Wondering why investing is necessary and where to invest? Check out this informative post that covers the benefits of investing, different investment options, and tips for creating a diversified investment portfolio to achieve your financial goals.
Investing is an effective process to help your money to work for you in the time of emergency and create wealth. The common people think it safe to hold money and bank savings accounts. But investing your money creates an opportunity to increase in value overtime with the benefit of compounding and long term wealth-creation. It is an essential way to achieve goals. To make your future better and live a peaceful life with-out any headache, you have to invest your money on regular basis. By investing you will cultivate a sense of financial discipline in your life.
We found the following reasons why do we need to invest!
1. Beating Inflation
Inflation in layman’s language is an increase of price of materials and services. Inflation has an inverse relationship with money. When inflation rises, the value of money decreases, so your purchasing power also decreases. Inflation rate is 8% means that you have to grow your money at 8% if you want to purchase the same things next year.
To grow your money you need to invest to beat the inflation otherwise you won't be able to afford materials and services to meet up your daily needs.
2. Creating Wealth
By making investments one can build a big corpus by the end of the targeted period i.e. up to retirement. By making a bigger corpus one will be able to live a smoother life after retirement or for other purposes also such as children’s education, marriage, house/flat purchase, travel to foreign countries after retirement etc.
3. Meeting Other Financial Goals
You can also consider investing to increase your money to meet other financial goals. For instance, investing in your child’s college fund. You can also accumulate a fund for a foreign tour or to meet some life’s aspirations.
Where to Invest?
Now we classified and figured out the reasons for investing. The next question is where to invest to get a sound return? While making investments one has to choose and select an asset class that matches the individual’s risk appetite and as well as return profiles. For example one may be high risk taker with his own money, one can be moderate risk taker, while another may be conservative in taking risk. Take an asset class as an investment wheel characterised by its risk and return.
Below are some asset classes:
1. Fixed Income Assets.
2. Equity/Shares.
3. Real Estate.
4. Commodity.
1. Fixed Income Assets
We can categorise the following assets under the fixed income assets class.
1. Government Bonds or we may call these G Sec. Bonds and T Bills (Treasury Bills).
2. Bonds Issued by Central Government undertakings such as GAIL, HUDCO, ONGC etc.
3. Corporate Bonds such as Adani, Reliance, Bajaj, Tata etc.
In the year 2022 the return from a fixed-income assets like FDs of Banks hovering between 5-6% only. Central Government bonds gave a return about 5-6% and some corporate bonds offered 9-10%. The rate of return of different instruments varies because of their variable risks. Among these asset classes Govt. Bonds are the safest investment option. Because the Government can't cheat the public and flee away with the money of the common people.
Corporate Bonds are risky due to its high return ability. Investment in corporate bonds can yield a zero return. There are so may examples we have witnessed in the past. So, before investing in corporate bonds one should check details and test the risk factor.
2. Equity/Shares
We can look for making investment in equities or shares of companies which are publicly listed in Bombay Stock Exchange (BSE) and National Stocks Exchange (NSE). It involves buying shares and keep them in demat account.
Investing in equities, unlike fixed-income instrument has no guarantee of sure-shot returns on capital.There is always a risk attached to capital erosion. However, it has been observed practically that the returns from equity investment had been much better. Indian shares had generated around 12% CAGR (Compound Annual Growth Rate) over the past 10 to 15 years. If you have to earn 12-15% return from equity market you have to identify the opportunities and for this you should have knowledge, skill, hard work and patience. Some of the famous Indian companies which have good fundamentals, competent management have offered over 20% CAGR in the long run. So investing in equities is the most lucrative one and it also requires some basic knowledge of understanding the equity market.
3. Real Estate Asset Class
Investing in real estate assets include fixed non-movable assets such as commercial and non- commercial land, vacant plots ready-made houses, flats or apartments, and commercial building in simple words buying and selling of land, building etc. It requires huge amount of money and there are so many legal formalities involved in the transactions.
There are two types of earnings in this assets class. One is rental earnings and another is appreciation of assets prices. Investing in the reality sector is not so lucrative for its complexities.
4. Commodities
In this section metals especially gold and silver are considered most popular investment options. These two metals over the long term have been appreciated significantly. In today’s world where there is fear of a further recession is looming on the world economy. Investors find the yellow metal(gold) as the safest option to invest their money. So many ways are there to invest in gold and silver. One can buy jewellery, or Gold ETF, or invest in Sovereign Gold Bonds which is known as SGBs.
Some important factors to be noted before investing:
Everyone must have a proper financial planning as investing is an integral part of it. Before starting the journey of investment you should always keep in touch of the following factors.
- Investing in fixed income asset class is a safe option. It is comparatively less risky. However, there is risk of losing capital due to the effect of inflation. For an example, if any fixed income asset gives the return of 8% while the inflation rate is 9% means you are loosing net 1% per annum. On the other hand if you invest in corporate bonds there is a high risk involved with your capital.
- Real Estate investment requires a huge amount of cash. Liquidity is also an issue in real estate investment. You cannot buy or sell anytime you want. Some long time legal complexities involved in it.
- Investing in equities or shares of publicly listed companies is a great option. If you want to beat the inflation in long run you have to invest in equities. It is historically observed that equity investment has created return close to 14-15% per annum. However, it is a risky process, demands some specific knowledge.
- It is always said that risk and return go side by side. Higher the risk, higher the return and vice-versa.
- Gold and Silver are comparatively safe option to invest in, one can consider these two metals for investment.
I hope you got some useful information from this post to make your investment journey better. Please share with your friends.
Disclaimer: The information provided on Money Wise Mind is for educational and informational purposes only. It is not intended to be financial advice, and you should not rely on it as such. Before making any financial decisions, you should consult a licensed financial advisor.
