Mar 17, 2020
Why should you prioritise investing?
If you are new to investing, asking “Why I need to invest” is a rather sensible question, the answer to which is simple. Assume that you’re a 90s kid. Now go down the memory lane and see if you remember the 25 paise and 50 paise coins.
If not anything, the coins could at least buy you a ‘peppermint’ or a random toffee. But what value do the coins have now? Can they buy you anything at all? No! And it’s only been close to 3 decades since then.
That’s the whole point.
Money’s worth today is less than what it was yesterday and it more than what it will be tomorrow.
The reason: money compounds in value. This cautionary principle of finance is called the ‘time value of money’ (TVM).
Interest: give and take
TVM is why lenders charge interest to their borrowers: because the sum they lend today is worth more than what they may receive tomorrow. It is also the same principle because of which you receive interest on a savings bank account and why you pay more for a piece of cake today than you paid a few years ago.
Saving vs investing
Given an option of receiving Rs 15,000 today or in 5 years, which would you choose? Without doubt, most of you would go with the first option, which then brings you to the next question: would you save it or spend it?
If you would save Rs 15,000, how would you do it? Store the money in your cupboard or park it in a scheme that offers interest? If you choose to do the first, you are only setting aside the money and not adding to its value. But if you take the second route and invest in a scheme, you can earn interest on the sum and grow it (unless, of course, the scheme is a sham).
What is investing?
Investing is an act of allocating money to an asset class with consideration of earning a benefit (return) in the near future. Therefore, it is the only way to grow your savings.
What should you know before investing?
Investing doesn’t mean to allocate your funds blindly. There are certain rules to consider for your investments to bear fruits.
Investments carry zero to high risk
No investment is devoid of risks. Depending on the asset class you choose, your funds are at more than just one type of risks as follows:
- Market risk: the risk that you may not receive the entire principal amount when the investment matures or asset (gold, house property) is sold
- Liquidity risk: the risk that you may not be able to sell the asset at the prevailing market price at a short notice. Such a type of risk is high in case of real estate and gold
- Credit risk: this arises when your borrower is likely to default on repayments and is relevant in the case of bonds and loans
- Reinvestment risk: is the chance that you may not enjoy returns at the same interest rate on reinvesting your maturity proceeds. This risk may arise in case of bonds and fixed deposits
- Volatility risk: this is when an asset class doesn’t guarantee returns due to various economic factors. Equity is the best example of investments with high volatility
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