Where should I invest my money?
This is the common question that I have been hearing from a lot of people since I started my career. And the answer is not that simple due to 2 reasons:
- In our academics, there is no specific study that gives us the whole idea about where and how to invest our money once we have it in hand. Without prior knowledge or guidance of investment people fail to become rich although they are witty.
- The whole idea of investment is based on probability of success in ones calculation. And this calculation is majorly based on current market, Inflation and taxation. These 3 aspects are very dynamic and involves lot of parties including the government, makes it more difficult to make a decision.
Yet, there are few tweaks which I have included in this blog, which anyone can follow to gain maximum advantage out of their investments.
Do you keep most of your money in Savings account or Fixed Deposits?
If you do, you are losing your money. Savings account give around 4% interest on the money deposited in the bank. From this, if you give away the 30% on capital gains in taxes, you are left with 2.8%, which does not beat the inflation of around 7%. This essentially means that you must spend 4.2 rupees from your newly earned money this year to buy the same object this year. It leads to another conclusion that even if you earned Rs. 100, you will be left with only 95.8 rupees, because the other 4.2 rupees are given to purchase the object at higher cost this year.
Similarly, if you keep your money in fixed deposits at 9%, and pay taxes in the 30% tax bracket, then you end up paying Rs. 3 to the government. This leaves you with Rs. 6 with your principle of 100, making it Rs. 106. Does it even beat the 7% inflation? So, it takes away Re. 1 from your newly earned salary, making you lose that each year, and the compounding effect of losing this 1% year on year is phenomenal in making you less rich.
A Golden rule!
How much do I keep in Savings account and fixed deposits?
2 months worth of expenses in Savings account
4 to 6 months worth of expenses in the fixed deposits (as security against job loss)
Everything else must work for me
All other money that you already own and have worked for must work for you. If it does not work for you, it will certainly make sure that you keep working for earning more money. A simple rule to follow.
Anything more than 6 to 7 months of money must work for me to beat the inflation and taxation. Remember the percent point you have to beat and make your money earn more than that.
There are few option which can give more percentage of interest on investment,
- NPS and PPF – will give you base where you will have non taxable interest income at nearly 8.5%
- Mutual Funds– There are several Mutual Funds which have given year on year returns of around 15 to 20% on average. If you are a little smart in finding the right MFs with over 10 years performance in the market with at least 15% year on year cagr, your risk of losing money by investing in MFs will reduce to almost zero, and chances of getting almost those kind of returns around 15% will be higher than investing in a MF which has a track record of 5 or 6% year on year. So, be careful in which MFs you are investing. The rule is extremely simple: over 10 years and over 15% year on year.
- Equity – Some of the Large cap companies can keep giving returns and increase in value. Find some 4 to 5 companies which you might want to hold for years together without taking advantage of selling them. These companies keep growing and also give good dividends. Do your own research on which companies like ITC or L&T, etc are good to hold for a long time. Most billionaires have made a large amount of money just staying put on such large companies for over 10 to 20 years
Apart from beating the two termites named inflation and taxation, make sure you invest the first 30 parts of your 100 earned from each income.
Once you have learnt this trick, you are all ready on the path to financial success.
Hope you liked this article. Please help other people with awareness on simple tricks of becoming rich.