Why Should I Invest? – A Step By Step Guide

Why should I invest?

Before answering this question, let us understand what can happen if you do not invest. Let’s say you earn Rs 50,000 every month, and Rs 30,000 is your monthly expenses. Your monthly savings remain Rs 20,000. To keep this example simple, for now, we will not add income tax to it. Now suppose that- Your company takes great care of employees and increases salary by 10% every year Cost of living – Cost of living increases by 8% every year You are 30 and want to retire at 50, so you have 20 years to earn You will not do any kind of work after retirement your expenses won’t change The 20,000 that is left every month, remains with you in the form of cash or cash.

Year	Anual Income	Anual Expenses	Savings
1	600000	360000	240000
2	660000	388800	271200
3	726000	419904	306096
4	798600	453496	345104
5	878460	489776	388684
6	966306	528958	437348
7	1062937	571275	491662
8	1169230	616977	552254
9	1286153	666335	619818
10	1414769	719642	695127
11	1556245	777213	779032
12	1711870	839390	872480
13	1883057	906541	976516
14	2071363	979065	1092298
15	2278499	1057390	1221109
16	2506349	1141981	1364368
17	2756984	1233339	1523644
18	3032682	1332006	1700676
19	3335950	1438567	1897383
20	3669545	1553652	2115893
		Total Saving	17890693

If you look at the numbers given above, then you will understand that after 20 years the situation can be scary. With 20 years of hard work, you were able to add only 1 crore 70 lakhs. Because your expenses were fixed, you didn’t even change your way of living. Perhaps you have suppressed many aspirations like big car, big house, roaming around After retirement, if expenses increase at the rate of 8%, then you will have roughly 8 years out of 1.7 crores, and what will you do after that, you think. What will you do after 8 years, when the entire savings will be exhausted. How will the car of life run? Is there any way to add more than 1.7 crores in 20 years? Let’s look at the example situation with a slight variation. Suppose you didn’t keep 20 thousand as cash but invested it in an option which gives 12 per cent return every year. For example- in the first year you saved Rs 2,40,000, which you invested at the rate of 12% for 20 years, and in 20 years it would become Rs 20,67,063

Year	Anual Income	Anual Expenses	Savings	investing in at the rate of 12%
1	600000	360000	240000	2067063
2	660000	388800	271200	2085519
3	726000	419904	306096	2101668
4	798600	453496	345104	2115621
5	878460	489776	388684	2127487
6	966306	528958	437348	2137368
7	1062937	571275	491662	2145363
8	1169230	616977	552254	2151566
9	1286153	666335	619818	2156069
10	1414769	719642	695127	2158959
11	1556245	777213	779032	2160318
12	1711870	839390	872480	2160228
13	1883057	906541	976516	2158765
14	2071363	979065	1092298	2156003
15	2278499	1057390	1221109	2152012
16	2506349	1141981	1364368	2146859
17	2756984	1233339	1523644	2140611
18	3032682	1332006	1700676	2133328
19	3335950	1438567	1897383	2125069
20	3669545	1553652	2115893	2115893
		20 साल के बाद निवेश राशि		42695771

By investing the money you save every month, your money grows at a faster rate, and the result is visible – in the form of a substantial amount. Look in the chart, after 20 years you will have Rs 4.26 crores added instead of 1.76 crores which is 2.4 times increase. And this increase clearly means that your life after retirement will be more relaxed.

Now coming to the question which is the title of this chapter – Why should I invest? There are some very important reasons –

To deal with inflation – Rising inflation reduces the value of our money. Investing can solve this problem.

To add big capital – The example given above clearly shows how investing can make you a huge corpus till retirement, but not just for retirement, more important than investing Money can easily be added for work such as child’s education, marriage, buying a house, such work.

To fulfill your financial aspirations, aspirations.

Where to invest?

Now we know why investing is important. The next question that comes to our mind is where to invest, and what kind of returns should be expected. The very first thing you have to choose before investing is the asset class that matches your risk appetite. According to the return and risk, investments are divided into different categories. These categories are called asset classes. Some of the well-known asset classes are listed below-

1. fixed-income instruments
2. Equity
3. Real estate
4. Commodity (Precious Metal – Precious Metal)

Fixed income instruments

The principal amount in this investment option remains safe. You get the return on this investment in the form of interest. You can get the interest annually, six months, or three months. At the end of the investment period, which is also called the maturity period of the investment, the capital is returned to you. Fixed Income Investment Options are bank fixed deposits, Government bonds (which are issued by the government), government company bonds & corporate bonds.

