What is Investment and How to Start Systematic Investment Plan 1


Investment Definition:

Investment refers to investing money or purchase of goods or assets with the intension of making profit in the long run. For example: Investing money into bank fixed deposit, buying real estate assets, purchasing gold, Investing in financial assets like stocks, bonds, futures, currency, etc and selling on the future date with the hope of appreciation and making profit out of it.


Where to Invest Money:

There are different ways for investing like bank fixed deposit, real estate, gold, currency, stock market, bonds, etc. Before you park your in any of the market one should perform research to analyze returns with time duration based on the past performance and conclude whether your investment opportunities is going to fulfil your retirement expenses. We will get into dept to understand best ways to invest for retirement.


Let us take an illustration to understand with the basic concept of investment. Let us assume Mr. Trader’s current monthly income and expenses report.

Income:  Rs.65,000/-  (approx. around $1000)
Expenses Summary:
1. Home Loan Repayment  Rs.25,000/-  (approx. 39% of Salary Income)
2. House Hold Expenses  Rs.20,000/-  (Includes Food, Transport, Shopping, Medical, etc)
3. Miscellaneous Expenses  Rs:10,000/-  (Including Society Maintenance and Electricity Bill)
Total Monthly Savings:  Rs: 10,000/-  Calculated as: Income – Expenses

(Lets ignore the income tax fact for the time)

Wiki Finance pedia - e-learning course on Investing wikipedia Chapter - What is InvestmentPortfolio Scenario – 1; Example of Savings:

Let us calculate the retirement and financial planning with few simple assumptions:

  • Salary hike is expected to growth at 10 percent per annum year on year.
  • The cost of living is likely to go up at inflation rate i.e. by 8% year after year.
  • Mr. Trader is currently 30 years of age and Mr. Trader map to retire at the age of 50. Which conclude only 20 years for retirement planner.
  • You don’t have it in mind for occupation after you retire and your expenses are fixed and don’t forecast any other expenditure.

Going by these assumptions, here is how the cash balance will look like in 20 years as per Table

Years Salary Income p.a. Expenses Y-o-Y Net Cash Savings
          1                   7,80,000                6,60,000                     1,20,000
          2                   8,58,000                7,12,800                     1,45,200
          3                   9,43,800                7,69,824                     1,73,976
          4                 10,38,180                8,31,410                     2,06,770
          5                 11,41,998                8,97,923                     2,44,075
          6                 12,56,198                9,69,757                     2,86,441
          7                 13,81,818              10,47,337                     3,34,481
          8                 15,19,999              11,31,124                     3,88,875
          9                 16,71,999              12,21,614                     4,50,385
        10                 18,39,199              13,19,343                     5,19,856
        11                 20,23,119              14,24,890                     5,98,229
        12                 22,25,431              15,38,882                     6,86,549
        13                 24,47,974              16,61,992                     7,85,982
        14                 26,92,772              17,94,952                     8,97,820
        15                 29,62,049              19,38,548                   10,23,501
        16                 32,58,254              20,93,632                   11,64,622
        17                 35,84,079              22,61,122                   13,22,957
        18                 39,42,487              24,42,012                   15,00,475
        19                 43,36,736              26,37,373                   16,99,363
        20                 47,70,409              28,48,363                   19,22,046
 Net Cash Balance at Retirement Age:               1,44,71,603

Above calculation results are quite shocking:

  • After 20 years you have accumulated around Rs.1,44,71,603/- (approx. around $2,22,640).
  • Considering your expenses are same after retirement and expenses will continue to grow at 8%. It’s an adequate amount to keep you alive for about 4 years post retirement life but after 4 year onwards you will be into financial crisis. How would you manage year on year after 4 year? Is there any way to make better investment plans good enough for post retirement?

Portfolio Scenario -2; Example of Investment:

Let us understand by above scenario with additional two simple assumptions:

  • You have managed your fund and succeed in acquiring 15% returns year on year.
  • After 20 years, you do not have to pay home loan further. You expenses are reduced by Rs.3,00,000/- (Rs.25,000 * 12 Months) henceforth.

 

Years  Salary Income  Cash Savings  Cash Y-o-Y  15% Return  Net Balance
             1                 7,80,000                 1,20,000                 1,20,000                    18,000           1,38,000
             2                 8,58,000                 1,45,200                 2,65,200                    39,780           1,84,980
             3                 9,43,800                 1,73,976                 4,39,176                    65,876           2,39,852
             4              10,38,180                 2,06,770                 6,45,946                    96,892           3,03,662
             5              11,41,998                 2,44,075                 8,90,021                1,33,503           3,77,578
             6              12,56,198                 2,86,441               11,76,463                1,76,469           4,62,911
             7              13,81,818                 3,34,481               15,10,943                2,26,641           5,61,122
             8              15,19,999                 3,88,875               18,99,818                2,84,973           6,73,848
             9              16,71,999                 4,50,385               23,50,204                3,52,531           8,02,916
           10              18,39,199                 5,19,856               28,70,060                4,30,509           9,50,365
           11              20,23,119                 5,98,229               34,68,289                5,20,243         11,18,472
           12              22,25,431                 6,86,549               41,54,838                6,23,226         13,09,775
           13              24,47,974                 7,85,982               49,40,820                7,41,123         15,27,105
           14              26,92,772                 8,97,820               58,38,640                8,75,796         17,73,616
           15              29,62,049               10,23,501               68,62,141              10,29,321         20,52,822
           16              32,58,254               11,64,622               80,26,762              12,04,014         23,68,636
           17              35,84,079               13,22,957               93,49,719              14,02,458         27,25,415
           18              39,42,487               15,00,475           1,08,50,194              16,27,529         31,28,004
           19              43,36,736               16,99,363           1,25,49,557              18,82,434         35,81,796
           20              47,70,409               19,22,046           1,44,71,603              21,70,740         40,92,787
 Net Cash Balance at Retirement Age:     2,83,73,662

Above calculation results are quite joyful:

  • After 20 years you have accumulated around Rs.2,83,73,662/- (approx. around $4,36,517).
  • You have developed the skills to invest the fund and get 15% returns even after post retirement.
  • Considering your fixed expenses are same after retirement and expenses will continue to grow at 8%. It’s an ample amount of money to keep you alive till 21 years post retirement life. Which is good enough to live your life happily even after retirement.

Having figured out, how important is to invest your fund and what kind of returns one should expect by investment to live your life happily even after retirement. Now let us understand 3 things, Why, Where and How to select the asset class that outfit your individual risk and return outlook. Investment assets are characteristics based on risk and return. The following are some of the popular type of investments one should go thru…

  • Fixed income deposits

  • Stock Market

  • Real Estate

  • Commodities (Valuable Metals)

 

  

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What is Investment and How to Start Systematic Investment Plan
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About Kiran Mehta

A greek, passionate blogger and traveller who loves to travel around the world to enhance knowledge and to share information thru various writings.


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