Why we should invest

Lets understand what would happen if one choose not to invest. Assume person "A" earn INR 50,000/- per month and spend INR 30,000/- towards cost of living which includes housing, food, transport, shopping, medical etc. The balance of INR 20,000/- is monthly surplus. As of now just skipping the tax part.

To drive the point across, let us make few simple assumptions..

1. The employer is kind enough to give you a 10% salary hike every year
2. The cost of living is likely to go up by 8% year on year
3. You are 30 years old and plan to retire at 50. This leaves you with 20 more years to earn
4. You don’t intend to work after you retire
5. Your expenses are fixed and don’t foresee any other expense
6.  The balance cash of Rs.20,000/- per month is retained in the form of hard cash

There are few compelling reasons for one to invest..

1. Fight Inflation – By investing one can deal better with the inevitable – growing cost of living – generally referred to as Inflation
2. Create Wealth – By investing one can aim to have a better corpus by the end of the defined time period. In the above example the time period was upto retirement but it can be anything – children’s education, marriage, house purchase, retirement holidays.
3. To meet life’s financial aspiration

An asset class is a category of investment with particular risk and return characteristics. The following are some of the popular assets class…

1. Fixed income instruments
2. Equity
3. Real estate
4. Commodities (precious metals)

Investing is a great option, but before you venture into investments it is good to be aware of the following…

1. Risk and Return go hand in hand. Higher the risk, higher the return. Lower the risk, lower is the return.
2. Investment in fixed income is a good option if you want to protect your principal amount. It is relatively less risky. However you have the risk of losing money when you adjust the return for inflation. Example – A fixed deposit which gives you 9% when the inflation is 10% means you are net losing 1% per annum. Fixed income investment is best suited for ultra risk averse investors
3. Investment in Equities is a great option. It is known to beat the inflation over long period of times. Historically equity investment has generated returns close to 14-15%. However, equity investments can be risky
4. Real Estate investment requires a large outlay of cash and cannot be done with smaller amounts. Liquidity is another issue with real estate investment – you cannot buy or sell whenever you want. You always have to wait for the right time and the right buyer or seller to transact with you.
5. Gold and silver are known to be a relatively safer but the historical return on such investment has not been very encouraging.

So choose wisely and follow your own knowledge and guts.. Happy Investing