Investing means, making more money on your money towards increasing your wealth. An investment is anything you purchase for future income or benefit. In other words, anything not consumed today and saved for future use can be considered an investment. Income earned from your investments and any appreciation in the value of your investments increases your wealth. Before we take a look at the different financial products, it is important to know the basic principles of investing!
Investment refers to a placement of funds in some assets that will be held over some period of time with the expectation that the funds will grow. Each one of us has assets of some kind, ranging from physical assets to financial assets. For our purposes, investment will mean a measurable asset retained in order to increase one's personal wealth.
The prime motive behind investing is that we want to improve our future welfare. Sources of funds may be from assets already owned, savings or foregone consumption or borrowed money. By foregoing consumption today and investing the savings, we expect to enhance our future consumption possibilities. Anticipated future consumption may be by other family members, such as education funds for children or by ourselves, possibly in retirement when we are less able to work and produce for our daily needs. Regardless of why we invest we should all seek to manage our wealth effectively, obtaining the most from it. This includes protecting our assets from inflation, taxes and other factors.
The sooner one starts investing the better. Your investments get more time to grow, whereby the concept of compounding (as we shall see later) increases your income, by accumulating the principal and the interest or dividend earned on it, year after year.
Three rules of investment:
- Invest early
- Invest regularly
- Invest for long term and not short term
- Invest Early: The sooner you start the better. Start investing in small amounts, continuously for a long time, money grows due to the power of compounding. If you start investing when you are single you will be able to save maximum. The best policy is to start saving from the moment you begin earning.
- Invest Regularly: Develop the habit of adding to your recurring deposit / systematic investment plan of mutual fund / deferred annuity account on a regular basis, perhaps monthly or quarterly. By investing regularly with SIP of mutual funds you take advantage of a strategy called rupee-cost averaging. Regular investing, however, does not ensure a profit or protect against loss in declining market scenario.
- Invest for Long Term and Not Short Term: If you decide that your money can work for you over a long period of time, then better compounding works. Consider this: Rs 1,000 invested at 8% earns Rs. 80. Left to compound, the original Rs.1,000, plus accumulated interest, will earn Rs.160 in the 10th year, Rs.507 in the 25th year, and Rs.1,609 in the 40th year -- returns of 16%, 51%, and 161%, respectively, on the initial Rs.1,000.
The proper choice of investment instrument can actually make it almost simple to realize your goals. In other words, right choice of investment will improve your present life and let you look ahead to the future too. It allows you to understand how today's financial decision affects other areas of your finances. For example, buying a particular investment product might help you pay off your housing loan faster or it helps to support your retirement significantly. One must view each financial decision as part of a whole and also consider its short and long-term effects on your financial objectives. Surprisingly, many of us do not have any type of formalized investment plan in place.
