Perfect Investment: Does it exist?

High rate of return: The returns on the investment should be such that it beats inflation by atleast 5 to 10% and thus we are able to create real wealth for ourselves. An investment that is such that returns overcome all expenses, loads, taxes and still there is much more left. Perhaps 12 to 15% is what we are asking for. Hence it is real estate, stocks, equity mutual funds that qualify in this category but then safety of capital is compromised.

High Liquidity: The investment must be such that we can exit anytime we like without having to worry about associated penalties. Bank FDs, PPF (public provident fund), insurance policies and bonds do not fit the bill then.

No or minimal transaction costs: An investment that does not have entry cost or has minimal associated transaction costs can have a huge impact on the ongoing profitability of that investment. ULIPs (unit linked insurance policy) do not qualify as the transactions costs can be quite steep. All the same, transaction costs at exit can also have a huge impact on profitability. On stock investments, the overall cost can be in the range of 1.5% to 2% or more for an entire buy and sell transaction. So if this is repeated often naturally it will have an adverse impact on the portfolio. Take mutual funds - for equity mutual funds, you could easily land up paying about 2 to 2.5% as loads and leave aside the fund management charges and other charges. On Rs 10,000 investment a 2% charges may look tiny but multiply the zero's and see the impact. On Rs 10 lakh investment Rs 20,000 goes towards charges even before you make a penny. This is the most overlooked area.

No taxes or minimal taxes: Ideally the returns from our investments must be completely free of any tax liability. The law of the land influences this aspect regularly and each investment must be assessed from time to time in terms of its tax advantage.

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No need for knowledge: The investment must be completely easy to understand and should not require special knowledge. You could buy it and forget about it. Tree plantations qualify here but it is not practical to think of growing trees at home unless you have land in native places. Trusting external companies is fraught with risk. Bullion is another option that qualifies here but then high rates of returns may have to be compromised with.

Completely passive: The investment does not need active management. Real estate qualifies here but then liquidity has to be compromised with and transactions cost can be exceedingly high.

Shortest time frame: An investment that moves like a rocket and makes you rich really fast like 'a double in a year' type. You could be a trader in derivatives but then safety of capital is out of the question.

From the above characteristics, each one of us decides which one of the above combinations is best for us. Thus begin the search for the best tip available as we generally do not want to take the effort and do the hard-work ourselves. There are no short cuts in life and there is an opportunity cost for everything we do in life. The above are the characteristics of the perfect investment however such a perfect investment just does not exist.

It is ideal to relate your circumstances and situation to some combinations of aspects from above and then search for your 'customised' perfect investment. Quite likely you will find it.

Kartik Jhaveri, an expert at Financial Planning, is a Certified Financial Planner and a Chartered Wealth Manager. He may be reached at kartik.jhaveri@transcend-india.com .

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