Let us start by revisiting why anybody invests money.
E.g. suppose one can buy 4 apples for Rs 100 today. Instead of buying the 4 apples and eating them today, if one invests the money for say 10 years, then one should be able to buy more than 4 apples with the same money 10 years from today.
Investment is the setting aside of money today so that it is worth more at a future date after accounting for inflation.
There are only four types of investment products in the world
All other investments are a subset of the 4 mentioned above.
E.g. NSC, PPF, EPF, Debt Mutual Funds operate very similar to Fixed Deposits (FDs)
Mutual Funds are same as stocks except that someone else chooses what stocks to buy.
Currency and commodity trading is similar to buying/selling stocks
Biggest risk to personal financial health
Apart from losing one’s job or one’s line of business becoming unprofitable, the biggest risk to anyone’s financial health is not the default by a bank on one’s Fixed Deposit or the stock going down, but Inflation.
Think about what was the first salary of your mother / father and what was your first salary. Don’t you get the feeling that your parents probably got much lesser first salary than what they deserved?
Partly true, but the major reason for this is that the value of Rs 1000 in say 1972 was probably similar to the value of Rs 1,00,00 in 2017.
To be precise, the average inflation in India in the last 37 years has been a staggering 7.7% p.a.
|Investment||Characteristic||Risk||Historical Returns (37 yrs)|
|Fixed Deposit||Most accessible, easy to understand, easy to operate||Barely manages to beat Inflation||8.4%
1 Lac à20 Lac
|Gold||Perfect for women (ornaments).
Most trusted store of Value
Ornaments have problem of wear & tear
1 Lac à36 Lac
|Real Estate||Large Ticket.
Most people don’t buy more than 2/3 houses/plots in their life time.
Cost of making the wrong choice of house is very high
|Illiquid – Doesn’t get sold at the time and price that you want it to
High Transaction Costs – Brokerage (2%), Stamp Duty (6%)
Locality – Appreciation depends to a large extent on future development of the surrounding locality
|No concrete data
1 Lac à66 Lac
|Stocks||Opportunity to participate in the success of the best businesses of today & tomorrow||Can go down in value
Investing without proper knowledge is injurious to wealth
1 Lac à471 Lac
Choice of Investments
Given that beating inflation is the biggest concern when investing our money, there is an obvious choice left for the bulk of one’s investments.