Here's an easy-to-understand guide that answers this basic question
15-Feb-2022 •Research Desk
Why should you invest? The answer is very simple: to create wealth. And why would you want to create wealth? Well, to fund various financial goals you may have in your life like an expensive car, foreign holiday, retirement, and so on.
The trouble is that most of us have a single source of income and there are various needs that can be immediate, medium term or long term. If we move from one goal to the other with our accumulated savings, we would be left with almost nothing for our long-term goals. This is why it is important to not just keep money in the savings bank, but use it to make investments that will help you create wealth over a long period of time.
If you start your investments as early as possible, you will be in for a pleasant surprise. This is because time and compounding interests are a lethal combination that will multiply your wealth beyond your imagination over a long period of time.
Consider this example: Ram and Shyam are friends, both are 30 years old. Ram invests Rs 1,000 every month for his retirement. He manages to earn an annual return of 12 per cent on his investments and succeeds in amassing a neat corpus of about Rs 31 lakh after 30 years. Shyam does nothing for 20 years. He suddenly wakes up 10 years before his retirement and starts investing Rs 12,000 every month for the next 10 years. He also manages to pocket an annual return of 12 per cent on his investment. However, at the end of the exercise, Shyam managed to create only around Rs 27 lakh for his retirement.
How is it possible? Ram was investing a measly Rs 1,000 per month aggregating to Rs 3.6 lakh whereas Shyam was investing Rs 12,000 every month summing to Rs 14.40 lakh. Well, it is possible because of the compounding interest. Some people call it the eighth wonder of the world because of its power to multiply money over a long period. If you invest in a disciplined manner and give your investments plenty of time, you can achieve most of your goals without much pain. For some academic interest, how much do you think Shyam will have to invest to create a corpus of Rs 31 lakh? Well, he will have to invest around Rs 14,000 per month for 10 years to create that kind of corpus.
Here is a quick list of habits that stop you from being rich:
Waiting for the perfect plan: Spending months or years to come up with a fool-proof investment plan is not a great idea. There is no guarantee that your perfect plan is indeed going to be perfect. So, start right away.
Starting late: It is extremely difficult or almost impossible to catch up with someone who has started investing regularly much earlier. Even with a very large investment, you would find it difficult to catch up. Once again, start now.
Investing for short-term: Try to think beyond a few months or a year. You should go for short-term investments only for your short-term goals. Long-term goals need long-term investments. As a basic rule, stick to debt investments for goals that are upto three years away and invest in equity if your goal is five years away or longer.
Playing it safe: You can't build a large corpus with small investments in debt schemes. If you want to beat inflation, you should invest in stocks. Over the long run, the volatility of equity returns diminishes substantially. So get rid of the fear of stocks and invest in equity for your long-term goals.
Looking for tips: Don't waste time looking for tips to get rich quick. Most of these tips would do exactly the opposite- rob you a chance of making money on your investments. If you have your basics right, shut out all the noise and stick to your plan. Take our word for it: you will be rich one day.
Trading is not investing: Getting in and out of investments, especially equity investments, is not a great idea. You will end up paying higher taxes on such frequent sale and purchases. It will also rob you a chance to make spectacular returns from your investments over a long period as it throttles compounding of returns. Giving time to your investments is the key to creating wealth over a long period.