As of June 2014, the returns of fixed-income instruments range between 8 and 11 percent.

Equity Investing

Equity means buying shares of companies listed on the stock exchange. Trading or buying and selling of shares take place on both the stock exchanges – Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). When you invest in equities, there is no guarantee of capital invested, but the returns you get in equities can be quite attractive. The returns of the Indian stock market have been around 14-15 percent CAGR (Compound Annual Growth Rate) in the last 15 years. Many well-known trusted companies have earned up to 20% CAGR in the long run. But finding such companies desperately requires skill, hard work and patience. If you invest in equity for a period of more than 1 year, then the profit of up to Rs 1 lakh on exit from the investment is tax-free. Income above Rs 1 lakh attracts 10% tax. Before 1 April 2018, this earning was completely tax-free. But still, this tax rate is lower than other asset classes.

Real estate

Under real estate, you invest in a house, shop, or land. There can be two types of income from this investment. One income can be in the form of rent, the other income comes from the increase in the value of the property. But there is a lot of complexity and confusion in this investment. It can take a lot of time and at the same time a huge amount of money is required for investment. There is no official formula to measure real estate returns, so it is difficult to comment on it.

Commodity

Bullion Gold and silver are well-known investment options. In the long run, the price of both gold and silver increases. Investing in both of these for 20 years has given returns of up to 8% CAGR. Investing in these can be done by buying jewelry or through Exchange Traded Funds (ETFs).

Keeping in mind the example we gave in the beginning, let us now try to find out how much amount will be added if one invests in Fixed Income, Equity, and Bullion for 20 years.

If you invest in fixed income instruments and get an average return of 9% per annum, you will get Rs 3.3 crore.

If invested for 20 years in equities and the return is on average 15% per annum, then Rs 5.4 crores.

Assuming the return of investment in bullion ie gold and silver at 8% per annum, then Rs 3.09 crore.

So it is clear that investing in equities gives the best returns, especially when you invest for a long period of time.

Important things related to investment-

When investing, it is important to keep in mind that not all investments are in one asset class. It is very important to divide investments into different asset classes, and this process is called asset allocation. For example, young professionals in the age group of 23-25 ​​years can take more risk as they are younger and have more time to invest. So, they should invest around 70 percent of their total investment in equities, 20 percent in bullion, and the rest in fixed-income investments. Similarly, for an investor who has retired, by law, 80 percent of his total investment should be in fixed income instruments, 10 percent in equities, and 10 percent in bullion.

This is the ratio of how much percentage should be invested in which asset class, it depends on the risk taking ability of the investor.

What are the things one should know before starting investing?

It is important to invest but before starting investing, know and understand these things – Risk and return are linked. The higher the risk, the higher the return is likely. The less the risk, the lower the return. If you want the principal invested to be safe, then fixed-income investment options would be better. They have less risk. But keep in mind that in the long run, whatever amount you get into your hands due to inflation, its value will be less. For example – Bank Fixed Deposit gives you 9% return, and if the inflation rate is 10%, then you are incurring a loss of 1%. Fixed income options are for those who have a very low-risk appetite.

Equity will help you deal with inflation. If we look at the old data, then it is found that long-term investment in equities gives returns of up to 14-15%. But keep in mind that investing in equities also comes with risk.

Investing in real estate or real estate requires a huge sum of money, and it takes a long time to come out of such an investment. You can never buy or sell real estate. You need the right buyer and seller at the right time to buy and sell.

Gold and silver are considered safe investment options, but their returns are not very attractive.

Important points

Invest for the security of your future. The amount you want to add towards your goal depends on the returns of the investment option. Even a small difference between the returns of the two options can have a significant impact on the amount. Choose an option that suits your risk appetite or risk appetite. If you want to stay safe from the effects of inflation, then some part of your entire investment needs to be in equities.

Credit: Zerodha