is 15% per annum.
• Equity fund, it is suitable for aggressive investor who has long term financial goal, which is more than 10 years. Minimum 80% of the fund will be invested in stocks. Since the risk is the highest compared to the three funds above, this fund also provides the highest return, approximately 20-25% per annum.

3. Stocks

If we choose to invest in mutual funds, we don't need to choose which stocks that we want to purchase as the fund manager will select and diversify the stocks to be invested. However if you already understand the fundamental and technical analysis to select the best stocks, you could invest in stocks directly. Of course you need to have the time and knowledge to monitor and trade your stocks to obtain the capital gain. Nowadays you could easily trade stocks through online broker.

4. Property

Some of my friends are not comfortable investing in securities and they prefer to invest in property since return of investment in property in Indonesia is relatively high, about 20-30% per annum. I guess this type of investment is suitable for low risk profile investor. However you should also note that investing in property requires large amount of money while for mutual funds you could start investing from Rp100,000. The most important thing that should be considered in investing in property is the choosing strategic location, otherwise you would get capital loss instead of the return.

5. Gold

If you're following the news, the price of gold is decreasing recently, which means a very good timing to buy. I would prefer to use gold as long term investment or for emergency fund instead of for short term investment since the price is hardly to be predicted. 

From the above five instruments, my husband and I choose savings for emergency fund and short term financial goals, we also have fixed income fund and equity fund for the goal of kids education fund and we also have golds for long term investment. I also trade stocks using online broker, however I only use idle cash for that since I just started learning about trading stocks, so I didn't consider it as an investment.

So, have you decided which of the above investment you would choose?

Cheers,

Indispensable Lady