But the truth is there is an another way which can make you rich apart from the buisness. But that thing takes time to make you rich you need a lot of patience and knowledge for that. I am talking about investment here. The great advantage of investment is that there are some ways also in which you do not require huge capital you can start from low capital also.
So, we are going to talk about the importance of investing and how and where to invest to get good returns.
Contents
- What is investing?
- Savings vs investments?
- Reasons why should we make investments?
- Demerits of investing.
- How and where to invest?
- What cannot be considered as investment?
What is investing?
Trying to get some good returns or profit by using your resources over a time period is called investing.
Lets take an example to make it easy:
We all have studied and went to schools and colleges to gain the knowledge. And maybe some of you are still studying who are reading this article. So, basically we have invested our time to gain the knowledge and now because of that knowledge we are doing a job or buisness or you can say we are earning good returns and able to survive in this world. Hope you all have understand the term investing.
We can classify the investing in three parts; low risk-low returns, medium risk-medium returns, high risk-high returns. So, we can say returns is directly propotional to the risk. The higher the risk you will take, the higher the returns you will earn. But it doesn't mean you take risk without doing any analysis or research. If you are doing this there's a high chances of loosing the whole capital.
Before we go further we should talk about the inflation.
Inflation is the general rise in the prices of goods and services of an economy over a time period.
The average inflation rate of india is 5-6% per year.
Lets understand by an example, suppose you bought a shirt at 20$ today and after a year the price of the same shirt is 22$. Then this 2$ rise in the price is known as inflation.
Savings vs investing
Savings- when you use to put your money which is left after all the expenses and liability's in a instrument that gives you less or equal returns to the inflation level, it is called savings.
Usually savings is used for a shorter time period(upto 3years). Some examples of savings are fixed deposits, reccuring deposits, saving accounts, liquid debt schemes etc.
Investing- when you use to put your money left after all the expenses and liability's in an instrument which gives you higher returns than the inflation rate, it is called investing.
Investing is used to earn some profit over a long time period (more than 3years). Some examples of investing is gold investments, equity, mutual funds, real estate.
Some people also use savings for a long time period without even knowing that this decision can make how much difference between the returns.
Lets understand by an example. Suppose there are two friends john and mark. john use to save his money and mark use to invest. They both put a lump sump amount of 100$ for 10 years. John's money is growing at the rate of 6% annum and mark's money is growing at the rate of 10% per annum. Now see the difference between their returns after 10 years.
Now you can see that john's money has grown to 170$ in 10 years. It can't even doubled. Wheareas mark's money has grown to 237$ which is more than double. So a little change in compounding rate can make a big difference in profit and this difference will continues to increase over a time period.
This happens in real life you see same people doing same jobs and earning equal. But after some years one have been gone to another level, he may have a car, house everything. But one hasn't been upgraded he is still at the same place they had started from. The difference is just that one had chosen the savings and one had investing.
Reasons why should we make investments.
1. Retirement
Everyone wants to retire early and wants to enjoy his life but you know what if you want to enjoy your life after retirement then, you need a wealth in your account which can replace your income after retirement.
2. To beat inflation
If you want to save money as well as wants returns more than the inflation then investing is best for you. In this rapidly growing world if you cannot be able to beat the inflation then you are not saving my friend you are loosing the money.
3. To reach your goals
Investing helps you to achieve your goals like owning a house, buying a car, want to gift a ring to your partner etc.. It could be anything. As investing has the capability to multiply the money and create a big wealth over a long term.
4. You can be a part of well developed organisations.
Everyone has the opportunity to be a little shareholder of the top companies. Everyone has the opportunity to make profit with the growing economy of our country. If you are not doing this.. Who are stopping you?
Now we have learnt that what is investing, why should we invest and benefits of investing. But there are a demerit also.
Demerit of investing
1. Losses
Yes investing has the power to make you rich. It has the potential to help you to reach your financial goals. But apart from that it has some demerits also. Losses is one of them. If you don't invested carefully or you don't have any knowledge about it. Then there is high chances of losses. Sometimes people losses all of the capital. There are different risks in different industry we will read deep further.
Investing requires a lot of knowledge if you want to earn high returns.
How and where to invest?
