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16 Oct 2020

Why is Investment Important – Reasons to Invest in 2021

Nisha Ramesh

There are two ways of building wealth in the modern world.

  1. You work to earn money
  2. You put your money to work for you.

Jumping from one goal to another with a single source of income can leave you with almost nothing for your long term goals. So, putting your money to work is the only way to stay financially stable.

So how do you make your money work for you? The answer is simple – Invest. 

In this article, we will try and understand the importance of investment, the importance of investment management

What is Investing?

Investing means purchasing an asset with the anticipation that it will yield more returns in the future. The benefit can be either regular income (e.g. rent) or an increase in the asset’s value (e.g. gold).

Investing is very different from saving. If you keep money in a savings account or under your bed, you are merely holding it for the future. If you use the same money to buy an asset that will generate returns in the future, you are investing (making money work for you).

For example:

Suppose you buy a bag of rice to consume in the future; you are merely saving. If you decide to sow the same rice on a piece of land, nurture it and be patient, it could yield a good crop that you can sell in the future. 

Though the solution sounds simple, only 1% of the population have managed to decode it. 

Invest In Crypto With Just Rs.100

What Stops People from Investing?

Here are some of the most common reasons why people hesitate to invest their money:

  • Insufficient Income

When most people think of investing, they picture something like this: (Image of a wolf on the wall street movie or the big bull movie). There is a common misconception that small earnings are not enough to start an investment. 

  • Lack of Trust

Investors are most unlikely to invest in anything that they do not trust. Insufficient knowledge or hearsay may lead people to misunderstand the consequences of investing. In addition, people are scared that they will lose their money if they invest. 

  • Lack of understanding

Until very recently, not much information about personal finance and investment options was available. Even today, the education system does not teach us money management from an early age. This huge education gap has led to a lack of knowledge or, even worse, gross misunderstanding of investing and finance.  

  • Too many opinions

While the media provides enough information about finances, too many opinions can lead to conflicting information. In addition, the overload of information without proper understanding of the markets instils a sense of overwhelm in the people.

  • Fear of Risk

The fear of risk is a significant factor that keeps people from investing. Investing can create fear of financial loss in new investors. Existing investors are also scared sometimes. The fear of market volatility keeps many potential investors at bay.  

How to get yourself to start investing?

->Unlearn the fact that investing requires heavy capital. How much money you have to start investing does not matter; your mindset does. You can start with whatever little you may have and work your way up.

->Educate yourself. Understanding what you are investing in helps alleviate fear. There are many resources available online. Choose a few genuine resources that provide the right information and stick to them. At the same time, avoid gobbling up on everything that’s on the internet because too many opinions on a single subject could confuse you. 

->Look at the big picture. Instead of considering only short term goals, take a step back and re-evaluate your investment goals. Consider what you have to lose over what you might gain. 

Importance of Investment in India

Before we get to that, let us understand what will happen to your money if you don’t invest. 

Let us assume that you earn ₹50,000 per month. Your expenses, including food, rent, clothing etc., cover ₹30,000. For simplicity, let us ignore tax, inflation and other complicated factors. 

Money invested vs money saved

Scenario 1:

You retain the remaining ₹20,000 under your mattress (safest place in your home).

In the next 20 years, you will have a surplus of only ₹48 lakhs. Let’s say that after retirement, you withdraw ₹30,000 (your expenses) every month. The money you saved will last for the next 13 years, after which you will not have any money of your own. 

Scenario 2: 

Let us assume that you invested ₹20,000 in an investment plan at a 10% interest rate per annum. In that case, after 20 years, you would have a sum of ₹1.51 crores (3.5 times higher than your savings). If you continue to withdraw ₹30,000 each month, this amount will keep you sorted for nearly 41 years.  

Benefits of Investment:

Now going back to the original question, ‘Why is investment important?’ 

Here are some strong benefits of investment:

Build Wealth 

The primary aim of any investor is wealth creation. When you invest in an asset, it generates returns. In the long run, your profits get re-invested and provide more returns. This concept is called the power of compounding

Investing works like this:

Let us suppose you plant a seed (initial investment). It grows and bears fruits (returns). The fruit seeds fall back on the ground, growing many more trees over time (compounding). This process repeats, and over time you will have created an abundant forest (wealth). 

Outgrow Inflation

Inflation is the general rise in the level of prices over time. When it occurs, the value of money reduces. Remember when the cost of ice cream was just ₹10 when we were kids? If you have to buy ice cream today, the good ones are priced at ₹50 at the least. This is the effect of inflation. It erodes the value of money over time. 

The value of ₹100 saved today will be ₹96.5 next year at the current inflation rate. This implies that your money’s worth will reduce by 4.5% in one year. Suppose you invest the same amount of money in an asset that returns 10%; its value will increase to ₹110. Thus investing helps you outgrow the effect of inflation. 

Achieve Financial Goals

Investing can enable you to achieve many financial goals that could seem far fetched with just your regular income. You may have many goals in life, some short term, others long term. Investing gives you the power to achieve these goals.   

Create a Retirement Corpus

Retirement funds are something that we take for granted. However, given the current situation, almost no employer offers a pension after retirement. Therefore, it is upto you to plan and save for retirement for a comfortable life. Investing early in retirement may not seem like a burden, but you will be amazed by the amount of capital you will raise over the years. 

Note: If you are earn a monthly paycheck and are looking for some solid investment options, our article on Investments for Salaried Persons could help you pick the right investment.

Save Tax

While all investments are meant to provide returns, some investments offer tax benefits too. For example, if you invest in Public Provident Fund, National Pension Scheme, Mutual Funds etc., you can claim them as a deduction from your income. Thus, saving tax which you can further invest to earn more returns.

Why investment is important

How to Invest Wisely?

Before we talk about investing wisely, let us face two significant factors that could cause you to lose money and try to prevent it before it happens.

  1. You invest in an asset that you do not understand. You risked investing in something only because FOMO struck you, but you have no idea whether the investment is good for you or not.
  2. Your investment may have gone up, but not high enough to outpace the fees you pay time on time on your investment.

If you want to be a wise investor in the Indian investment ecosystem, learning to invest by preventing both outcomes is essential. Here are three simple steps to follow:

Diversify your Portfolio: By diversifying your investments across multiple asset classes, you will be able to eliminate the risk of losing your money. In addition, the profit from one investment may set off any losses from another investment.

Research: Before investing in any asset, make sure you understand how it works and who is behind the asset. Once you know everything about the investment, there are high chances that you will make the right investment decision. 

Watch out for Fees: Look for investments that do not come with high fees or charges. Although a small percentage of costs may not look significant, they can curb out a big chunk of your investment growth. 

Now that you understand the importance of investment in India. You may want to check out our guide on ways to build a good investment portfolio.

 

P.S: KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing. 

Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.

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Nisha Ramesh

Content Writer

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