One of the most fundamental questions of investing is actually a no-brainer. Would you want to spend (invest, in other words) your money today, in a year’s time or even later? The answer is today, now, because the first principle of finance and investment says that every rupee you receive today is worth more than the rupee you will receive in the future.
Start planning now
To accumulate wealth in the long term, start working on your investment plan now. Of course, there are risks attached to most plans, but take only those risks that are suitable at your age and for your eventual financial goals.
Photoimaging: Raajan/Mint
If you remember your class V math lessons, compounding is the ability to earn a return in the current year on not only your principal amount, but also on returns earned in the previous year. Put simply, it’s a process through which your money multiplies and you can earn returns that can go towards meeting your financial goals.
Also, it is only through investing that you can offset the damage inflation wreaks on your personal finances. The experience of other countries has shown that relying on your salary alone isn’t enough.
For instance, let’s say, you earn a salary of Rs10,000 and deposit it in your bank savings account, earning a measly 3.5% return (which could be as low as 2% after tax). This is a pittance when you consider the rising cost of living. In fact, long-term inflation in India has been around 5%. So, you are essentially earning only 2% after tax returns, but your costs are likely up by at least 5% per annum.
Investing allows you to earn returns higher than the rate of inflation, offsetting the reduction in purchasing power caused by inflation.
Don’t speculate
Investing is the activity of putting your money into securities or assets using an investment framework, backed by adequate risk management and supported by insight and research into the prospects of the company or the different assets you want to invest in. It requires an investment philosophy—a set of guiding principles that provide you with direction and discipline, irrespective of whether the markets are racing high (the bull phase) or are falling towards rock bottom (the bear phase).
Newcomers often make the mistake of putting their money on things they don’t understand. This isn’t investing, it’s speculation which is more like gambling—with you relying on chance and luck.
Investing, however, can’t be left to chance. It requires patience, especially for your investment thesis to mature, something speculators have little time or interest in.
Customize
Before investing, base your decision on the following criteria:
• Your unique situation, your risk-taking capacity.
• Why you need to generate returns for: your financial goals.
• By when you want to exit the investment: a timeline.
• How quickly you want to convert your investment into ready cash: liquidity.