Money doesn’t grow on Money Plants #JanoTohMano

Everyone knows that financial planning is critical for the well fare of future needs. But not everyone really knows how to really go about it. Added on top of it, half baked knowledge and popular superstitions come in the way of sound investments.

Let us take the example of Biswa, who goes on to interview an old “knowledgeable” person, who could have provided him sound advice on how to invest money. As highlighted, the “knowledgeable” voice of wisdom banks on investments made on realty (property / house) and on car. Like all investments, he expects the investment to grow and provide higher and higher returns as they mature. Like money plants, when they mature, they are expected to rope in more and more returns for the owner. Check out the video to understand it better.

Indeed an interesting thought for those who are planning to invest. What is not apparent here is that today if you invest in an asset like a property, the property price may also go down due to a multitude of reasons, beyond the control of an individual. Social issues and industrial developments may depreciate an investment in realty sector or land. For example, you may have purchased a property on an expressway which is coming up, and suddenly due to social pressure, the project is postponed indefinitely. Investing in cars is on the other hand a sure shot to disaster, since cars, like all machinery, depreciate in value. According to CarsDirect, the average car depreciation rate is roughly 15% per year in the first year. New cars depreciate about 20% the moment you drive them off the lot. The second and third year onwards, most of the cars depreciate roughly 15% a year. So this raises a lot of questions on how to really invest money so that the investment can be protected.

So how should one plan their investments? One of the more popular investment options are through systematic investment plans. In SIP, a fixed amount of money is paid by the investors every month automatically through debit of their bank accounts and invested in a specified instrument like a mutual fund. The investor is allocated a number of units of the instrument according to the current net asset value. Everytime a sum is invested, more units are added to the investors account. This protects the investment from fluctuation from spikes in the markets and monetary fluctuations. Therefore being a disciplined investment, this helps smaller investors to systematically invest on instruments, which are monitored by professionals and yet be somewhat insulated from market volatility. To get an idea of what we are contemplating through actual figures, JanoTohMano provides an interesting calculator which demarkates, based on monthly investments, how much one may save through different investment options like savings accounts, fixed deposits, provident funds and equity based SIP. Suppose you want to invest 10,000 Rs every month, you are likely to receive from your savings account a return of 4% (total Rs. 1,477,406) or from fixed deposits a return of 8.075% (total of Rs. 1,849,497), or from provident funds, a return of 8.70% (total of Rs. 1,916,458) and from Equity SIP, a return 10.28% (a total of Rs. 2,099,455), based on this calculator.

Not only should one look at investments as a thing that can be done with half baked knowledge, it is also an activity that requires inputs from prtofessionals with deeper understanding of markets and finance. Be wise like Biswa, don’t put your eggs in a basket which is not sturdy. Do not take the words of wisdom from people who lives in a world which is surrounded by popular superstitions. Build your future on solid foundations based on scientific knowledge.

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Author: Kar

Dr. Kar works in the interface of digital transformation and data science. Professionally a professor in one of the top B-Schools of Asia and an alumni of XLRI, he has extensive experience in teaching, training, consultancy and research in reputed institutes. He is a regular contributor of Business Fundas and a frequent author in research platforms. He is widely cited as a researcher. Note: The articles authored in this blog are his personal views and does not reflect that of his affiliations.