Reasons Why You Should Do Financial Investments

Life is full of uncertainties and being financially prepared for the future is important. Our earning capacity is limited, and it is essential to plan for the future when our income may not be as stable. Investing is a way of converting savings into higher-return options over a period of time. It is important to invest to secure our financial future and have a stable source of income post-retirement via a financial investment.

Making sound financial decisions is essential for a successful life, both personally and financially. Just as one would make career choices based on the market's demand for certain skills, wise investment decisions must also be made. There has always been a compelling reason for individuals to invest their money wisely, as logical and well-informed actions are the foundation for achieving financial success.

Safeguarding against inflation
Inflation is a persistent problem that affects both financial experts and ordinary people. It not only reduces the value of salaries but also makes it difficult for individuals to save enough for the future. Keeping funds in a savings or current account alone is not a wise option as the interest rate offered by banks on such accounts is generally lower than the inflation rate. To combat inflation, it is essential to create a sound investment plan that generates better returns over time. Investing in mutual funds and stocks can offer higher returns, although they are not risk-free and subject to market fluctuations. However, the longer the investment horizon, the more resilient the investments become to market fluctuations. Over a prolonged period, such investments can provide returns that compensate for inflation rates.

Creating a financial corpus
Investments do not always involve cash that has been invested in stocks and trades. They can also include precious metals, gems, and personal or commercial property, which can yield significant returns in many cases. Gold, silver, and jewels can be traded at almost any time during one's life to obtain a considerable amount of funds. Although the price of precious metals may not always rise, it is rare for them to lose value by a large margin. Owning properties near prime business locations and highways can be a boon in terms of investment as their value tends to appreciate over time. It is important to remember that we live in a world that is largely dominated by fiat money. Since fiat money does not have a commodity associated with its value, investing in more tangible assets such as precious metals or property is a good idea. This way, even if you do not have liquid cash at hand, your money has a more definitive value compared to others. Additionally, when these investments are cashed in, you end up with more cash than what you had originally invested.

Ensuring wealth
Investing in real estate and mutual funds offers numerous ways to use one's money wisely. Equity options in mutual funds allow for aggressive growth of the invested money. By monitoring the market closely and tracking the growth of investments, one can gradually move the profits earned from equity funds into fixed income assets to protect the profits made and still allow the initial investment to grow over a longer period of time. Ultimately, when the return on investment is obtained, it would be significantly higher than the initial funds invested. Real estate investment has its ups and downs too. However, if one carefully buys and holds properties in areas that are at the center of or around business hubs or transportation locations, such properties are likely to increase in value over time.

Saving for retirement
Retirement years are often thought of as a time when one is free from financial obligations. However, the reality is quite different. While expenses on things like dining out and transportation may decrease, healthcare costs and travel expenses may increase. Moreover, hobbies and leisurely activities can also add up to significant expenses. Therefore, having an investment that provides regular payouts during retirement can prove to be extremely beneficial in such situations.

Just 20 years ago, investing and Systematic Investment Plans (SIPs) were typically associated with knowledgeable urban professionals who had the financial resources and willingness to build investment portfolios that could enhance their financial future. Additionally, the necessary resources such as accessibility and knowledge were mostly concentrated in certain regions and were not as widely available as they are today, making investing less accessible to the masses.

Looking at the present scenario, the approach towards investment has significantly transformed. With the proliferation of smartphones and the widespread availability of inexpensive internet, investing has become feasible and available to a substantial number of Indians. What was once a challenge due to a lack of resources has now become an abundance of options. However, with an overwhelming number of investment options and contradictory advice, how does one determine the appropriate investments to select?

Thankfully, the fundamental principles of investing remain constant. If you possess a clear comprehension of your identity, objectives, and your current status in relation to them, then you can evaluate any potential investment based on five categories to determine if it aligns with your requirements. These categories are not ranked in any specific order:

Return on Investment (ROI)
ROI, or return on investment, is often considered the most important metric when building a portfolio. Government bonds and fixed deposits have traditionally been popular among the Indian middle class for their safety and stability. On the other hand, the stock market is more suitable for those willing to take risks for the chance of earning high returns, with the possibility of losses as well.

Every investment opportunity should be evaluated based on its expected ROI, relative to your financial situation. Your desired lifestyle in the future will determine the amount of money you need, which will then guide your investment decisions.

If you're feeling overwhelmed and need a simple rule of thumb to get started, consider choosing an investment vehicle that is projected to grow faster than the average inflation rate of the past few decades. In India, prices have increased by an average of 7% over the last 40 years. This means that your return on investment should be at least 7% to be worthwhile.

Cost
Investing in high-yield opportunities often requires a significant upfront investment, while those with moderate returns are typically more affordable. Therefore, it's essential to keep this correlation in mind while allocating your hard-earned capital.

The popular 50:30:20 rule of personal finance recommends spending 50% of your income on needs, 30% on wants, and 20% on investments. If you're new to investing, it's wise to limit your investment amount to a maximum of 20% of your overall income. This will prevent you from being overextended, which could result in your entire savings being wiped out during a market downturn.

Time Horizons for goals
Goal-based planning is essential for personal investing and many modern investing platforms use it to recommend investment options. The time horizon for each goal determines the investment strategy boundaries for it.

If you have long-term goals and are starting early, you can afford to take on more risk to increase your upside potential. This usually means that your portfolio would contain more equity than debt. For medium-term goals, a more balanced approach to risk is appropriate, while for short-term goals, a conservative strategy is generally advisable.

Tax Considerations
Investors face a complex challenge in managing taxation, which is why novice investors are advised to seek the guidance of an experienced chartered accountant to mitigate the impact of taxes on their investment gains. While many investors seek tax-free investment options, such opportunities are generally restricted to pension schemes, insurance, and government-sponsored savings schemes.

For those investing in mutual funds, stocks, and other financial instruments, it is crucial to understand how the law recognizes and taxes gains. Long-term capital gains (LTCG) refer to equity delivery-based instruments held for more than a year, whereas short-term capital gains (STCG) apply to those held for less than a year. The disparity between these two is significant, as STCG is taxed at 15%, while LTCG is taxed at 10% over and above Rs One Lakh.

Liquidity
We can never predict when fortune or misfortune will strike, making it crucial to prepare for both good and bad events as things can turn sour at any time. Such situations require a certain degree of liquidity in your investment portfolio. After all, what good is money if it cannot be withdrawn when you need it?

Short-term investments are typically highly liquid and serve as excellent options to keep your funds accessible. Examples of highly liquid investment options include recurring deposits, liquidity-debt funds, and large-cap mutual funds, where money can be withdrawn almost immediately.

Always keep in mind your investment goals! Each asset has a unique investment objective, which emphasizes the importance of aligning one's investment objective with the assets they wish to invest in. Not all investment types cater to the needs of all investors, as what may be an excellent investment option for one investor may not be the best for another. Therefore, it is essential to carefully align your financial plan and investment objective with your financial goals.

Long-term goals such as a child's education, marriage, and retirement planning can be met by investing in equities. On the other hand, for short-term goals, investing in fixed deposits (FDs), money market instruments, and other fixed-income investments may be more appropriate.

In conclusion, investing is an essential component of wealth creation and financial planning. It allows individuals to grow their assets and generate income over time, helping them achieve their long-term financial goals. Whether it's investing in stocks, bonds, real estate, or other asset classes, a well-planned investment strategy can provide significant returns while mitigating risks. By prioritizing investment in their financial planning, individuals can secure their financial future and enjoy long-term financial stability and prosperity.