Many people want to invest but they don't know where and how to invest? Look there is many ways of investing. As we discussed earlier that higher the risk the higher will be return. We are going to discuss about the ways and also the risk paramenters of each particular thing.
1. Fixed deposits
Fixed deposit scheme is provided by almost all the banks. NBFC companies also provides fixed deposit. It provides higher interest than saving accounts. In this instrument you earn interest over a time period on your amount. The interest rate varies from 4 - 7.5%. The longer the time period the higher the interest rate will be. The minimum tenure of fix deposit is 7 days and maximum tenure is upto 10 years. The great advantage of fixed deposit is that you know how much returns you will get after the fixed tenure. This is very low risk investment almost negligible.
The great advantage of fixed deposit is that you can avail a loan of 80-90% of the value of deposit at 1-2 % of interest.
2. Gold investments
Usually Indians have a lot of attachment with gold. They are doing investments in gold since many decades. The CAGR( Compund annual growth rate) of gold is 10%. If we compare the returns with the risk then it would be medium risk and average returns. The risk is medium because it is very volatile as it is not fixed that the prices continues to rise every year. Sometimes it falls down also.
The great advantage of gold is that there is no problem of liquidity. You can sold it easily whenever you need money.
But there are also some demerits of gold;
- Its very difficult to find that the gold you are buying is pure or not.
- Storage- If you use keep gold in your house then it is very risky as there is chance of being theft. If you keep it in bank then they will apply some charges to keep them in locker.
But in previous years lots of schemes comes forward. Now you don't have to buy it physically you just have to invest your money in gold ETF(exchange traded fund). You will get the returns as the gold price rises. And the great benefits of gold ETF is that there is no chance of theft and you don't have to pay the charges to keep it secure.
3. Real estate
The average CAGR of real estate over the last 5 years in India is around 10-11%. Usually lots of people in India use to invest in real estate. There is two ways of earning profit be real estates one is its price rises over a long period. But you can earn from rent also. Real estate is a medium risk investment except some situation. The investment in real estates can make you rich overnight but it requires luck also.
Lets understand by an example, lets assume that we used to live in a non-metro city and govt. decided to run a metro in that city. And your house is very near to the metro station which is going to construct. The price of the properties near the station will rise in unexpected way. Its an example so don't take it seriously. It is very risky also because there are some house also which is going to destruct by the govt. to clear the path. Yes govt will give them the accommodation but not enough. So, sometimes it is very risky also.
4. Government bonds
Government bonds usually issued by national government at a fixed interest rate. If will give you returns time to time but you have to deposit your amount according to the bond tenure you cannot withdraw the amount before the time period. The average returns of government bonds is around 7%. It is very similar to the fixed deposits.
5. Stock market
Reputation of stock market in India is not too good as there are many frauds happened in this market earlier like harshad mehta scam. Parents never advice there children to go in the stock market as most of the people think that it is not more than a gambling. But the truth is very far from that. You can make much higher returns in stock market than other investing options but yes it is very risky too. You need high knowledge of investing and you should know how to read the balance sheet and to analyse fundamentals. The returns in this market is not limited its all depends on yourself.
The big disadvatange of investing in stock market is that you can loose your whole capital if you are investing without analysis. We will talk about it in a separate article in details.
If you do not have any knowledge about stock market and want to learn how to analyse stocks like the experts. You must read the book "The Intelligent Investor" by Benjamin Graham. I had personally read this book when I was a beginner in stock market. Even the big bull of stock market Warren Buffet had suggested the book to beginners.
5. Mutual funds
Mutual fund is the another way of investing in stock market. The returns in stock market is usually very high if you are investing with a long term perspective. In the mutual funds schemes you don't need to analyse any stock you just have to give your amount to that scheme. They are experts in that industry they will manage your funds but they charges some commission for it. The returns in mutual funds that can be earn upto 18-20%.
If you don't want to take risks you can simply invest in index funds which follows the top companies of that particular company.
What cannot be considered as investment?
As we discussed above in savings vs investment para that in savings you generate returns less than the inflation rate which is around 6% in India that is called saving.
So its quite simple if the returns you are generating cannot be able to defeat inflation rate is not considered as investment.
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