Let's first look at the question. Let's say you make Rs.50,000 per month and spend Rs.30,000 on your living expenses. This includes food, housing, transportation, shopping, medical, etc. Your monthly surplus is Rs.20,000/-. We will not discuss the personal income tax because it is too complicated.
Let's make some assumptions to help us get the point across.
These assumptions are what will make the cash balance look in 20 years.
|Years||Yearly Income||Yearly Expense||Cash Retained|
These numbers are scary. The above calculations reveal a few things that are very startling.
What would you do if you ran out of money after 8 years? How can you finance your life? Is it possible to collect more money at the end of 20 years?
Let's take another example. Instead of keeping cash idle, you decide to invest it in an investment option that increases at 12% per year. As an example, if you keep Rs.240,000 in the first year, the 20-year-old investment yields Rs.2,067.063/- at 20 years.
|Years||Yearly Income||Yearly Expense||Cash Retained||Retained Cash Invested @12%|
|Total Cash After 20 Years||42695771|
Your cash balance has increased dramatically after you made the decision to invest surplus cash. From Rs.1.7Crs, the cash balance has risen to Rs.4.26Crs. This is an astonishing 2.4x increase in the cash balance from Rs.1.7Crs. This means you will be able to manage your post-retirement life in a better way.
Let's return to the original question: Why invest? There are many compelling reasons to invest.
After determining the reasons for investing, the next question is: Where should one invest and what returns can one expect from investing?
When it comes to investing, you have to make the right choice Asset class This suits the individual's risk-taking and return personality.
An asset class refers to a type of investment that has particular risk and returns characteristics. Here are some examples of popular asset classes.
These instruments are highly investable and pose minimal risk to the principal. The return is paid to the investor as interest based on the specific fixed-income instrument. You could receive interest at quarterly, semi-annual, or annual intervals. The capital is returned to the investor at the end of the maturity period, also known as the term of deposit.
A typical fixed income investment would include:
The typical return on a fixed income instrument is between 8% to 11% as of June 2014.
Investing in Equities means buying shares in publicly traded companies. These shares can be traded on the Bombay Stock Exchange, (BSE) and the National Stock Exchange, (NSE).
An investor can't guarantee capital if they invest in equity. As a trade-off however, equity investments can yield handsome returns. Over the past 15 year, Indian Equities has generated returns of close to 14%- 15% CAGR (compound annually growth rate).
Over 20% compound annual growth rate has been achieved by investing in well-run Indian companies over the long-term. It takes patience, skill, and hard work to identify such investment opportunities.
If equity investments are held longer than 365 days, the tax rate is 10%. This applies to gains greater than Rs 1 lakh as of 1 April 2018. This tax rate comparing to others is low.
Real Estate Investment is the purchase and sale of commercial or non-commercial land. Examples of real estate investments include sites, apartments, and commercial buildings. Two income streams from real estate investments are available: Rental income and capital appreciation.
Transactions can be complex and require legal verification of documents. Real estate investments often require large cash outlays. Real estate returns are not measured by any official metric. It would therefore be difficult to comment.
Investing in silver and gold is a popular way to invest. Over a long time, silver and gold have appreciated. These metals have a compound annual growth rate (CAGR) of around 8% over the past 20 years. You have many options for investing in silver and gold. You can invest in jewellery or Exchange Traded Funds.
It would be interesting to compare the amount one could have saved if he invested the surplus cash to the original example. He can invest in equity, fixed income, or bullion.
Equity investments tend to provide the highest returns, especially if you have a long-term investment plan.
A strong mix of assets is key to investing optimally. Diversifying your investments among different asset classes is a smart move. "Asset allocation" is a way to allocate money among different asset classes.
A young professional might be more willing to take on greater risk due to his experience and the years of investment he has. Generally, investors should invest 70% in equity, 20% in precious metals and the remainder in fixed income investments.
A retired person could also invest 80 percent of his savings in fixed income, 10% in equity markets, and 10% in precious metals. The investor's risk appetite will determine the proportion of investments allocated across asset classes.
Although investing is an excellent option, it is important to know the following: