Generally speaking when we talk of investments there is just one thing most people want. They want to know what the best investment is that will maximise returns is or what is the best mutual fund or what is the best stock portfolio. In other words there is a perpetual search for the most perfect investment. But does it exist?

Is there such a thing like a perfect investment?

Before we answer that let us understand what a perfect investment should be like? Each investment has characteristics and our eluding perfect investment also certain specific characteristics. It is important to know this because only when you know the characteristics of the perfect investment will be you adjudged as the successful investor. Here it is:

1. Complete Safety: The original investment must remain intact, no matter what. Bank FDs, government bonds, other bonds and similar fixed interest type investments offer this benefit but then you have to compromise on higher rates of return. You also have to compromise to the extent that these investments may not even meet the inflation rate and as a result you are making no real gain.

2. 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 is capital is compromised.

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

4. No or minimal transactions 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 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 a 10000 investment a 2% charges may look tiny but multiply the zero’s and see the impact. On a 10 lac investment Rs. 20000 goes towards charges even before you make a penny. This is the most overlooked area.

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

6. 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.

7. 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.

8. 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 begins 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.