Introduction to Investment
Manish Choudhary is 32, married and works for a MNC. Just like the rest of the lot, he has his dreams. His dreams are no different than you and me, he also dreams to live is a plush home owned by him. He dreams to build and decorate his home with his wife and children and family. He wants to give the beast possible education to his children’s. He wants to go on exotic holidays each year and wants to make sure that he has enough funds make his life secure post retirement.
One careful look at his bank balance and spending habits, and we get the clear picture that his dreams are going to stay as dreams and the chances of them turning to reality is in oblivion. His savings pattern is just not sufficient enough to pay for his dreams. Every one has got the right to dream and dream big. But our habits (bad) holds us from achieving those dreams. The only way to achieve our dream is to create wealth. Wealth creation is possible only through wise investment . Lets discuss and understand the thought process that goes into investment and the process to create ways of wise investment .
What shall be the objective of investment ?
Investment is one sure-shot process that can make you rich and will enable you to achieve your financial goals of life. The first step before you start your investment activity is to budget your expenses. You shall know the pattern of your spending. The items that makes you most greedy and items on which you have control. How much a movies to costing you each month? what dent your dinning is creating on your pocket? how irrelevant it was when you decided to buy that mobile phone last month? By budgeting your expenses you are actually putting a upper limit to all your expenses so that at the end of the month you can track your spending habits. Objective is to plan your budget and follow your plan. Buy budgeting you not only plan your expenses but also plan your savings. Unless you have savings you have no investment . Once you create your realistic budget, start following the same. You will find that you have made a big value addition to you life. You are saving, and when you see your investment grow you will feel proud of your self. Do not think, just do it, it will feel good. Take it from me. The thought process driving your investment is wealth creation for happiness and well being of your family.
What is the process of investment ?
Investment has no secret formulae. The rule of investment is have the right information, plan your savings and investment , and make investment on assets. The steps involved in the process of investment is as listed below:
- Budget to Save
- Save and make investment regularly
- Investment shall be for long term
- Control your debts
Why at all we should do investment ?
Ask your father and he will tell you the wisest thing he did when he started his career was to open a recurring deposit account in the bank at the start of his career. In those time investment were limited or else people were less informed about investment options and about necessity of investment . Now the days have changed, not only people has become more aware about investment but also the demon of inflation making us think more aggressively about wise investment .
- Inflation is eating away your savings
- Maintain a good standard of living
Inflation eats away your money even when you are sitting and watching your favorite movie. If your have a monthly expenses as on today as Rs 15000 and annual inflation is 5%, 20 years later those same goods will cost you a whopping Rs 40,000. It means for the same set of items today you are spending Rs 15,000 and after 20 years you will have to spend Rs 40,000. Bank deposit gives you a meager return of 6-7% per annum. After considering the effect of inflation and tax you are left with returns which is practically negative. Means investment in bank deposit is making you loose money rather than making it grow. This is not a wise investment .
What is the key to wise investment ?
Warren Buffet is an example of the most successful investment icon of this world. He has not build wealth over night. No one can build wealth over night. To build wealth you must remember those steps of investment , budget to save, save to invest, invest long term and control your debts. But this is for sure that all rich people did something very different than most of us. We will discuss few such wise investment to-do’s
Start the process of investment as early as possible.
Lets take example of two friends, Ritu and Manish. Ritu started saving and investment of Rs 750 per year from the time she was just 15 years of age. After 15 years (when she was 30) she stopped investment . She allowed her investment to grow without any additions and withdrawals.
On the other hand Manish started investment of Rs 5,000 per year when he was 30 years of age and continued his investment of Rs 5,000 till 60 years of age.
Assuming both earned a steady return on investment @ 15%, Ritu’s portfolio was a massive Rs 27.7 Lakhs by the time she reached 60 years of age. Manish accumulated wealth when he aged 60 was Rs 25 lakhs. The key to wise investment is give more time to your money to make more money.
Get the benefit of compounding of money
Once there was a king and a farmer. Both of them were good friends since childhood. One day they were playing chess and the farmer played a good game and defeated the king. King was very impressed with the farmers game and he asked the farmer to choose his reward. The farmer was very clever. He asked the king to give him 1 grain of rice for the fist square of the chess board. 2 grains of rice for the second, 4 grains of rice for the third, 8 grains of the rice for the fourth and so on till the 64 squares are complete. The quantity of grain that was required to fill was 18,446,744,073,709,551615.
Suppose you have Rs 1 today. Every year your money doubles, then at the end of 64 years, your investment of Rs 1 today will become Rs 18,446,744,073,709,551615.
This is the power of early investment compounding of money. Lets take a more practical example. Assuming your father gave you Rs 1,000 on your 10th birthday. As you was to young to handle that money he decided to make a fixed deposit of those Rs 1,000 for next 50 years. Fixed deposit gave a steady return on investment @ 8% per annum.
- Your investment of just Rs 1,000 today will become Rs 47,000 in 50 years
- Your investment of just Rs 5,000 today will become Rs 2,35,000 in 50 years
- Your investment of just Rs 20,000 today will become Rs 9,38,000 in 50 years