01. How is investing different from savings?
This way, your money is safe and even fetches a nominal interest rate of 6-9%. However, the inflation rate, which in reality is well over 10%, keeps eating into your purchasing power over a period of time.
To stay ahead of the inflation, you need options that provide an interest rate of at least 12-15%. This is where investments come into the picture. Investments could be in anything ranging from a small business to rare antiques to gold coins, stocks, bonds, mutual funds, real estates, etc. It is the process of putting your money in assets which will generate relatively higher returns over time, making you wealthier with each passing year.
02. Why is investing a smart idea?
When you invest, your money is planted in areas where it can really grow and flourish. In which case, your robust financial health beats inflation hands down. This is where investments have an upper hand over money kept in a savings account.
With clever investments, you’ll have a lot more money for things like retirement, education, recreation or you could pass on your riches to the next generation so that you become your family’s most cherished ancestor!
So come to think of it, in today’s world investing isnt just smart its essential.
03. How can I manage my finances?
For each goal, you need to consider:
Your risk appetite
Your time frame
So if you have more time to reach your goals, you can afford to take more risks with equities that have the potential for higher growth. Plus, you can also ride out short term market volatility. And more time gives your money the power of compounding too. This means, you actually need to save less to reach your goal.
04. What are the different investment options?
A bond is a financial asset issued by governments, companies, banks, public utilities and other large entities which can come under fixed-income securities.
When a bond is purchased, your money is lent out to a company or government. In return, they agree to give you an interest on your money and eventually pay you back the amount you lent out. Bonds in a way are quite safe and stable but they come at a cost. Because there is little risk, the returns are also limited.
Stock is a security issued in the form of shares that represent an ownership interests in a company. The owners of the companys stock are called stockholders or shareholders and they receive profit or loss of the company as per the percentage of stock they own. The benefit of owning a stock is that you profit as the company profits. However, stocks are volatile as they fluctuate in value on a daily basis and the returns aren’t guaranteed. But the upside is that equities have relatively higher potential returns when compared to bonds.
Quite simply, a mutual fund is a mediator that brings together a group of people and invests their money in stocks, bonds, and other securities. Each investor owns shares, which represent a portion of the holdings of the fund. Thus, investment in mutual funds is one of the most viable investment options for the common man as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost.
Alternative investments: Options, Futures, FOREX, Gold, Real Estate, Etc.
Besides debt and equity, there are alternative investment instruments which are generally high-risk but high-return options which need expertise before going any further. For a novice, these are the territories best left unchartered.
05. What is the power of compounding?
Thus, if you invest Rs. 1 crore today in equity at 15%, the corpus would grow to Rs. 4 crore in 10 years time. In contrast, in a fixed deposit at 7%, the corpus would only be Rs. 2 crore in 10 years time.
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