When you invest, you commit your money or resource in the expectation of future benefits. For instance, when you want to accumulate some Rs. 20 lakh for higher-education of your child, you may need to save about Rs. 10,000 per month for next 10 years to achieve the goal.
This Rs. 10,000 that you forgo now towards a goal in the future is your investment in that goal. Also, investing implies that you have committed the money to a financial product with the hopes of getting significantly more money in the future.
Majority of us have a single source of income, but we have several needs that are immediate, medium term and long term. And if we start to fulfil one goal after other with our accumulated savings, we would be hardly left with anything for our long-term goals.
Savings = Income - Consumption
his equation shows savings as the remaining amount after the deduction of total expenditure from total income. Mathematically, the equation gives higher importance to consumption first. However in real life, experts recommend to invest/save for future first and then manage your spends with the remaining amount. Thus, if you plan to save more money to fulfil your goals, there are only two possible options – reduce spending and increase your income. Often the former is easier than the latter.
In simple terms, saving means putting aside money, bit by bit. The primary goal of saving is to preserve capital. People usually save up their hard-earned money to pay for something specific, like a vacation or a wedding, deposit on a car or house, or to cover for any unexpected emergencies. Typically, it includes the act of putting the money into cash products, such as a savings bank account.
Investing involves committing your money into an investment product with hopes of making a profit. Investing is different from saving as it involves some level of risk. Investors assume this risk with the hope that they will make more money and increase the value of their investments.
The potential of receiving more money is the motivation behind why you should invest in the first place. However, just putting your money in any financial instrument may not be a smart way to invest.
In simple language, inflation is the rate at which the overall market prices increase over time. For example, if the inflation rate was 5% last year, any commodity which was priced at Rs. 100 could cost about Rs. 105 now (Source: TheSWO Financial Calculator)
While looking at your wealth, the effect is simply reverse of the commodity price. Just imagine that if you had Rs. 100 on year ago, you could’ve bought that commodity. But if you kept this money in your pocket for a year, you would find that you are short by Rs. 5.
This is why, you need to invest smartly to overcome this wealth eating monster, and it’s not difficult.
Most investments can be categorised as either equity investments or debt investments. In an equity investment, a person buys a share of the ownership in a company, which entitles the investor to the profits and losses of the business.
Most investments can be categorised as either equity investments or debt investments. In an equity investment, a person buys a share of the ownership in a company, which entitles the investor to the profits and losses of the business.
For example, if you buy a ‘Food Truck’, your profit will be based upon the net profit that the food truck generates. Similarly, if you buy shares of a company, your profit is based upon the rise (or fall) of the value of the company’s shares and the dividend which Reliance pays (if any).
In a debt investment, you lend money to a business or a government institution. However, in this case, your’s business. If you buy a bond you are eligible to receive a fixed interest irrespective of the profits earned by the firm or the government.
Besides above stated kinds of income (dividends in case of equities and interest in case of debt), one can also earn capital gains by sale of the investment. Due market factors the price of the equity and debt changes almost daily and the difference in the price of sale and purchase is investors’ capital gain.
You can invest directly into the stocks of companies or buy the bonds issued by them and the government.
A mutual fund is a pool of savings contributed by multiple investors. The common fund so created is invested in one or many asset classes like equity, debt, liquid assets etc. It is called a ‘mutual’ fund because all risks, rewards, gains or losses pertaining to, or arising from, the investments made out of this savings pool are shared by all investors in proportion to their contributions.
A fixed deposit (FD) is a financial instrument provided by banks or NBFCs which provides investors a higher rate of interest than a regular savings account, until the given maturity date. It may or may not require the creation of a separate account.
For a fixed deposit is that the money cannot be withdrawn from the FD .
Bonds are certificate of your lending money to the issuer at the said interest rate. The interest on each bond could be paid to you regularly and at the end the face value is returned. Alternatively, you can also sell the bond before expiry if you need.
Highest rated bonds and government securities often carry lower risk, but they will also offer lower rate of interest.