India has one of the highest percentage of Savers and below-average percentage of Investors. For many Indians the sole reason they invest is only to save on Income Tax and sadly most people dont see any need beyond that.
Gone are the days where interest rates were regulated, people used to work for 25+ years in the same organization & retired with fat pensions and had controlled financial services.
Free markets that exist today offer many MNC jobs, high salaries, great income opportunities, easy loans but comes with de-regulated interest rates, many investment choices and tough financial decisions. With high aspirations for great life style there is a great need for smart financial planning and investments.
The top 3 reasons for people to invest.
1) To beat Inflation.
The Consumer Price Index which represents Inflation has been above 10% in the past few months. Lets assume the Inflation for next 1 year to be 10%.
The impact of inflation would be, what you can buy for Rs.10,000 today will cost you Rs.11,000 a year later. “Avenue” in the table below represents some of the options to keep your money and shows by how much you will short fall by.
|
Avenue
|
Rate of Interest / Return
|
Fall short by
|
|
Cash at home/locker
|
0%
|
Rs.1000
|
|
Savings bank a/c
|
4%-6%
|
Rs.400 to 600
|
|
Fixed Deposit
|
9%*
|
Rs.100
|
|
Debt Mutual Funds
|
upto 12% ^
|
Surplus possible
|
*The current FD rate of SBI (pre-tax) for 1-2 yr period.
^ The return from Debt MF would depend on the type of Debt MF choosen.
Points to note from the above table:
i) Its an absolute necessary to invest your money and not keep it idle at home or bank savings account as the value of your money decreases because of Inflation and you will make losses.
ii) In the case of FD and savings a/c lets remember that we need to pay taxes on the interest income.
So post tax return would be much less (1% to 2.75% less than the rate of interest offered) depending on the tax-slab you would fall in. Real return = Returns – Taxability – Inflation
iii) Debt based MF investment options like Income Funds/FMPs/Gilt funds/Short term debt funds could offer you better post-tax returns viz a viz FDs. The choice of the right debt fund would depend on the investment time horizon and interest rate cycle outlook.
2) To provide for your LIFE GOALs
LIFE GOALs are important instances and events in your life which will require you to spend large amounts of money at one go. For Eg. House purchase, your Child’s College Education, Wedding etc
Mr.X has a child age 5 yrs and some of his LIFE GOALs and their Future Cost because of the impact of Inflation (calculated with 10%) has been shown in the table below.
|
LIFE GOAL
|
Current Cost / Value
|
No. of years Left
|
Future Cost / Value
|
|
Down-payment for House Purchase
|
15,00,000
|
4
|
21,96,000
|
|
Child’s Higher Education (college)
|
10,00,000
|
12
|
31,38,000
|
|
Child’s Marriage expenses
|
8,00,000
|
20
|
53,82,000
|
Points to note from the above table:
i) Its very important to estimate the Future Value of our Goals and not think it will be the same cost even after years.
ii) Unless we save and invest towards our LIFE GOALS we will face cash-crunch at the time of our requirement.
iii) We need to invest in instruments that could beat inflation, especially for our Long Term Goals.
3) To support ourselves in your Retirement phase of life
Mr.X aged 30 desires to have an nominal income of Rs.30000/month (in todays value) when he retires from active work at age 55 and expects to live for another 20 years i.e. till the age 75.
Any guess for how much corpus he will require at his age 55 to sustain him till he is 75?
Assuming that Mr.X will invest the corpus in a safe 9% fixed income investment to give him periodic income throughout his retirement period, he will require 4.52 Crores when he is 55 to take care of his retirement expenses. When he turns 75 the corpus would exhaust. And the calculation has been done with inflation assumption of just 8%.
Points to note:
i) Planning and Investing towards ones Retirement has become extremely essential
ii) Starting to invest regularly from an early age gives a huge advantage because of Compounding.
iii) Counting on your EPF alone to fund your retirement expenses will not be sufficient.
So, do you need to invest at all? I will leave it to you to answer
What is most important is where/in what you invest in.
Choosing the right asset class and the asset-allocation for the Goals based on time left for the Goal, investors risk-appetite and market conditions it all the more important.