How do we Spend, Save and Invest? Part 2

What is the need for making investments?


What is the need for making investments? In simple words, we invest our money to earn returns on them; the growth potential multiplies when we re-invest already earned returns. In an example of Rs. 100 monthly invested in an account earning 8% annually will become Rs 18,417 in 10 years! If the return is 12% then the value of investment would be Rs. 23,234.

There are numerous ways of making investments. Traditional investments are well known assets including cash, stocks and bonds (fixed income securities). On the other hand, Alternative investments comprise real estate, commodities, infrastructure, private businesses, collectibles etc.

Can you imagine a situation when your assets keep growing despite inflation, recession, financial turmoil, political drama, technological disruptions etc? The secret lies in creating a diversified portfolio containing a mix of asset classes. How does it happen? This is because prices of and returns on various asset classes don’t move together in one direction! One goes down, others go up and this happens because of events which are not in our control. When stock markets don’t perform well, gold performs well. Soon after demonetization was announced, contrary to the popular notion that real estate prices would keep going up; we saw the prices of real estate falling dramatically.

Designing a well diversified portfolio is not an easy task for a common man. That’s where investment advisors and portfolio managers come in to help. If I don’t have sizable investments, I can’t hire someone to manage my portfolio of assets. The popularity of mutual funds is the evidence of the fact that it’s easier to invest in a diversified pool of funds which is managed by a professional fund manager. Each mutual fund has a stated objective such as equity, debt, balanced and money market funds and they are well regulated.

Indian household’s favorite investment is Gold. According to a report published by the world gold council, India’s gold stocks are around ~24,000 tonnes which is valued at over US$800bn and gold jewellery plays a dual role in India- as an investment as well as an adornment. From making investments point of view Gold lost ~28% in the last 5 years! However, Indian stock market (nifty 50 Index) gained ~63% during the same period. I don’t recommend selling all the Gold and investing in equity market, the point I want to emphasize here is that your investments may sometimes give you a handsome return and sometimes they may disappoint you.

A portfolio designed with realistic risk and return objectives given the constraints (Time Horizon, Tax, liquidity, legal, or any unique circumstances). In the interest of time and simplicity we are not going to discuss complex portfolio theories, we are here to discuss and explain the thoughts on savings and investments and with that enhance your knowledge on money related matter.

We will discuss the investment related biases and objectives & constraints in our future articles. Please post your comments and write in with your questions about making investments.

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