By Binodgopal Mukherjee
Whenever I initiate a discussion with someone regarding investments, I get mainly two types of responses: “Paisa kahan hai?” Or “Kuch tips hai. Double hoga?” Of course there are other types of investors who put their money in FDs, Postal Savings, real estate, gold and some in shares, mutual funds etc.
I do agree with “paisa kahan” type of persons as after your living expenses, health and medical cover and tax related savings it is difficult to invest in early days of working life especially if you are sole earner of the family. But it is important to start investing because after a particular age, for some reason (Retirement) or other (Unable to work), you will not be able to get the cash flow from your salary. You have to depend on your children or on the corpus you have saved. I am sure that first option is not desirable. So, let’s talk about investment.
Why do you save/invest?
If you are a family person, you have various expenses which you have to incur in future i.e., a future event - children’s higher education, marriage, your yearly vacation and finally for your retirement. In today’s world, with various investment opportunities these are possible only if you plan early and understand the features of different investments.
Before we go further, let me tell about Sharmaji who stays very near to our house. Sharmaji (68) was working in a large private sector undertaking and retired with a good amount of money (PF, Gratuity and his savings but no pension). Ten years back, he had visited my house for suggestions regarding investing his retirement corpus. I spent good amount of time explaining everything but later he told me that he had invested all his funds in post office & Banks’ senior citizen’s savings scheme and FDs in heydays of high interest rates.
In a recent social function, we met and he shared with me that with rise in price and medical expenses he had to break his FDs. He added “My other investments are due to mature. With present interest rate and increasing price level it will be really difficult”. He sounded worried.
So, let us understand “Rise in price” (Economists call it “Inflation”) and how it reduces your buying power. Assume you have Rs 100, 000 which you can spend now or save with a bank deposit earning 7% p.a. The present price of wheat is Rs 40 per kilo. So you can buy 2500 Kg of wheat. You want to save the money and plan to buy one year later, but the price of wheat is likely to increase by 10% i.e., Rs 44 per Kg. Now with the interest you earn (7% on Rs 100,000) i.e., Rs 7000, you can buy an additional amount of 159 Kgs (approx). But with your principal (Rs.100, 000) you can buy 2273 Kgs. So in total you can buy only 2432 Kgs (159+2273). This means your buying power has gone down by 68 Kgs(2500-2432). This is because price rise (inflation) is more than what you were earning in your savings. So, the most important lession – you need to earn more than the inflation rate so that your principal remains protected.
We will discuss two very common and basic investments people make – Home and Gold.
Now, let us try to understand whether your residential flat is an investment. Few months back I met Mr Ahuja, an old friend of mine. As it happens with us, after some meetings people like to talk money. Ahuja added, “Yaar, you know I invested Rs 75 lakh in the flat. But now, since children are not staying here, I was planning to buy a flat in a new locality where my brother is staying. But your Bhabi is reluctant as she has got used to this complex. In fact, if I move to the new one I will have Rs 15 lakh extra to invest somewhere. But I am stuck.”
I remembered the most important lesson. Most of the middleclass people buy a house/flat with a loan for residential purpose. After a long period of paying EMIs, the home becomes legally yours. It is very unlikely you would plan to sell that off after few years neither you will rent that out as this is where you reside. However, it will save on rentals and will give a security. Of course sometimes we do move to a better home, at a later stage, selling the old flat. Please note this sale finances (partly or fully) purchase of new house only.
For that reason your property where you reside, is an investment but generally sold in exceptional cases only. However, if you have extra money you can obviously buy another residential or commercial property (Do due diligence regarding the property and consult your lawyer).
NEXT we will be discussing about ‘investing in Gold’.
(DISCLAIMER: The views expressed are the author’s own and have nothing to do with OTV’s charter or views. OTV does not assume any responsibility or liability for the same.)