4 Common Myths Busted About Investment
The discipline of investing brings some serious reservations. Caution, hesitation, and unpredictability are some of the first emotions that surface when someone new to investing comes face to face with it. However, the truth is far from this. Investments are beautiful for a multitude of reasons. They help you reach your financial goals as they have the power to multiply your wealth .This means essentially anyone can chalk out a suitable investment plan and take control of their finances. It is true that investments can seem overwhelming, especially with the plethora of information that surrounds it. This has also given rise to some myths. We list out a few here and address them one by one.
Myth: Young people do not need to invest.
Reality: If you understand the concept of compound interest, this myth will shock anyone reading it! Compound interest is nothing but interest on interest. It essentially means earnings on your principal plus the interest last accrued. This means every time you earn interest on your investments, it is not just on the principal amount but also on the interest last earned. According to this amazing phenomenon of compound interest, investing as early as possible in your life is the key to make compounding over long periods work in your favour.
So the myth among young people that they can defer their investments to a later time is completely untrue. For example, an 18-year-old starts investing and continues to do so for the next twenty years, post which he stops and lets the money sit in his account. Another investor starts at the age of 25 and continues to invest till age of 65 years. Who do you think walks away with more amount in his bank account at the age of 65 (assuming both earned similar returns of at least 5% per annum over this period and the amount invested each year remains the same) ? The first investor! How? The power of compounding over the long term was working its magic!
Myth: You need a lot of money to invest.
Reality: This is a myth that needs to be addressed at the earliest. You need not be rich to invest! There are a wide variety of financial products available in the market today, fine-tuned to the requirements of all kinds of investors. These are based on your risk appetite, the amount of funds you are comfortable parking as investments, and the time for which you are looking to stay invested based on your financial goals. Many people stay away from jumping onto the investment bandwagon under the pretext of not having millions of dollars to invest. However, in reality, it is just not needed.
Myth: My PF will be sufficient post-retirement.
Reality: Many people rely on their provident fund savings for their life after retirement. While PF is a great tool to ensure you have a large corpus in the long term, it is important to consider if it will be enough to meet your needs and whether it makes sense to place your bets on it completely. For an average salaried person, if you factor in inflation and do the math, you realize that although PF is necessary and might be opted for, you need more than just PF to live your post-retirement years comfortably. And what about any unpleasant eventualities such as the death of the primary provider of the family? This is where you need to secure your family’s future using other options, such as term insurance that works in times of such unforeseen events, beating the myth that having only PF funds will be sufficient.
Myth: Insurance is an expense, not an investment.
Reality: For people who are unaware of how insurance works, they might end up believing the myth that it is nothing but an out-of-pocket expense, not an investment. The basic premise of insurance is that insured pays a certain sum every year to the insurance company, known as the premium amount and in return an insurance company pays a certain amount of money (sum assured) to the insured in the case of an unfortunate event. In its most basic form, this is called insurance. However, the industry has evolved significantly, and financial experts have come up with different insurance products that suit the needs of investors. To reach one’s long-term financial goals, such as retirement planning and children’s education, there are many options available at an investor’s disposal.
What are the three main reasons for investing?
The three main reasons for investing your money are:
1. Wealth preservation:
While making a fortune requires hard labor, keeping that fortune intact and safe requires even more effort. Investing your hard-earned money will ensure your wealth is preserved safely.
2. Grow your wealth:
Money does not grow by itself. You need to invest it in assets that will generate wealth. You can earn more money with money, but you need to invest it for the long term.
Keeping money idle is a bad idea as money loses value over time due to the phenomenon called inflation. You need to make your money work for you by keeping it invested so that it grows with time and you can beat inflation.
Where should I invest my money?
There are several investment avenues available for investors, such as:
1. Equity shares
2. Mutual funds
3. National pension scheme (NPS)
4. Bank fixed deposit
5. public provident fund
7. Term insurance
What is the safest investment with the high return?
Here are some of the relatively low-risk investments that promise decent returns:
1. Savings account
2. Money market funds
3. Certificates of deposits
4. Corporate bonds -AAA rated
5. Dividend-paying stocks
6. Guaranteed# return Insurance plan(UIN: 110N152V07)
Investing should always be backed by adequate information from reliable sources. Remember, myths can hold you back from achieving your optimum financial health. Do not let myths hamper your chances of becoming a smart and informed investor! Happy investing!