Investment Archives - Page 2 of 2 - Dave Fintech Wealth Advisors

Savings refers to that part of disposable income, which is not used in consumption, i.e. whatever is remained in the hands of a person, after paying all the expenses. For example, Monthly income of Mr. A is Rs. 50000 and his monthly household and other expenses amount to Rs. 30000 so ultimate Savings of Mr. A, money remained in his hands, amounts to Rs. 20000 in cashor Bank savings account.

Savings are defined as the part of consumer’s disposable income which is not used for current consumption, rather kept aside for future use. There are several ways through which a person can save money like, accumulating it in the form of cash holdings, or depositing it into the savings account.
The stepping stone of wealth formation is savings, which is decided by a person’s level of income. The higher the income of a person, the higher is his capacity to save, because the rise in income increases the propensity to save and decreases the propensity to consume. It can also be said that it is not a person’s ability to save that encourages him to save money, but the willingness to save forces him to do so. The willingness depends on some factors like his concern or financial background, etc.

On the other end, Investment is the act of investing the saved money into financial products, with a view of earning profits. It indicates the increase in capital stock. For example, Monthly income of Mr. A is Rs. 50000 and his monthly household and other expenses amount to Rs. 30000 so Mr. A invests remaining Rs. 20000 in Mutual funds. Thus, Rs. 20000 is Investment and another income source for him.
For an enterprise/entity, investment implies the production of new capital goods, such as plant and machinery or change in inventories.

The process of investing money saved is known as an Investment. It could be anything, i.e. money, time, efforts or other resources that you exchange to earn returns in future. When you purchase an asset with the hope that it will grow and give good returns in the coming years, it is an investment. Present consumption should be foregone to obtain higher returns later.

The ultimate purpose that works behind the investment is the creation of wealth which can be in the form of appreciation in capital, interest earnings, dividend income, rental income. Investment can be made in different investment vehicles like stocks, bonds, mutual funds, commodities, options, currency, deposit account or any other securities or assets.

As investment always comes with a risk of losing money, but it is also true that you can reap more money with the same investment vehicle. It has a productive nature; that helps in the economic growth of the country.

Money if invested in mutual funds, will be invested in different industries and can help industries grow and ultimately Indian economy will grow and with good Industry returns, the person investing money will also grow.

Savings = Money is Idle/not invested
Investments = Money Makes more Money by generating returns
A smart way to generate Passive Income
Understand why Investing is the only way to grow Savings.

Comparison Chart

BASIS FOR COMPARISON	SAVINGS	INVESTMENT
Meaning	Savings represents that part of the person’s income which is not used for consumption.	Investment refers to the process of investing funds in capital assets, with a view to generate returns.
Purpose	Savings are made to fulfil short term or urgent requirements.	Investment is made to provide returns and help in capital formation. Help Creating Wealth.
Risk	Low or negligible	Very high
Returns	No or less	Comparatively high
Liquidity	Highly liquid	Less liquid

Savings, alone cannot constitute to the increase in wealth, because it can only accumulate funds. There must be the mobilisation of savings, i.e. to put the savings into productive uses. There are a number of ways of channelizing savings, one of them is an investment, where you can find limitless options to invest your earnings. Although risk and returns are always associated with it, but when there is no risk, there is no profit.

5 key differences between saving and investing:

1. Period

Savings are typically for small financial objectives to be met in short periods of time, say about 1-3 years! If you’re looking forward to buy mobile phone or to go on a small domestic vacation in near future, saving might be a good option to meet such objectives. On the other hand, investing is typically a long-term plan for bigger financial goals. Say you’re planning for your child’s education or wedding or your comfortable retired life which is due in about 5 or more years ahead from now, investing from now can make these goals achievable by the time of need.

2. Access to money

At time of critical need of money savings serve as handy cash. You have all the access to your money in savings. You may withdraw a part of your savings or the whole amount as per your wish but at times, you end up spending money you have easy access to. In case of investing, access to your money depends on the kind of investments you make. Mutual funds schemes require long Investment duration to generate consistent returns to beat inflation.

3. Risk

If you have savings in reputed banks your money is safer in the bank accounts than at home. Investing mediums may involve risk of possible potential returns pertaining to the term of investment or the market situations. Investing in equity market comes with an inherent risk. One might lose money if not invested in quality stocks with long term growth potential companies. Hence it is advisable to avail services of expert financial advisors. Risk in investing varies according to the channels of investments. If your money is invested in good quality companies with long term views, then short term ups and downs should not affect your outlook towards such investments. Mutual fund provides the scheme details thereby indicating the possible risk involved. Investing wisely may give returns much higher than savings in the long run.

4. Returns

5. Choice

The right thing is to first identify your purpose. Why do you want to save or invest your money? Check whether your goals are short term or long term. It’s always wise to save money for small term goals, emergencies and casual expenses as it provides quick access. This makes it easier to meet small goals.

But in the long run, consider your changing needs, limited income sources and inflation; savings may fall short for bigger financial goals. Remember you are planning for future. It’s advisable to start investing at a young age but it’s never too late.Savings are for the present and investments are for the future. Investments are made typically for bigger financial goals which may seem impossible now but would be possible in the time to come if they are wisely planned today. Investing smartly is the key to meet such goals. To conclude, your dreams don’t follow inflation rates. It is recommended to save for small term goals but investing simultaneously may make it simpler achieve your long term dreams.

