In the last friday, it was just a brief about this blog and an initial summary of how this blog operates. Before we start our first innings of investment, we should know what is an investment. Firstly we should know the basics of investment. Wikipedia says;
"to invest is to distribute money in the expectation of some benefit in the future"
Therefore it is important to note that investments are entities that has basic characteristic feature of benefit. Unfortunately, risk is also another characteristic feature of investments, which is an exact clash for benefit. These two define the most important aspect of the investment called Returns. Wikipedia states that;
"Investors generally expect higher returns from riskier investments. When we make a low risk investment, the return is also generally low"
Return is an outcome of investment characterized by benefit or risk. Therefore before investing it is important to estimate the benefit and risk of each investment and then take a leap. Investments with low risk and high returns are ideal investment options. However when compared with the returns of more riskier investments, these investments are low performing entities.
The reason to expect some benefit out of this investments are to fight the inflation. As we discussed on the other day, a product worth 10 INR is a product worth 90 INR within a decade. Therefore the inflation is now 0.8. (However coming to the actual approach of calculating the inflation we come through a different process and lot of variables are involved. Since it is out of scope we are actually concentrating on the actual topic). Therefore one needs to plan accordingly his investments to meet the demands of inflation.
The best examples of low risk and moderate benefit investments are
i) Fixed Deposits
ii) Provident funds
iii) Recurring Deposits
iv) Savings etc...
Most of the government led financial schemes are moderately returned investments with an annual rate of return of 7pc. An investor, therefore expects a minimum of 8pc return while he is investing upon something. The risk is approximately zero until unless one may get into something like Krushi Bank. Otherwise, it is the most affordable investing option as it requires no knowledge to very less knowledge on investing. However there are investing options with low risk and high returns. These investing options are expensive and not affordable to normal investor. The best examples of these investments would be;
i) Real estate
ii) Gold, Silver commodities
iii) Petrochemical commodities etc....
To start your innings into investment, it is therefore very important to organize your income. It is very essential to plan your needs and costs. Let me putforth through a story,
Sambhrama is an employee in excell investing solutions. She receives a pay check of 90k per month and she is entitled for 12lakh gross annual income. She needs to pay the loan for education which she did to study MS in United States which is now 20 lakhs. This loan incurs an annual interest of 10 pc. Therefore she created a 10 year plan in which she calculated amount as follows;
gross salary = 12 LPA
Gross salary for 10 years = 120Lakh INR
Needs - Car, Home, furniture, daily expenses, debt,
With an annual interest of 10 pc the 40 lakhs will be compounded to 51 Lakhs in ten years. Therefore the amount residing with her will be 120-51 = 69 Lakhs INR. Out of 69 lakhs she may keep 50 percent to her expenses which would be 39.5 lakhs, 10 percent savings which would be 6.9 lakhs and the rest 22.6 laks are actually meant for her Car, Home and furniture. She might afford a car and some furniture but definitely not home. Which conveys that she is not really into proper planning. Another plan would be clearing the debt within five years which means, she should then control her expenses for first five years.
Definitely you might not need this high profile salary payslip to plan your needs, but definitely something to plan the start. However we did not include hikes or demotion during this 10 year term. Therefore the risk on planning increases with duration. We need to invest appropriately over intelligent and affordable options available to keep check on our financial targets.
One of the most affordable and intelligent option available is investing on tobacco in countries like Australia, where there is an annual hike on tobacco products of about 12pc. Therefore does that mean to hold some Australian tobacco for an year and making profits out of it for the next year. So this is called trading.
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