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Significance Of Investment

Significance Of Investment
As mentioned in the previous blog, the concept of investment is simple. It’s basically giving your money to one of the financial institutions for a specific time and in return you would receive returns. Simply put, Investment is a way to grow your wealth in terms of capital appreciation for future needs. But before investing “Know your goals”. Investment lies on 3 principles i.e.
  • Investment horizon
  • Financial goals
  • Risk appetite.
This means that you should have a specific time limit in your mind i.e. whether you want to be a short-term investor or a long term one and the amount to be invested. You should also set some financial goals which are moreover profit goals so that you have a clear idea of the amount of money to be invested in. Also, you should be prepared for every kind of risks, basically not losing your money but minimise the loss.  

Inflation:

Inflation is generally increase in the price levels of the goods and services leading to erosion of purchasing power of money.Inflation is measured in 2 ways i.e. Wholesale Price Index and Consumer Price Index. RBI, being the regulatory body for fixing interest rate, tries to control inflation rate of the country. Inflation will continue and prices will tend to rise on year on year basis. If investments are not made, we will keep up with the inflation though, but wouldn’t make any money in the course. Investment has proven to be the tool to beat inflation and create wealth. Investing, with the usage of compounding technique, can tell you how much you could earn , taking into consideration inflation figures. Indian stock market gives you returns of around 15% (approximately) in comparison to Fixed Deposits, PPF or any Fixed Income Products which would deliver returns up to 6.5% to 7% and a lock in period up to 15 years such as in Public Provident Fund.

Achieving Goals:

Understanding your future needs would make it easier for your financial advisor to help you get good returns. All this while you would be adding up savings into your portfolio Say you need money for education or retirement what would you do? First , ask yourself, how much you have and how much you will require to full fill your needs. Say your age is 30 now and have Rs1 Lakh and you will need 50 Lakhs by the time you turn 60. What will you do? The table below shows that how a single investment will grow at various rates of return. As you can see there are 4 rates to one single investment: 6.8% rate is the rate for PPF and FD returns, 15% is the average returns you may get from stock investments. Since Stock market is a risky market, there is an downside risk and upside potential. The potential to get as high as 20% return or more on stocks depends on the stock picking and the economy at that period.

Growth returns:

 RATE OF RETURN (CAGR%)
AGE YEARS 6.8% 9.5% 14.0% 20.0%
30 0 1,00,000 1,00,000 1,00,000 1,00,000
31 1 1,06,800 1,09,500 1,14,000 1,20,000
35 5 1,38,949 1,57,424 1,92,541 2,48,832
40 10 1,93,069 2,47,823 3,70,722 6,19,174
45 15 2,68,268 3,90,132 7,13,794 15,40,702
55 25 5,17,942 9,66,836 26,46,192 95,39,622
60 30 7,19,677 15,22,031 50,95,016 237,37,631
As we can see, how in the first year, money is growing at various return levels. A higher rate will show further growth as and when the years of investment are added up. This will eventually fetch your monetary returns. This is called compounding, where you increase the rates and time and results will be seen increasing exponentially. Seeing the above case, if the investor is in need for 50 Lakhs after 30 years, he must go with stocks or mutual funds or mix of both to get the required amount. He cannot go with FD or PPF alone, as it would yield only 7.2 Lakhs at the end of 30 years after investing whereas stocks alone would accomplish his financial goals by fetching 50 Lakhs or more. The investor will fulfil its requirement i.e. the future needs will be accomplished. The concept of investing is so simple that if we make it a habit rather than just a formality, our lives can be so easy and secured in many ways. Investment should be a routine rather than a onetime affair.
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9 Comments on "Significance Of Investment"

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Amey Katkar
Member

Know your goals, thats more important

Susmit C
Member

Hi Amey!

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