Never depend on single income. Make investment to create a second source. – Warren Buffett

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Share market decision making is not everyone’s cup of tea but it can be achieved with great experience. While multi-beggar stocks have created wealth for investors, these stocks are very difficult to identify by average retail investors, more so at the right price – the endeavour to create wealth by investing heavily in stocks that you expect to multiply 10 – 15 times can be risky. The secret to wealth creation is actually much simpler, the power of compounding. Let us discuss in this blog post regarding Systematic Investment Plan(SIP) and Power of compounding benefits and why the same is essential in today and tomorrow.

What is power of compounding?

Power of compounding is essentially making your money work for you. Think about a daily wage laborer – if he works for 300 days, he will get more money than if he works for 100 days. Your money, if invested wisely over a long investment horizon, is like a daily wage laborer; every extra day your money works, will get you incremental money. Let us now understand it from a theoretical perspective.

Money when invested earns returns – how much returns it earns, depends on the asset class and asset type. Historical data shows us that, equity is the best performing asset class in the long term. Returns earned by your investments get added to your investments and the overall amount earns higher returns.

Let us assume you invested Rs 10 lakh @ 15% returns. After 1 year, you will make a profit of Rs 1.5 lakhs. This profit, unless it is withdrawn, will get added to your investment and your investment amount will be Rs 11.5 lakhs. In the second year, at the same rate of return, you will make a profit of Rs 1.72 lakhs, more than what you made in year one. This profit of Rs 1.72 lakhs will get added to your investment and your investment amount at the end of year two will be Rs 13.2 lakhs. In the third year, at the same rate of return, you will make a profit of Rs 1.98 lakhs. The chart below shows the cumulative profit growth every year.

You can see that the profit growth is not linear but exponential. By year 5, the cumulative profit is more than your investment amount. By year 8, the cumulative profit is more than double your investment amount and by year 10, the cumulative profit is more than three times your investment amount.

SIP and the power compounding

Power of compounding is not as much about what you buy and how much you buy, as it is about how you buy and how you manage. Sounds confusing? Let us illustrate with the help of an example.

Let us assume that you invest Rs 10 lakhs in lump sum in a mutual fund, which will give 20% CAGR returns, for 10 years. 20% CAGR over 10 years, is a pretty aggressive assumption, but for the sake of the argument, let us assume you were lucky enough to invest in such a fund. What will be your investment value after 10 years? Rs 62 lakhs, more than 6 times returns in 10 years, which is quite impressive.

Let us now assume, you invest Rs 30,000 every year over the next 30 years – in total, you invest Rs 9 lakhs. Let us further assume that you get a CAGR return of 15% over 30 years. What will be your investment value after 30 years? Rs 1.5 Crores, nearly 2.5 times what you got by investing in lump-sum, that too by investing Rs 1 lakh less and at lower annualized returns. The chart below shows the cumulative profit growth for annual investments.

Investing is not just about money, it is more about time. This is the essence of power of compounding. The power of compounding is more magnified in SIP, because you can start with a smaller amount, invest regularly and remain invested longer.

Let us take this example further. You got Rs 1.5 Crores by investing Rs 9 lakh over 30 years (Rs 30,000 per annum) versus Rs 62 lakhs by investing Rs 10 lakhs in lump sum over 10 years. Let us now assume that, instead of investing Rs 30,000 on an annual basis, you spread the same annual amount over 12 months, in other words, you invest Rs 2,500 per month over the next 30 years. The tenor of investment remains the exactly the same to what it was when you were investing annually, but what will be your investment value after 30 years? Rs 1.75 Crores, which is Rs 25 lakhs more than what you got from the same investment capital, over the same tenor!

You got the extra returns because you were investing monthly instead investing annually – this again is a demonstration of the awesome power of compounding. By investing on a monthly basis you made your money work harder (instead of being idle throughout the year).The chart below shows the cumulative profit growth for annual investments.

Regularity of Investments:

SIP regularizes investments by making it a disciplined Investment process which is what it is supposed to be. It removes human judgment from the decision making process. It instillsdiscipline in the investor and helps him stay focused, investing regularly for the long term.

Rupee Cost Averaging

Apart from the power of compounding, SIPs enjoy another major advantage, especially in equity mutual funds. Equity as an asset class is intrinsically volatile – prices move up and down on a daily basis.
By investing through mutual fund monthly SIPs, you will be able to take advantage of volatility by investing at various price levels. This is known as Rupee Cost Averaging. Over long investment tenors, asset prices will follow a secular trend (unaffected by short term volatility). Therefore, rupee cost averaging of purchase price can help you get enhanced returns in the long term.

One must continue SIP in lower or Higher market situations. Never try to time the market, only provide 5 years and more and returns will be astonishing.

Conclusion

Power of compounding is simple to understand, but we often do not realize its potential. Understand the importance of power of compounding in wealth creation. Once you get a sense of the potential of compounding, you will realize that you can have considerable control over your financial destiny – more than what you would have imagined earlier. It is essential to get benefit of SIP investment to cope of with Modern Life style expenses and it will become necessity in future, then why should you wait when others have already started SIPs considering its magic ?
All that is required on your part is patience,discipline and Stay invested as per our advice.

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Category: Investment

Investments a smart move as compared to savings