why investment is so important

why investment is so important

Investment plays a major role in creating a very healthy fund for future life. But the truth is maximum people invest their hard earned money in a haphazard manner.

When we invest, we just think about post-retirement life. We want money for living a peaceful life after retirement. But have you ever think about inflation? What will be the cost of living after 30 Years? Are your investment is sufficient to meet your future’s need?

Last week, I met one of my childhood friends. He is a Government employee. When we talked about investment, I was really surprised. He has 3 life insurance policy with a high premium, some fixed deposit, and SIPs. Is there any reason to invest in two or more life insurance? I don’t think so.

Let’s start our today’s conversation about investment.

1. What is investment

Investment is an asset. You bought this asset by using your hard earned money. This asset will give you benefits in two ways. It will give you wealth in the future and it will give you financial support in a critical situation.

Both are very important for us. If you have no plan for wealth creation then how can you survive in future? Again, if you can’t arrange sufficient fund to handle the critical situation then how can you survive?

So, investment is a way of survival. It will help us to serve our family, society etc in an organized manner.

2. Why investment is so important?

In my last article (Don’t forget to save your money and invest it in a proper way), I already told you that idle money has no use. Idle money means blocked money. You can save your money in a wallet or in a moneybag or in any normal saving bank account. After a certain time span that money becomes idle money.

You can spend your idle money but can’t create your desired fund.

If you want a higher return then you must invest that money in a proper way.

3. When we invest our money?

There is no specific time to invest your money. When you start, that is your time. However, you must remember that if you start early then you have a chance to make a very healthy fund. You can’t expect a higher return from the very first day of investment. You have to wait for some time. So, if you start early you will be in a good position.

The benefits of early investment are as follows:

  • You are financially free at the age of 20 or 25. As a bachelor, you have no such responsibility to spend your money on household expenses.
  • You can plan your investment as per your dream.
  • No risk no gain. You can take more risk if you start early.
  • You can increase your income. More income means more investment.
  • You can start with a small investment.
  • You have enough time to expand your investments.

If you start your investment after 35 or 40, then you must think about your family. You want to take a less risky investment. You can’t expand your investment very wisely because you have not enough time. Moreover, you have to invest more to meet your desired goal.

4. Where to invest our money?

It’s depending on you what will be your investment style. There are three types of investment based on risks and returns. They are as follows:

  • Low risk and fixed return.
  • High risk and high return.
  • A balance between risks and returns.

Now it is your choice which types of investor you are.

4. I. Low risk and fixed return

If you want to take less risk and desire to earn a fixed return then traditional investment methods are good for you.

In India, following are the traditional methods of investments:

  • Savings Account
  • Fixed Deposit Account
  • Recurring Deposit
  • Public Provident Fund
  • NSC
A) Savings Account

It is not a good idea to invest all your money in savings account. You have to take some smart moves. You can invest in a savings account with auto sweep facility. It is a combination of savings account and fixed deposit account.

b) Public Provident Fund

Only resident individual can open a public provident fund account. Duration of this account is 15 years. However, the period can be extended. The extended period is one or more block of 5 years each. You can take a personal loan against the balance available in PPF account. You are eligible for deduction U/S 80C for the entire investment amount in PPF.

c) Fixed Deposit

In case of a fixed deposit, you will earn a fixed income after a certain period of time. However, your invested amount will be locked for that period. You may also eligible for a loan against your fixed deposits. The banks offer loan facility up to 90% of the value of the fixed deposit. However, this percentage may vary from bank to bank.

d) Recurring Deposit

In case of recurring deposit account, you have to deposit a small amount every month or every quarter. You can start with Rs 500 also. It will help you to meet your small requirement. For example, suppose your life insurance premium is Rs 5500 per annum. You can start a recurring deposit of Rs 500 per month for a period of one year. After that period you will get Rs 6000 plus the accumulated interest. There will be no problem to pay your insurance premium.

e) National Savings Certificate

National Savings Certificate (NSC) is a one types of tax savings bond. It is one types of fixed income investment scheme. You can start this investment with any post office.

4. II. High risk and high return

“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case” – Robert. G. Allen

It is true that in the case of traditional methods of investments you can get a fixed return. You will receive a fixed percentage of interest. But the fact is this return can’t beat inflation. Moreover, you can’t create your desired fund by investing in traditional methods only. If you want more return then you have to take more risk.

Following are the methods for risk takers:

  • Investment in share market
  • Mutual Fund
  • SIP
  • Real estate
A) Share Market

Investment in share market is a risky one. If you have no idea about the financial structure of the company, market situation etc then please avoid it. You can start with a small amount. Don’t try to invest all your money at a time. Remember, the share market is not a place of gambling.

B) Mutual Fund

You can try a mutual fund. You may not have much time or expertise to select proper share in the market. In that case, the mutual fund is the right choice for you. You have to invest a lump sum amount in a particular mutual fund according to your desire.

