(A) Clearing the air around Investing
Let’s be honest , when people are told about investing , they straight away think about gambling. They think about this:
But in reality , we all gamble. A Student studies a night before his exams gambling his career or future. Our parents sometimes make us do hard things , which is again a gamble. A student studies a specific subject because he thinks that subject will make him more competent , which is again a gamble.
In other words gambling can be said to be taking a certain amount of risk for a certain amount of reward. Fair enough right?
Risk and Reward are proportional , greater the risk greater the reward and vice versa.
A student takes up a course which is very niche and not in demand by employers. But it would be in demand in 2 years , so the student does the course and his risk pays off , he is employed with a fat salary package since he is one of the handful few who has done the course.
Risk is the uncertainty of a certain thing happening or not happening. For instance a financial instrument suddenly falling down in value. Now you certainly don’t want that to happen , do you?
Risk is like Vicco Vajradanti Ad , it always pops up in unexpected places.
And the worst thing is that you cannot erase the risk , but you can transfer the risk or hedge against the risk by placing some counter-bets.
On a serious note , risk is present in all the things we do in a day. Driving a car, having a bath , exercising in the Gym , eating , drinking or speaking on the phone ( Just watch Final destination to know what I mean).
It is said Knowing the enemy is half the battle won , the same applies for Investing. Know your enemy or rather know your investment , when you invest in a financial instrument know in and out of the financial instrument.
(C) There is no Correct time or correct Age to invest , there are only correct investments.
Warren Buffet bought his first stock at the age of eleven. At the age of eleven I was playing Pokemon.
We love procrastinating but as Kabir says in his famous Doha:
It means do the things today which were supposed to be done tomorrow , and do the things right now which were supposed to be done today. If you lose the moment , how would the work be done?
(D) So Finally why should you invest?
We all love to save and at the end of the day look at our bank balances and say to ourselves “Damn Homie , I am rich”.
Sorry to bust your bubble , but the only person you are fooling is yourself. I will tell you exactly why:
The highest rate of interest in savings account is offered by Kotak at 6%
So for example at the start of 2012 , you have 1,00,000 in your account and you want to save it till end of 2016. Now you would think that the below will be your expected interest or earnings:
So your investment turns into 126,247.70 Rupees for 4 years (2012-2016). But that’s not the real earnings.
Some of the below costs are also present:
500 per year for 4 years bank service charges : 2000
Minimum Account Balance : 5000
So as we can see each year inflation rate(rate of general goods in economy rises , so therefore rupee buying power decreases) deteriorates your money , so your total return would be
126,247.70 – 2000 – 500 (atm and cheque book charges) – 20% inflation total over 4 years so it would be 25,250
so the above equals to 98,450!
Instead of gaining , you lost money that too 2%
The biggest mistake people make is ignore the fact that there exists a huge financial market for financial instruments which bear better returns than the savings bank account. A savings bank account should only be used to keep some idle cash for unforeseen requirements.
Now that i have told you there is the Indian stock market for you to take advantage of , lets us see the two financial instruments :
- Equity Shares
Equity Shares are a part of a company , and the profit/loss is divided into equal parts as per the number of equity shares.Equity shares are traded and influenced by the market news and sentiments and Equity share investments can give you the best and at the same time the worst returns depending on the company you have invested.Some companies like Wipro have returned 535 crores just from a 20,000 Rupee investment in 27 Years! But at the same Time companies have destroyed 99% of the wealth , so it is imperative to select good companies.
Bonds is nothing but a loan taken by a company from an investor with the promise to pay him regular interest and the principal on the date of maturity.Bonds are financial instruments which have a face value and interest value , for instance if one bond is 100 rupees and it carries 8% interest for 5 Years. so it means for 5 years you will get 8 rupees each year and 100 rupees at the time of redemption i.e after 5 years.
Why you should invest early?
Here is a great example why you should invest early , even though the amount may be small.
As you can see from Case 1 and Case 4 , if you started out late , the amount generated would almost be less than 90% of what was generated in Case 1.
Compounding is the best thing for your investments, assuming even a modest 10% yearly return , 1,00,000 invested each year for 25 years , your corpus would be worth 12,53,99,431.14 !
But if it was easy , everyone would do it and be crorepatis , however it is not tough either. This post was just to clarify the misguided facts about investing and tell the readers about better returns.
The next post will be on how exactly the stock market works.
Hope you liked the Article,