THE NEED FOR FINANCIAL INVESTMENT
B. NEED TO INVEST
1. NEED
The money you earn is partly spent and the rest is saved for meeting future expenses. Instead of keeping the savings idle, you may like to use these savings in order to get maximum returns on it.
This process of utilizing your idle funds to generate excess returns is called INVESTING.
Let us understand when one chooses not to invest.
Assumptions -
- You make 40000 per month.
- You spend 25000 per month on the cost of living such as transport, shopping, medical, etc.
- Balance 15000 is idle in the bank.
- Your employer gives you a 5% hike every year.
- Your expenses rise by 3% every year.
- You will retire in 25 years.
This will be your balance after 25 Years-
After 25 years you would have around 1.04 cr.
Now let us understand when we choose to invest this amount in an investment that yields us 8% (assumed) return in a Year.
With this decision to invest, our balance has grown significantly from 1.04 CR to 2.60 CR ie 1.5 times the money.
Hence one needs to invest for the following reasons -
- Earn a return on your Idle resources.
- Generate a specified amount of money for a certain goal in life
- Making provision for an uncertain future.
2. WHEN TO START INVESTING
The sooner one started investing the better. by investing early you allow your investments more time to grow, increases your income, by accumulating the principal and the interest or dividend earned on it, year after year.
Three golden rules for investors are-
- Invest early.
- Invest regularly.
- Invest for the long term and not short term.
3. WHERE TO INVEST
You have to choose an asset class that suits your risk profile.
There are two primary types of asset classes-
- Physical Assets.
- Financial Assets.
Physical Assets includes-
- Real Estate
- Jewellery
- Bullions
- Commodity
Financial Assets includes-
- Fixed Deposits
- Small saving schemes
- Insurance.
- Provident funds
- Pension Funds
- Equity.
- Bonds.
- Debentures.
4. INVESTMENT HORIZON-
It is very important to analyze one's investment horizon before choosing a financial asset.
Investment horizon can be divided into 2
- Short Term:-
- Savings Bank Account.
- Money Market.
- Liquid Funds.
- Fixed deposits with Banks.
2. Long Term:-
- Post Office Savings.
- Public Provident Fund.
- Bonds.
- Mutual Funds.
5. INVESTMENT GUIDELINES-
- Its always better to do your own research before investing.
- It's not wise to take decision based on rumours.
- Monitor your investments regularly so that you can eliminate the loss-making stocks.
- Patience is very essential for any investor.
- Take the help of research experts also before making an investment move.
- Always be updated with market news.
These are a few steps that will help you understand the need to invest.
More details about equity stock basics , stock selection, risk management will be covered in articles to come......!
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