The Need to Invest

The Need to Invest 

1.1 - Why should one Invest?

1.Fight Inflation – By investing one can deal better with the inevitable – growing cost of living – generally referred to as Inflation

 2.Create Wealth – By investing one can aim to have a better corpus by the end of the defined time period. In the above example the time period was upto retirement but it can be anything – children’s education, marriage, house purchase, retirement holidays etc 

3.To meet life’s financial aspiration 

1.2 - Where to invest?

When it comes to investing one has to choose an asset class that suits the individual’s risk and return temperament.

An asset class is a category of investment with particular risk and return characteristics. The following are some of the popular assets class…

1.Fixed income instruments

 2.Equity

 3.Real estate

 4.Commodities (precious metals)

Fixed Income Instruments

Typical fixed income investment includes:

1.Fixed deposits offered by banks

 2.Bonds issued by the Government of India 

3.Bonds issued by Government related agencies such as HUDCO, NHAI etc 

4.Bonds issued by corporates 

Equity

 Investment in Equities involves buying shares of publicly listed companies. The shares are     traded both on the Bombay Stock Exchange (BSE), and the National Stock Exchange (NSE).

Real Estate

Real Estate investment involves transacting (buying and selling) commercial and non commercial land. 

Commodity – Bullion

Investments in gold and silver are considered one of the most popular investment avenues. Gold and silver over a long-term period has appreciated in value. 

conclusion-

1.By investing in fixed income at an average rate of 9% per annum, the corpus would have grown to Rs.3.3 Crs 

2.Investing in equities at an average rate of 15% per annum, the corpus would have grown to Rs.5.4  Crs 

3.Investing in bullion at an average rate of 8% per annum, the corpus would have grown to Rs. 3.09 Crs 

Clearly, equities tend to give you the best returns especially when you have a multi – year investment perspective.

1.3 - What are the things to know before investing

1.Risk and Return go hand in hand. Higher the risk, higher the return. Lower the risk, lower is the return.

 2.Investment in fixed income is a good option if you want to protect your principal amount. It is relatively less risky. However you have the risk of losing money when you adjust the return for inflation. Example – A fixed deposit which gives you 9% when the inflation is 10% means you are net net losing 1% per annum. Fixed income investment is best suited for ultra risk averse investors

 3.Investment in Equities is a great option. It is known to beat the inflation over long period of times. Historically equity investment has generated returns close to 14-15%. However, equity investments can be risky

 4.Real Estate investment requires a large outlay of cash and cannot be done with smaller amounts. Liquidity is another issue with real estate investment – you cannot buy or sell whenever you want. You always have to wait for the right time and the right buyer or seller to transact with you.

 5.Gold and silver are known to be a relatively safer but the historical return on such investment has not been very encouraging.

Key takeaways from this chapter

1.Invest to secure your future 

2.The corpus that you intend to build at the end of the defined period is sensitive to the rate of return the investment generates. A small variation to rate can have a big impact on the corpus 

3.Choose an instrument that best suits your risk and return appetite 

4.Equity should be a part of your investment if you want to beat the inflation in the long run