Why Should One Invest?

Before we understand why should one invest let us understand what is investing: –

What Is Investing? 

Investing is the process of allocating funds to various financial assets in order to put your money to work and profit from the results. This can serve as a supplemental or, in certain situations, primary source of income, allowing you to achieve your financial objectives. We tend to focus on only a few of the flaws that exist. And, in the end, turn a blind eye to the numerous advantages it delivers. That’s something we’re not going to do anymore. It’s time to look into the possibilities that the world of investing has to offer. To begin, let’s define the difference between saving and investing.

Saving or Investment?

The better option The majority of people frequently confuse the two terms. However, in the realm of finance, saving and investing are two different things. You are saving when you actively set aside a portion of your money in a safe and conveniently accessible account. Purchasing stocks, bonds, or any other financial commodity with the intention of profiting from capital appreciation, dividends, or regular distributions is referred to as investing. While both provide a good return on investment, the rate on investments is far larger than the rate on saves. Investments aren’t just for the wealthy or those with a lot of money, it’s for anyone who wants to better their financial situation and experience financial freedom. If you have heard the famous saying from warren buffet: –

“If you don’t find a way to make money work while you sleep, you will work until you die” – Warren Buffet

One might have read this quote a couple of times but have you wondered what it means or how are you going to make your money work for you once you are asleep? The answer is pretty simple one can do this by simply Investing their money. Let us proceed further and understand the what is need for Investing?

Why Should You Invest?

Put Your Money to Work:

When you invest, you put your money to work with the hope that over time, it will generate an income and grow. This can happen in two ways:

• • An investment may generate income for you. For example, you may receive dividends on your shares, coupon interest income from bonds or rental income from the property that you lease/rent out.
  • An investment may grow in value over time, allowing you to make a profit when you sell. This is often referred to as a “capital gain”. For example, if you may purchase an asset at a certain price and after a number of years you sell at a higher price, then the profit that you make is called “capital gains”. Overall, the income and capital gains you receive from your investment can be much higher than the interest from bank deposits, which means you accumulate wealth faster. Of course, the faster you accumulate wealth, the sooner you get to achieve your financial goals.

Investment Helps in Beating Inflation:

Inflation is a significant barrier to wealth building, therefore choosing paths that outperform inflation is the only way to get wealthy in the long run. Inflation is the gradual increase in the price levels in a given economy. It eats away at the value of your investments and your money’s purchasing power. Due to inflation, an item that costs 100/ today may cost 130/ next year. Bank Fixed Deposits and PPF returns are unable to keep pace with inflation. If your returns are not higher than the rate of inflation, your investment returns are practically small, zero, or even negative, whereas stock investments can yield large returns over a lengthy period of time in a relatively short time frame.

Magic of Compounding:

The key to accumulating wealth lies in the concept of “compounding”. The compounding principle can help your money grow faster over time. This happens when you reinvest income earned from your initial investment rather than spending it. This reinvested income will earn extra income which you will reinvest as well. If this cycle is allowed to continue, it eventually has a “snowball” effect.

This is because with each cycle, your total investment grows larger and therefore earns even more income in the next cycle. Let us understand this with a simple real-life example, If you would have invested Rs. 10000 in Infosys June 1993 you would today have a value of Rs. 2.97 crore from the same investment made 28 years back this investment has given a Compounded Annual Growth Rate (CAGR) of 39% which means one would have grown his money by 39% every year if he would have just stayed invested in the stock for 28 years without doing anything.

This is the magic of compounding isn’t it amazing? Want to know more about stock Investing? Lets start with understand the different investment instruments available for investment.

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