Why should one invest?

Why should you Invest?

Investing your money is important for numerous reasons. You may want to generate wealth, have enough savings during uncertain times, plan for future goals, job change, or even retire. You also want to build on the power of compounding while considering inflation rates so that your investment is not worth less over time. Additionally, investing is vital to help you achieve those goals when you retire.

Let's understand a few of these reasons & why investing is so important for you.

Wealth Creation

Wealth can mean different things to different people. It could mean a certain lifestyle, a definite amount of money in your account, or achieving specific financial goals. Either way, investments can help you get there.

Wealth creation is not just a financial goal that can only help you. You can leave behind a legacy by building generational wealth with investing. Generational wealth can provide solid financial footing for your children and may be a step toward bridging the wealth gap that many communities face.

Compounding

Compound interest is such interest that you earn on your principal amount plus the money reinvested over the period. It helps you to grow your wealth quickly. Sometimes, it is also called "interest on interest."

For example, if you invest Rs. 5000 a month for 15 years, your total contribution would be Rs. 9,00,000. Assuming a 12% rate of return on the invested amount, the nine lakhs would grow to over ₹25,22,880 in that period, thanks to compound interest.

Beating Inflation

Inflation essentially refers to the overall increase in the price level of products & services over time. If prices rise over time, your money buys less today than it did yesterday. If your money earns more than the inflation rate, it is worth more tomorrow than it is today. If there is inflation over 20 or 30 years, the money will be worth less than the growing cost of living. An effective way to beat inflation is to start investing.

Retirement

If you plan on retiring, you must have an investment corpus saved to live off the later years comfortably. To plan for retirement, you can start working backwards from a number you set for your retirement. This number can be determined by thinking about how soon you want to retire and the lifestyle you believe you will have in retirement. You can then develop an investment strategy for retirement that aligns with your current financial situation and your retirement goals.

Traditional/ Fixed Income Instruments

Traditionally, India has had a higher household savings rate. However, such savings went towards traditional investment products offering guaranteed but relatively low returns. The bank's fixed deposit scheme is a simple example of a traditional or fixed investment instrument. However, the traditional investment avenues tend to be less lucrative when you factor in the inflation rates.

• Public Provident Fund (PPF): PPF is a government-backed savings scheme that aims to mobilise small savings and provide a secure post-retirement life to individuals. It is a long-term savings scheme with a lock-in period of 15 years. PPF investments are eligible for tax deductions under section 80C of the Income Tax Act, 1961 and are also considered relatively safe.

• Employee Provident Fund (EPF): Just like PPF, EPF is also a retirement-oriented investment scheme that is specifically designed for salaried employees. Under this scheme, a certain percentage is deducted from the employee’s monthly salary with an equal contribution from the employer. EPF contribution is eligible for a tax deduction, and the final amount received upon maturity is also entirely tax-free.

• National Pension System (NPS): NPS is a retirement pension scheme introduced by the government to build a corpus that can provide a monthly pension to people post-retirement. It has a mandatory lock-in period till retirement; however, you can make partial withdrawals after retirement. Investments made towards NPS are also eligible for a tax deduction.

Equities & Mutual Funds

Over the past few years, mutual funds have been emerging as preferred investment products among retail investors. Mutual funds pool investors' money and create an investment portfolio comprising several securities as per the investment mandate. One of the major reasons for investing in mutual funds is the potential to earn returns that may beat inflation in the long term.

What is the right investment for me?

Over the past few years, mutual funds have been emerging as preferred investment products among retail investors. Mutual funds pool investors' money and create an investment portfolio comprising several securities as per the investment mandate. One of the major reasons for investing in mutual funds is the potential to earn returns that may beat inflation in the long term.

Final Words

It is never too late to start investing. You may be well into middle age before realising that life moves quickly, requiring a plan to deal with future plans and retirement. Fear can take control if you wait too long to set your investment goals, but that should go away once you put the plan into motion. Remember that all investments start with the first rupee, whatever your age, income, or outlook. That being said, the people investing early have the upper hand, having enough time to grow their wealth, allowing them to enjoy the lifestyle they desire.