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The importance of Investing – Why Should You Invest???

The importance of Investing

Before starting to invest, it is very important to understand the true meaning of investing. Basically, investing is the act of putting money into an asset with the intention of generating a profit or earning a return.

Many people are hesitant to invest because they may not fully understand the concept or feel that it’s too risky. However, investing can provide significant benefits that can help individuals achieve their financial goals.

Why Should You Invest?

Investing is important for a number of reasons. One of the primary reasons to invest is to earn a return on your money. When you invest, you have the potential to earn a profit through the appreciation of your asset’s value or through the payment of dividends or interest.

Another important reason to invest is to protect your money from inflation. Inflation is the rate at which the general level of prices for goods and services is rising.

Over time, inflation can erode the value of your money. Investing can help you keep pace with inflation by generating a return that exceeds the rate of inflation.

Finally, investing can help you achieve your long-term financial goals. Whether you’re saving for retirement, a down payment on a home, or your children’s education, investing can provide a way to grow your money and achieve your financial objectives.

Benefits of Investing

There are many benefits to investing, including:

1. Compounding: One of the most significant benefits of investing is compounding. Compounding is the process by which your investment earns interest, and that interest is reinvested, generating even more interest. Over time, compounding can have a significant impact on your investment returns, as your money grows exponentially.

2. Beating Inflation: Investing can help you beat inflation by generating returns that exceed the rate of inflation. This can help ensure that your money retains its value over time and that you can afford to maintain your standard of living.

3. Diversification: Investing can help you diversify your portfolio, which can help reduce your overall risk. By spreading your money across different assets, such as stocks, bonds, and real estate, you can minimize the impact of any one investment performing poorly.

4. Potential for High Returns: While investing always carries some level of risk, it also has the potential to generate high returns. By investing in high-growth assets, such as stocks or real estate, you can potentially earn a significant profit over time.

5. Tax Benefits: Certain types of investments, such as retirement accounts or municipal bonds, can offer tax benefits that can help you keep more of your money.

What if you DON’T invest

Let’s say you are Tipendra Jethalal Gada a.k.a. Tappu of (the very famous) Taarak Mehta Ka Ooltah Chashmah aka TMKOC. So, Tappu (at 30), has taken responsibility to manage the family business of electronics (Gada Electronics).

Assume he generates a net profit of Rs.50,000/- per month (consider this to be his net monthly income). Also, Tappu spends Rs.30,000/-towards his living, which include expenses like food, medical,  transport, shopping, etc.

That means he saves Rs.20,000/- per month.

Tappu is confused – whether he should invest or not. Right now, his primary goal is to not work beyond the age of 50. That means at 50 years, Tappu wants to retire.

To make things simpler, let’s take some general assumptions like:

1. The business will grow annually by 10% and so is the income of Tappu.

2. Inflation will approx be around 7%, i.e. Tappu’s cost of living is likely to go up by 7% annually.

3. Tappu is now 30 years old and wants to work no later than the age of 50, which means there are 20 working years remaining.

4. Till now, Tappu saves a surplus of Rs.20,000/- per month as hard cash. That means not even saving in a savings account.

On the basis of the above assumptions, Tappu will have Rs. 2 crores (approx) at the age of his retirement, as follows:

Years Yearly Income Yearly Expenses Cash Retained
1 600000 360000 240000
2 660000 385200 274800
3 726000 412164 313836
4 798600 441015 357585
5 878460 471887 406573
6 966306 504919 461387
7 1062937 540263 522674
8 1169230 578081 591149
9 1286153 618547 667606
10 1414769 661845 752923
11 1556245 708174 848071
12 1711870 757747 954123
13 1883057 810789 1072268
14 2071363 867544 1203819
15 2278499 928272 1350227
16 2506349 993251 1513098
17 2756984 1062779 1694205
18 3032682 1137173 1895509
19 3335950 1216776 2119175
20 3669545 1301950 2367596
  Total Corpus at the age of retirement 1,96,06,622

Tappu Beta! Don’t get too comfy with your cash stack of Rs. 2 crores, ’cause the set of numbers is gonna be a real kick in your pants (Pairo tale Zameen khisak jayegi!).

Age Available Cash Yearly Expenses Remaining Cash
51 19606622 1393086 18213536
52 18213536 1490602 16722934
53 16722934 1594945 15127989
54 15127989 1706591 13421398
55 13421398 1826052 11595346
56 11595346 1953876 9641470
57 9641470 2090647 7550823
58 7550823 2236992 5313831
59 5313831 2393582 2920249
60 2920249 2561133 359117
61 359117 2740412 -2381295

So, dear Tappu, don’t think you’ll be living like a king on this chunk of change in your post-work life, ’cause it’ll only stretch till 10 years.

As per the above table, (assuming annual expenses growing at the same rate), you will run out of money in the eleventh year. At the age of 61, you will require Rs. 27,40,412 for the year, but you will end with only Rs. 3,59,117. A humongous deficit of Rs. 23,81,295.

What if you DO invest

Tappu got shocked witnessing the above facts and figures and wanted to figure out the other scenario-if he invested in it.

Let’s assume that Tappu invests its surplus in an investment scheme, which grows annually at a rate of 14%.

Now let’s calculate Tappu’s corpus at the age of his retirement:

  In the first year (Rs)
Monthly Income 50000
Monthly Expenses 30000
Cash Retained 20000
Annual Cash Retained 240000
Annual Growth 12%
Tenure 20 years

The final amount in hand = Rs.54460278 as follows

Years Yearly Income Yearly Expenses Cash Retained Retained Cash Invested @ 14%
1 600000 360000 240000 2893366
2 660000 385200 274800 2906056
3 726000 412164 313836 2911288
4 798600 441015 357585 2909754
5 878460 471887 406573 2902096
6 966306 504919 461387 2888907
7 1062937 540263 522674 2870741
8 1169230 578081 591149 2848098
9 1286153 618547 667606 2821458
10 1414769 661845 752924 2791255
11 1556245 708174 848071 2757882
12 1711870 757747 954123 2721719
13 1883057 810789 1072268 2683103
14 2071363 867544 1203819 2642349
15 2278499 928272 1350227 2599746
16 2506349 993251 1513098 2555562
17 2756984 1062779 1694205 2510039
18 3032682 1137173 1895509 2463403
19 3335950 1216776 2119174 2415859
20 3669545 1301950 2367595 2367595
  Total Corpus at the age of retirement 19606622 54460278

Almost, Rs. 5 crore 45 lacks, which is an amazing 3x more than the previous figure. The calculation makes it clear that investing will put Tappu in a very good financial condition so that he can better deal with his post-retirement life.

Conclusion

In conclusion, investing is an important tool for achieving your financial goals. Whether you’re looking to generate a return, beat inflation, or diversify your portfolio, investing can provide a way to grow your money and achieve your long-term objectives.

While investing always carries some level of risk, the potential benefits are significant and can provide a way to secure your financial future.

Indian investors have several investment options to choose from, and it is important to choose an investment tool that aligns with their investment goals, risk appetite, and time horizon.