Anyone who ever earned any money or was given any money to manage heard almost always – ‘Save Money’. Wasn’t it the first advice you got when you were given money in hand as a child or when you got your first paycheck. ‘Now keep this money properly’, was the only advice.
I wish someone had said invest your money, grow your money vs just saving your money as there is a fundamental difference between saving and investing. Both are great financial habits and are often interchangeably used. But there is a crucial difference between the two. If you only save money and keep it in your bank, then over time, due to inflation, the value of your money actually decreases. However, if you invest it in any instrument that gives you a return higher than the inflation rate, you are actually growing your money or wealth.
Investment and Saving
Investing refers to growing your savings (wealth) overtime with the resources you have right now. When you put a certain amount of your money into buying assets that might increase in value, such as stocks, shares in a mutual fund or property and gold. Savings could just be untouched money in your bank or your home and is easily available when you need it. With this fundamental difference in mind one should approach the concept of investing. Having said that, you must always have emergency savings handy before you invest all your money and lock it in. You should always have at least three to six months worth of living expenses as available liquidity. And your investment choices should also be distributed between what is committed for long and what is likely to be available readily in case of an emergency.
Women are likely to take more breaks as caregivers or homemakers. And therefore they need to grow their money much more if they have to consider their life goals and the financial independence they may need to support them.
Goal-based planning ensures you have set for yourself your long-term and short-term wants and needs and investment planning ensures how this will be achieved.
Your options for investing
Investing can be done across a variety of instruments, and it’s important to know a few key highlights of different options.
Investments made in the stocks
Equity refers to the investments made in the stocks. Investing in stocks means being a part owner of (the business) of the company whose stocks are being purchased. Businesses have their good days and bad, that means that the stock price is likely to be volatile. Hence you need to give this investment time to grow and weather out the up and down cycles. If your horizon is short, then equities are riskier than other options, but if you have a 7-year or longer horizon, equity is a good place to be.
Another option to invest your money is to go with debt instruments, which have a fixed tenure and a fixed rate of interest payout. Debt includes offerings from banks in the form of Fixed Deposits, but the debt market (also known as the bond market) has similar offerings from public companies as well as the National or State Governments.
At times, it becomes a bit unwieldy for individual investors to keep a track of all the stocks or all the debt offerings out there, which has led to the rise of mutual funds. There are equity MFs, and debt MFs, and by investing in a MF, your investment is spread out across the multiple equity/debt holdings that are a part of that MF. Each mutual fund is managed by an asset management company with the help of their fund management teams, and there’s a small Asset Management Fee that most MFs charge the end customers.
One of the other truisms in investing is “Time in the market is more important than timing the market.” Markets are impossible to time correctly and in hindsight, everything seems obvious. But it’s important as young investors to start young, and stay the course for the long term.
And if you’re not young, and you haven’t started investing yet, fret not. The best time is today.
As each of you start on your investing journey, it’s important to research a few more things.
What is your risk appetite? How long can you commit the money for? Which goals need immediate money and which needs the money to grow to support them. Buying a car for your immediate transport needs is different than planning your retirement.
Your mental makeup. Are you someone who cannot bear the loss of even a single rupee? Or are you someone who is willing to bear the chance of 20-30% of your investments going to 0 if it comes with the chance of 70-80% investments going to 2x?
Property and gold are also some of the instruments that people invest in. Real estate investment has traditionally been a favourite investment in our country. However it comes with its pros and cons. Since it is a big ticket investment and most likely to include a loan, much thought needs to go into this before choosing it as an investment avenue.
Public Provident fund also is a great option if you are ok to lock your money for a tenure of say 15 years. This money is tax free and one of the most secured long term investment options in India.
Are you finding it all overwhelming? Worry not. There are professionals who make your life easy and should be hired to help you invest right. Warren Buffet, one of the richest businessmen of the world, rightly said “Never depend on single income. Make investments to create a second source”.
Disclaimer: Reach out to your financial advisor for a better understanding of your risk management needs and investment tools.
The article is published in collaboration with BSE Investors’ Protection Fund to spread awareness with respect to personal finance and investing, especially for women.