Investment Basics

Investment Basics




What is Investment?

The money you earn is partly spent and the rest saved for meeting future

expenses. Instead of keeping the savings idle you may like to use savings in

order to get return on it in the future. This is called Investment.

Why should one invest?

One needs to invest to:

-earn return on your idle resources

-generate a specified sum of money for a specific goal in life

-make a provision for an uncertain future



One of the important reasons why one needs to invest wisely is to meet the

cost of Inflation. Inflation is the rate at which the cost of living increases.

The cost of living is simply what it costs to buy the goods and services you

need to live. Inflation causes money to lose value because it will not buy the

same amount of a good or a service in the future as it does now or did in the

past. For example, if there was a 6% inflation rate for the next 20 years, a

Rs. 100 purchase today would cost Rs. 321 in 20 years. This is why it is

important to consider inflation as a factor in any long-term investment

strategy. Remember to look at an investment's 'real' rate of return, which is

the return after inflation. The aim of investments should be to provide a

return above the inflation rate to ensure that the investment does not

decrease in value. For example, if the annual inflation rate is 6%, then the

investment will need to earn more than 6% to ensure it increases in value.

If the after-tax return on your investment is less than the inflation rate, then

your assets have actually decreased in value; that is, they won't buy as

much today as they did last year.

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