Of course 100% growth in a year is very rare, but a good growth rate can be achieved which would make you wealthy. But, Investing is not easy. It requires knowledge and skill.
How Investment Makes Money Grow?
We know that money is necessary to live in this planet. From Food to flight, everything requires money. You can get money by serving to other. You can get more money through the business. But to start a business you need a money. Most of the businesses need a minimum amount for basic expenses. If you can put the required money, your business would start. Greater the amount, bigger would be business. Once your business starts running, you can easily earn much more than you have spent.
Thus, an entrepreneur can make his money grow by using it into the business. Your money can also grow if that entrepreneur takes money from you and makes you a partner. Your money can also grow if that businessman promises to return you a higher amount after a certain period.
So, you have seen that when money is used in an economic activity, it makes more money. If you keep it inside the safe, It will not make a penny. Make your money work if you want to grow it.
Power of Compounding
There was a poor lady who lived beside a shop-owner. The shop owner did not like the hut of old lady with his big house. So, he wanted to get rid of it. Once he got a chance, as lady was going on pilgrimage. Lady was ready to sold her land to the shop-owner with a condition. She wanted to put some money with shop owner so that it can grow when she would come back.
She gave 2 rupees to the shop owner and requested to make the amount double after every 6 months. The shop owner considered it very high return but agreed as he wanted the land of the lady. He thought how much two rupees would grow? If the the lady comes back after 5 years. It would not be more than 100 or 200 rupees. The deal was done and lady went for pilgrimage.
She came back after 12 years and went straight to the shop-owner. She demanded her money as per promise. The shop owner did not calculate but showing magnanimity gave her ₹500. He considered it a very big amount. But lady did not accept it. Rather she asked for a proper calculation. What is your estimate? How much would be the final amount? Let us look at it.
As money grew double in six months there would be 24 periods in 12 years. Have a look at the growth of the money.
She had to get 3.35 Crore after 12 years. Do you believe Rs 2 has grown to Rs 3.35 Crore. It happened because of the compounding. Because, the earned interest was also earning interest.
This steep growth of ₹2 happened because of the 200% interest rate. Normally, you did not see such a earning. However, Bill gates, Mark zuckerberg, Steve jobs and Jack Ma had erned in such a rapid speed because of their outstanding businesses.
Types of Investment
Broadly, you can divided all the investments in two categories.
- In the first category, The return on investment is almost fixed. Your investment earns an interest. This type of investment carries minimal risk. The example of such investments are bank accounts, post office schemes, bonds and EPF.
- While, in the second category, the return on investment is not fixed. The money can grow rapidly. But if market condition turns bad, you can also loose your principal amount. The example of such investments are shares, mutual funds, gold and property.
I am going to discuss all the main investments for general public
These are the safe investments and return is almost fixed. Of course, interest rate fluctuates but you would never lose principal amount. The return of such scheme are comparatively lower than shares and property.
Saving Account in the Banks
This is the most common type of investment. It gives you a lot of flexibility, you can take out money whenever required. It is safe but return is low. The interest rate of saving account is fixed at 4%.
It is also a bank account. You put money for a fixed period. The interest rate of FD is greater than the saving account. It varies according to the period of FD. It is as safe as a saving account. There is a tax saving FD as well. Money gets locked for 5 years in tax saving FD.
It is a type of fixed deposit. In this bank account, you have to deposit a fixed amount monthly.
Small Saving Schemes
Government runs many small saving schemes through the post offices and banks. These scheme are very safe as government gives guarantee of return. The return of these schemes are similar or higher than bank FD. PPF and NSC gives better rate than FD. Sukanya Samriddhi Account and Senior citizen saving Scheme give far better interest rate. These schemes also give you a chance to save tax.
These are the retirement saving account. Every private sector employee has to participate in this scheme. Employee provident fund scheme, gives better return than PPF. It also saves tax.
By purchasing bonds, you lend money to the companies or government. Government bonds are considered safe that is why gives less return. Corporate bonds can give good return but these are not very safe. Purchasing a bond is also not very easy.
Mutual Fund are the platform to invest in shares and bonds. As common people can’t manage the investment in shares or bonds, mutual funds manage money of the investors. The fund managers of a mutual fund is an expert and tries to earn best return.
Equity Mutual Fund
Equity mutual funds primarily invest its money into shares. Because of the inherent fluctuating nature of the shares, the equity mutual funds also fluctuates. The return of equity mutual fund may also turn negative. However, it has the potential to give highest return among all types of investments.
Debt Mutual Fund
Debt mutual funds invest into government and corporate bonds. The return from bonds also affected by the market condition. However return rarely turn negative. Bonds are safer than shares. But, these funds give lesser return than equity mutual funds.
Balanced mutual funds
These mutual funds invests on both, shares and bonds. Because of this mix, balanced mutual funds are less risky than equity mutual fund but also give lesser return than equity MF. However these give more return than debt fund.
The gold investment is glittering since centuries. Even an illiterate person know that investment in gold may give you a better return. However, sometimes gold can behave against this popular myth. The price of gold reached upto ₹33000/10gm in 2011. after that, it came down and could not reach to that point till today (2017). However, the attraction for gold still persists. I have given a rough idea of gold return in the following table.
|Duration in Years from 2017||Annualized return of Gold|
You can see than in the last 50 years gold has give 12% average annual return. While in the last 20 years this return came down to 9.5%.
Lately, property has been a very popular investment. With the growth of new middle class and home loan market, property prices have increased considerably. In the last 10 years, some people has got 4-5 times return in property investment. Such outstanding return is bringing more people into property investment which is further pushing property prices up. Even Smaller cities of India has gone through the property boom.
However, you must understand that property prices can always keep growing. People can’t afford EMI more than their salary. One day it has to come down. In the history there has been several crashes in property market. In the Mumbai and Delhi, there is no increase in property prices since 2011.
Also, Investment in property is complex deal. It requires much paperwork and effort for buying or selling a property. The frauds and delays are also the reality of property market.
Besides these 4 main types of investments, there are many other alternative investments as well, for example, futures market, gems, commodity, wine, painting etc. But these investments require expertise. therefore, common people should stay away from these investment.
Your approach to the investment should be very simple. Invest into those instrument which are easy to understand. You should start with bank accounts and migrate to debt or balanced mutual funds . Invest in equity mutual fund, gold or property only if you have conviction.