Part 1: Breaking Down The Basics of Investing

We hear the term ‘investment’ quite often these days, from our friends, colleagues, advertisements, and more. The question is, what investing means and how is it different from savings.

Savings is the money we save and avoid spending, more often in a bank account or fixed deposit. However, this money will usually lose its value due to inflation over a period of time. Let’s take an example, a 100 gm pack of Amul butter costed INR 23 in the year 2009. Currently, the same pack of butter costs INR 50. This is what inflation does - it reduces the purchasing power of money. According to a report, India’s retail inflation has risen to 5.59% in Dec 2021. This means the rising prices of goods are technically eating into your savings!

How to beat inflation?

So the next question is, what can we do to stop this from happening? The answer is - Invest!

Investment means parking your money with a view to making it grow and/or generate income. This is exactly why it is crucial to invest – to create wealth. This way inflation will have a lesser or no impact on your purchasing power. In fact, your money can even grow multifold by investing.

To decide whether you want to save or invest, it is necessary to list down your goals and their time horizon. For example, if you have savings worth Rs. 10 lakhs in your bank and want to buy a car in the next few days, it can be used from the savings. But if you choose to prudently invest this money, it can grow into a sizable corpus and be used to meet your financial goals such as education, retirement, holidays and more.?

Growing your money

Ever wondered how does the invested money grow? Well, it grows due to the magic of ‘compounding’. For instance, you invested Rs. 100 in mutual funds 5 years ago, and this money has grown to Rs. 250 today. This 20% CAGR (compound annual growth rate) returns are a result of compounding! No wonder some people even call compounding the eighth wonder of the world! CAGR is the yearly growth rate you will receive on investing your money over a specific period of time.?

This money basically grows in value due to the growth received in its underlying. Confused? Let’s look at this example, you invested some money in a particular equity mutual fund. This fund will in turn park that money in some other companies listed on the stock exchange. The growth received by these companies in terms of sales, profits, etc. will bump up their stock prices over a period of time which will thus reflect in the mutual fund you invested in. Voila! There are your compounded returns.

So, how do we proceed?

Now that you understand the importance of investing, the next question that pops in is where should I invest, what are the risks involved in investing and how can I do it? Well, we will discuss all of that and much more, stay tuned for part 2!

Disclaimer: Mutual Fund Investments are subject to market risk, read all scheme related documents carefully. This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.?