Saving is normally parked in Savings bank a/c.
Why not let it lie there? What is the need to invest?
We invest to earn a return on our money.
Lets make it simpler. Suppose you own an apartment and give it someone to use. It is natural to expect a rent. The tenant will compensate the owner of the apartment by paying them some money.
Similarly if you own money and you park it in the bank. The bank gives you an interest or rent to use your money. That’s interest or return.
Now the question is what is the need to earn more than the savings bank interest . Which is generally between 4-6%.
Say you have Rs. 1lac invested at the beginning of the year. Your saving bank interest is 5%. At the end of the year you have a balance of 1.05lacs. (That is 1lac+5% =1.05 lacs.) Whats wrong with it?
The problem is inflation.
What is inflation?
Inflation is general rise in prices. There are many technical reasons for inflation. Lets not get into that. The fact is that inflation is and you have to deal with it.
Whatever your normal expenses are you are sure that next year it will increase. That is inflation. Its not that you consume more . Just the same things cost more.
So if your savings have to fund your future life style it has to grow more than inflation. Inflation can be anything between 4-10%. It can go higher or lower than that but for our purpose lets stick to this.
Inflation reduces your purchasing power. If your monthly household expense is Rs. 35000/- then you can be sure that next year for the same stuff it will be 37000+.
So if you continue to spend only 35000 , you will have to cut down on expense.
That is why you have to invest your money and earn a return which is more than inflation. Your 35000 has to become more than 37000 next year to buy the same amount of stuff.
So you invest to make your money grow at the same pace as inflation at least.
Typically people invest to get wealthy. Not just to beat inflation.
Now we will look at different ways to invest.We will begin with the easy & common ways to invest and then go further.
And the pros & cons of each one of the options.
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