In India, the educated lot is qualified enough to earn fat pay cheques but how to put those to best use, is not their field of expertise.
Whether to invest in any of the ventures (or dreams) or to save for the future, is a question that bothers many. To answer this, one needs to understand the parameters- age and goals– that can help define one’s choice. Further, how to pick the best schemes offered in the market must be known too.
For example, to invest in shares, mutual funds and bond markets, one needs to have knowledge of the financial markets whereas to save money in the bank,one should know how and under which account should they save to get best returns.
“Time is money”, said by Benjamin Franklin in 1748-a founding father of the capitalist economy the United States- still holds true in the world of investments. Hence, the age at which you to invest plays a crucial role. Simultaneously, you should wisely set your goals according to your financial capabilities.
So, let’s begin!
Step 1: Age
To reap the benefits fully, try and invest at an early age. Lower the age, higher is the capability to take risks in the game of investment. Retirement is the wrong time for investments. People who are about to get retired in the next 5 years should be alert enough as to how much savings they require to live peacefully.
There should be clarity between short term and long term goals. Depending on which goal the person has to fulfill, he can decide whether to save or invest. Here is the difference between them:
|Short Term Goals||Long Term Goals|
|This can include goals like a 1-month foreign trip or further construction of an extra room in the house.
For such goals, it is advisable to pay from your savings.
If the person is reluctant to use his savings, he can also take personal loans for such requirements.
|This can include owning a house, a car or have asubstantial amount of money required after retirement.
It is best to plan for such requirements in advance so that these needs can be fulfilled smoothly, when the time comes.
Step 3: The Best Return
To understand which scheme of saving or investment will yield the best returns, we need to know what all options the market offers.
Types of Savings and their benefits
- Money market accounts: It pays higher interests as compared to saving deposit accounts.Limited money can be withdrawn from the account.(Source: investopedia.com)
- Savings accounts: There is an option of depositing the money in savings bank account which can yield returns from 4% to 6% per annum.
- Certificate of Deposit:It is a negotiable money market instrument on which you can receive a premium on the amount invested at maturity. It can be used as a short term saving instrument.
Types of Investment and their benefits
- Stocks: Investments made in the shares of companies listed on exchanges like NSE, BSE, etc. Income is generated through dividends or through price appreciation. They are accompanied by higher risk and hence generate higher returns.
- Bonds/Debentures: Some amount is paid to the govt. / companies as a debt against which, income is earned through interests on the bonds.It is less risky than stocks because the income is fixed in form of interests and coupon payments.
- Real Estate: The value of the property keeps increasing over the years thus, offering high returns. It alsogives certain tax benefits. Also, avenues are like REITs (Real Estate Investment Trusts) have come up to allow small investors to invest in real estate sector.
- Gold: Gold is often known as “Global Currency” and it is a time-tested instrument. It is beneficial as it becomes a valuable asset for people in the long run.
- Mutual funds:It offers a unique benefit of-hedging the risk by diversification of investments. This is a good option for people with less knowledge of the bond and share markets. Here, people can invest in a mix of stocks and bonds and generate optimum returns with relatively lower risk.
The dilemma gets cleared when we weigh the pros and cons of every option we have. Thus, the answer to the question of whether to save or invest differs from person to person.
One can say that your savings should be customized according to your future needs and when you decide to invest, you should always have some savings in your pocket in case the investments don’t turn out profitable.