We present here in this series some investment fundamentals. But even before investing, we want to make it clear to the investor (the reader of this blog) that one must, first and foremost understand and analyze the basic need as to why one should invest. A few words ...
It has been noticed since time immemorial that there has been a constant tug of war between the creditors and the debtors or to be more precise, between those who borrow and those who lend. However, there always have been governments in order for people to have faith in currency and the governments have always been big spenders and therefore borrowers and in order to set right their money machine, all governments, eventually end up inflating their currency. The borrowers have always won and lenders (mostly people who save their money and tuck it in bank for safety) have lost. In spite if the compounded bank interest rates, the inflation and devaluation of currency is a lot ahead in the curve from the lagging interest rates; inflation eating up your deposit's purchasing power.
Here is where the need for investment comes in.
Most people confuse investments with windfall profits and multi-bagger kind of expectations. An investor who gets trapped in such money making dreams has always lost.
Before investing, the first and foremost idea should be that the instrument you have parked your money will beat inflation and devaluation- i.e. it will beat the loss in purchasing power of your money.
The second and equally important thing that an investor ought to remember is that he should invest only the amount of money that he earns which is surplus to his requirement, i.e. the money that after spending the whole month, is left over- inspite of his best efforts to blow it.
We stress on spending money as we strictly believe that money doesn't have much of a store value - the value of money always has and always deteriorate. By the term value we exclusively mean the purchase value and the purchase value of money in present has and will always be more than its value in future.
The money that one invests, must therefore be the money that is surplus to one's requirement.
It may also be kept in mind that the money one has for investment must not be out of one's emergency fund. In other words, before earmarking the money for investment, one ought to have an emergency or contingency fund of one's own which is roughly approximated for an average man to be around one and a half years of his income.
So before investing, one should have a reserve worth one's eighteen month income which should be parked in the form of bank fixed deposits (FD) with the maturity period of 13 months (in India; elsewhere one may check the minimum period with max interest rate). The amount of each FD should be 10,000/- only or better 5000/-. The FD's should be so placed that they get auto renewed on maturity.
More in the next post.
.... to be continued
Disclaimer: The writers of this column do not personally hold any stock or position in the F&O market and do not intend to benefit in any way by publishing this column. The final discretion is that of the reader and we disown any responsibility for any loss incurred by the reader.
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