The constant need of Mr. money in order to meet all our needs and most of the wants can only be met when we plan for our future
Today’s world is full of materialistic distractions. World that is full of products, artifacts and services that constantly crave for your attention. Most often than not these items satisfy your emotional as well as physical needs. And there are also your basic necessities like food, clothing and shelter that one needs to focus on for a comfortable living. All these require constant flow of money without which one would need to live a life full of compromises.
While we are young and willing to work hard, one can ensure this constant supply of money but what when we get old and the physical energies begin to wane?
The constant need of Mr. money in order to meet all our needs and most of the wants can only be met when we plan for our future. Most of the present generation takes pride in living off credit. While that easy availability of money gets you the material comfort that you are looking for, one is only borrowing from the future which then has to repaid with time and effort and not just money. It is therefore important to plan your finances to meet your future needs.
Investing is an art by which you set aside a percentage of your income on a regular basis and invest in an instrument that is able to beat the inflation and also helps to keep your corpus save. Inflation is an important aspect that most of us forget to consider while planning for our future. Money continues to lose value as things and services become expensive year on year, therefore it becomes imperative that your money grows at a rate faster than what the inflation levels currently prevailing.
Where to invest?
After one has planned for his/her future goals, the most pertinent question that comes to mind is where to invest? There are tons of investment instruments that look attractive and equally confusing. So, which one is right for me? Let’s simplify a bit in the section below:
Mr. X earns Rs 1 lakh per month (net of taxes) and has to pay a housing EMI of 30,000 and an auto loan of 10,000. That leaves him with a saving of Rs 60,000 out of which Rs 40,000 goes into his families living expenses. Net, he is left with Rs 20,000 at the end of the month.
Now, he has a few options that he can look at to invest his Rs 20,000.
A) Fixed Income Instruments
a. Bank Fixed Deposits
b. Post office scemes/PF/PPF
c. CDs/NCDs – Convertible and Non-Convertible Debentures
d. Government Securities
e. Corporate Bonds / Bond Funds
These instruments are for a more risk averse investor who is satisfied with a decent ROI and doesn’t want to take too much risk with his/her money. Out of the above instruments, PPF/PF and Government Securities are the safest as they are backed by a guarantee from the government.
B) Equity linked instruments
b. Equity-based mutual funds
Most of the investors in our country consider stocks as risky and tend to stay away whereas there is clear evidence that shows that equities investments over a longer period of time far outstrips the returns from a fixed income instrument. The important aspect while investing in Equity is that one has to invest for a longer duration (e.g., 5-7 years) to enjoy the real returns of equity investing. One should avoid investing in equity if the time horizon is short as equity markets tend to be volatile and there can be periods of lull and the ROI might be much lower or even negative at times.
Just to summarize, it is important that one starts investing at an earlier age so that he/she has time for the corpus to grow. If age is on your side, equity investing should be an obvious choice as you can generate much higher returns as compared to a fixed income investment.
It’s important to define life goals and invest accordingly. These goals could be your child’s education, their marriage or building a roof over your head. Longer term goals can easily be met with equity-based investing. As and when you reach closer to your goal, one can shift his investments to a more secured fixed income instrument so as to safeguard the gains made in equity investments.
Investing is not a choice, it’s a compulsion if one wants a comfortable retired life. A life where you do not have to compromise but live happily ever after.
(By Neelam Rani & Nishant Kumar. Neelam Rani is Associate Professor at IIM, Shillong and Nishant Kumar is an independent Financial Market Analyst)