What is Investment and How to Start Systematic Investment Plan 1


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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-YNet 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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