C) SIP

At present, systematic investment plan (SIP) is a very good investment option. If you don’t want to invest a lump sum amount in the mutual fund then SIP is a good choice for you. You can start a SIP of Rs 500 per month only.

Remember, investment in a mutual fund is subject to market risk. Before investment, you have to read all the terms and conditions. Here the risk is confirmed but the return is not confirmed.

D) Real Estate

Real estate is a very risky investment. But if you succeed then the sky is the limit. You can earn both active and passive income from this investment. You may sell the property and enjoy the profit on the sale or you can earn rental income from let out property. Remember, it is not necessary that the whole of the property will be sold out in a day or week. You have to keep your patience. There may be a negative cash flow for a certain period of time.

4. III. Balance between risk and return

A smart investor always tries to maintain a balance between risk and return. It is called a portfolio. A portfolio is a collection of investment which includes stock, debenture, bond, risk-free return etc.

It depends on you what is your risk appetite. Based on that, you can make your portfolio. The balance between risk and return depends on your risk appetite.

If you start your investment at an early age then you must take more risk. You have a chance to earn in a long run. But if you start at the middle age then secured investments are most favorable.

5. Investment for the emergency situation

You can’t forget the emergency or critical situation like a health problem. If anything will happen then how can you handle it? You must invest your money so that you can handle it properly. Life insurance and medical insurance are very useful and must needed investment in your life.

5. I. Life Insurance Policy

I already told you about one of my friends. He has 3 life insurance policies with a high premium. Is this ok? No, it is a totally wrong investment. I am really surprised to see that maximum people take it as a tax saving investment. If you think only about tax saving and creating wealth then you have no idea about the main purpose of this policy. Think about the situation of your family if something happens to you. A good life insurance policy can give you that satisfaction.

Life insurance is not an investment in creating wealth. Yes, you can create by paying a high premium. But my friend, you can create more wealth if you invest in SIP’s or in mutual funds. Think about the term insurance plan. In term insurance, the premium is not so high and coverage is more than regular insurance. That is enough.

And my friend, if you think about tax deduction then only 10% of the total sum assured is allowed as a deduction under section 80C for normal taxpayers. So, what is the benefit of paying a high premium? Only to maintain your status or showing your wealth?

5. II. Medical Insurance Policy

Medicare or medical costs are rising year after year. For a common man, arranging the fund in a critical situation is not a matter of joke. Health insurance is the only way to survive in this critical situation. With health insurance, you are very much secure to handle health-related problems.

However, it can reduce your tax burden also. Premium paid on health insurance is eligible for deduction under section 80D. (You can read Deduction under section 80D-How can Medical Insurance save your income tax)

6. Importance of investment in your life.

You cannot deny the importance of investment in our life. Everybody in every time tries to save there had earned money and invest it. Somebody has done it in a haphazard manner and somebody has done it in a proper way.

Investment is not a hard work. No special effort is required for it. Only proper planning and patience are the keywords. The importance of investment are given below:

A) Inflation

Inflation means gradually increase in the price level of goods or services. It does not happen in a day or a month or a year. It takes a long time to show its result. The main impact of the inflation is on the purchasing power of the people. However, its impact is varied from man to man.

Only your income cannot beat the inflation. It is true that your income will increase after a certain period but that will be not enough. For this reason, you have to invest your money.

Traditional methods can’t help you with this matter. You have to take a few risks by investing in the market. That may be either in the form of share purchase or in the form of SIP/Mutual fund.

B) Secure retired life

Think about your retired life. You will not receive any salary after retirement. Any pension can’t be the replacement of your salary. But you have to spend for your living. From where you get that amount? The only answer is from your investment.

C) Emergency fund

I already told you that investment is not only for creating a fund. It can help you in the critical situation also. For example, life insurance and medical insurance are the two main investments to handle a critical situation. If you have no investment then how can you handle?

D) For special purposes

It is true that we invest for our better future but the investment can be made for your short-term requirement also. For example, children educations, any holiday tour, purchase house property etc.

7. You must invest in yourself

“The most important investment you can make is in yourself”- Warren Buffet

The most valuable investment is if you invest only for your development.

At the very beginning, you may have no idea about investment. In that case, you just need some training. You may follow some financial blog like “cashoverflow.in”/”chartered club.com” /”solvetaxproblem.in (you are already in) etc.

You can invest in some good investment books also. For example, “The Intelligent Investor”, “Rich Dad Poor Dad”, ”101 Entrepreneurial Facts about 10 of the most successful Billionaires that can inspire you, etc. (All the links are affiliate links).

Last but not the list; don’t try to invest your money in here and there. Avoid those schemes which offer you high return in a short-term period. You must choose the right investment according to your needs. If you have no idea or you are confused then please avoid that investment. At the end of the day, if you are happy then everything should be fine.

 

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