WHAT IS INVESTMENT?
Investment is nothing but parking your income/cash somewhere with an expectation or assurance of interest/dividend or capital appreciation or both (an instrument, of asset class). If you have cash piled up in a locker it is not an investment, it is merely currency or cash amount. Your bank savings account also doesn't come under instruments as it gives only 3-4% return and meant for primarily parking your cash rather than investment.
(However recently some banks have started giving 5-6% interest on savings bank account as well however their minimum criterion is to keep a minimum balance of 1 lack and above)
(However recently some banks have started giving 5-6% interest on savings bank account as well however their minimum criterion is to keep a minimum balance of 1 lack and above)
INVESTMENT
OBJECTIVES:
Investment is done
for following objectives,
- 1. Beating rate of inflation
- 2. Gaining return on money in access of over and above rate of inflation
- 3. Gaining capital gains
- 4. Specific Goals (fulfillment of financial planning goals etc.)
DEVASTATING
EFFECT OF INFLATION ON YOUR MONEY:
This is how increases
your expenses every year and how value of your money declines every year. You
can see in the image how inflation rate of 5% increases the amount of your same
expenses every year and decreases the value/purchasing power of your savings if
not invested.
We have calculated
only 5% rate of inflation but as you know the inflation rates are soaring above
7% to 10% many times in this globalized world and due to rising crude oil and commodities
prices.
WHY
INVEST? AND WHY INVEST IN STOCKS?
So, from the above
image you can clearly see how Sensex/Stocks have outperformed inflation, which
is the first objective of any investment, and given higher return over and
above inflation and Bank Fixed Deposite or so called risk free investment
instrument as well. This calculation is for over 30 years. But if you look at
the history of entire stock market all over the world, equities have always
outperformed inflation and debt instruments.
So, it is clear now
that one must have investments into equities.
THE
POWER OF COMPOUNDING RATE OF RETURN:
Just see the
difference of investing 5 years more and 3 lakhs rupees more. It is a whopping
71.04 lakh rupees. You can calculate yourself to make sure!
You can also relate
this to understand that Mr. B started investing 5 years earlier than Mr. A and
look at the difference. So this also signifies the important of starting
investing as early as possible.
Below you can see,
the same calculation showing power of compounding rate of interest if rate of interest
is 15%.
Now we will see below
what happens to your investments if the rate of return is 20% on compounding
basis.
