Why we should invest our money?We always invest our surplus income in fixed deposits or mutual funds to grow. Some people are interested to invest in buying land and few of them are also interested in buying gold jewelry. However, everyone wants to see his or her asset is growing with time. Now the question comes in our mind why should we invest? If we don't invest in any asset classes and stay away from any type of investment what will happen? If we consider an example it will be easy to understand rather economical terms and terminology. Consider A has 100 rupees and current inflation is 10%. If A is stay away from any type of investment and the inflation rate is the same after 5 years his asset value will be 50 rupees. So where this money goes, who ate his money? Actually the asset A was holding was depreciated by inflation.
Where should we invest our money?Invest your surplus income into an asset class that can grow more than the inflation rate. If your fixed deposit interest rate is 8% per annum and current inflation is 6%, that means your asset is growing only at a rate of 2%, though your bank is giving you 8% interest. Actually the value of your asset is depreciating. So, invest wisely to overcome the devaluation of your asset due to inflation. Investing in the stock market gives you more returns than any asset class, but investing in the stock market and managing your portfolio is not an easy task at all. So you need to consult with a financial planner, who will manage your portfolio professionally. Hiring or getting a professional financial planner could cost you a lot. For small investors or individuals, it is difficult for them to pay fees for their small investment. So they should invest through the mutual fund route, which is professionally managed by Asset management companies.
Different types of mutual funds.If you invest through mutual funds rather directly invest in the stock market your risk will be minimized and with an affordable little cost, you will get the benefit of your fund management. When you visit any financial services firm, they will assist you in which type of mutual fund should you buy. Depending on your goals and time horizon financial planner will suggest you buy the specific mutual fund. Depending on your risk appetite and investment goals they will suggest to you whether you should buy growth fund or balanced fund or debt fund. If you want to beat the inflation, then you have to invest more in the growth-oriented funds. Growth funds are a little risky than debt or balanced fund. Balanced funds are those funds that invest some portion in debt or fixed instruments and rest in the stock market. Debt fund is almost risk-free and you are assured to get a return. In a growth fund, there is a risk of facing loss if the stocks that are being held by the mutual fund losses.
What is the right time to invest?No one can time the stock market, you never know when the stock will get into correction and when it should rise exponentially. Rather than predicting the stock market if you invest regularly in a SIP (systematic investment plan) method, you will get the benefit in the long run. Always choose a good quality stock. Good quality stocks mean front-line stocks, that have significant weight in index (nifty). Then invest in this stock in a regular interval with a fixed amount for a decent time to get a good return.
Your expectations from your investmentSame thing (SIP) you can try for your mutual fund also. If you invest monthly with a fixed amount in a growth mutual fund for a longer time horizon for at least 5 years, you can get a decent return from your investment. If you study the market statistics, growth funds have given an average 15% return for the last 10 years. So it is very clear that you can beat the inflation by investing in mutual funds with a longer time horizon.
The author has tried his best to make the reader understand the importance of mutual funds. With the periodical revision of rate of interest of the fixed deposits in the current time, the investors are not being protected by the impact of inflation because of the prevailing rate of interest of both the Banks - nationalised and the private ones.
However, prior to investing in the Mutual funds, it would be always wise to have a consultation with the advisors of the stocks having long experience in this field. Debt fund, growth funds, equities portfolios etc are there offering you highest returns depending upon the portfolios being chosen by the investors.
Investors should be prudent enough to choose the portfolios having sound reputations in the market and should identify the financial results of such funds so as to mitigate the losses in the event of not being familiar with the financial health of the companies.