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16 October, 2021 19:51 IST
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  Why Invest ?
 
 
   
  A matter of good habit
 

OK, so we’ve heard about twenty something software programmers who have never seen anything smaller than a hundred rupee note, and for whom "bank" is just an uncool four-letter word. But in the real world, most of us save. Our parents saved, our grandparents did. They taught us that saving is a good habit, a lesson we hand down, in turn, to our children. In fact, as Indians, poor as we are, we have a pretty decent savings rate.

But why do we save and then invest our savings somewhere? The answer seems to be too simple to be blowing in the wind. We save to earn more money. Yet, does that really explain our motives in investing? There must be more to it than meets the eye.

We always invest for a specific purpose. For instance, we invest in life insurance to save on taxes. We put money into recurring deposits to, say, part-finance the down payment for a house. We invest for our children’s education, for their imminent weddings. We also invest to take care of our own needs after retirement.

If there are so many different reasons for investment, can there be a single, grand, all-purpose solution to the investment dilemma, one holy mantra that will take care of all our problems? Perhaps we should put all our money in equity? Or maybe in mutual funds? Or just buy prime real estate? Or play the pork belly futures market?

Ah, life may be full of colour, but nothing is truly black-and-white. No investment avenue can, by itself, meet all our needs. Every investment need requires a combination of solutions. We need to build a portfolio.
 
 

Test 3 for investments

 

Motives for investment may vary, but there are some common desires. We want our investments to give us some return. We want our money to be safe. And, in case of an emergency, we want our money back, quickly. Hence, there are three criteria to evaluate every investment avenue:

  1. Safety
  2. Liquidity
  3. Returns

We have to use these criteria to assess our investment needs. For instance, if you want to put away money for retirement, safety will be the most important criterion. A safe investment avenue that gives you a decent annual return will be good enough for you. What about the money your father sent you for the down payment on your car? You haven’t even decided on the model! You’ll probably keep the money in your savings bank account so that you can withdraw it quickly.

Different motives, different needs, same good habit.

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Are you investing? Or speculating?

 

"I can resist everything but temptation." -- Oscar Wilde

If you are investing you have, one, a well-defined time period for the returns you expect on your investment and, two, you are fairly sure of the returns you will get. In other words investing does follow a method, it could be a method you adopt from a financial expert or could be self-defined.

The difference with speculation is then about the degree. Once you invest the difference will be more apparent. Take it from us, if you follow a method you almost wipe out any chances of making losses and making money is not that difficult.

Speculators succumb to the temptation of putting their money for short periods expecting to get rich quick. Some do succeed but its all by fluke and hence, what has been seen is that most of the losers are ones who fail to cap this temptation.

So when you go investing make sure that you are aiming and shooting and not shooting and then aiming. And don't ever follow Oscar Wilde.

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