Monday, July 17, 2017

Stepping Into Personal Finance, Stock Markets and Investing!

Jai and Ashish were sipping a cup of hot coffee on a cool evening watching an IPL match between  Mumbai Indians vs Rising Pune Supergiant. While Jai was cool about the rising of Pune as a Supergiant in this IPL and sipping his coffee along, Ashish was not able to focus on the match due to rising of his personal expenses and pondering over the importance of SIP instead of few sips of coffee.

Both Jai and Ashish are IT Professionals! Jai and Ashish will help us step into the world of personal finance, stock markets and Investing! 

The above fictitious characters are having factual and certain financial scenario. In a world where the prime focus is on spending, there is a lack of financial literacy among many of us where we don't understand the power of savings and investing. Slogans like 'You live only once' motivate us enough to spend on whatever we 'want' and demotivates us to save for what we will be someday actually  'need'. The idea is not to stop spending. This will anyway hamper the economic growth of the country. The idea is to spend but after saving.

Irrespective of what or what we not earn, we should have some basic knowledge about savings, financial planning, budgeting and investing; no matter how much we hate economics. In this article, I would list some basic and some advanced tools of investments. The various tools available for financial planning are the mediums through which we can achieve our monetary goals. First, we need to understand the importance of financial planning and why we need it at all. Second, we understand the importance of saving more than spending (needs versus wants) and last we need to understand few tools of financial planning.

the importance of financial planning and why we need it - In a world where jobs market is volatile, expenses are on the rise with the global and national economy in an uncertain state, it becomes imperative for an individual to focus on managing their finances. Even small ants work day and night and save food so they can face the rainy days. I hope we remember this story from our childhood.

understand the importance of saving more than spending (needs versus wants) - Suppose Jai earns 100 rupees a month so does Ashish. Jai spends 90 rupees a month - eats in lavish restaurants, watches latest movies in multiplexes, goes on a weekend getaways regularly. Ashish spends 10 rupees a month - travels in public transport, eat outs in budget restaurants, keep going out to occasionally. Both of them follows the same routine for 12 months. At the end of the year, Jai saves 120 rupees while Ashish has 1080 rupees as his savings! And the difference is quite significant.

need to understand few tools of financial planning - Both Jai and Ashish now saves 90 rupees a month. At the end of the year, Jai saves 1080 rupees while Ashish saves 1122 rupees. How can both saving same amount but Ashish having more money at the end of the year? Ashish earns 7% more by using a simple tool of investment called as recurring deposits!

So I believe we are now ready for discussing of few common & popular investment tools in a concise way. We will elaborate and focus more on other details and technicalities like their pros and cons, which tool is suited for what purpose in future posts.

  • Bank Accounts  
A bank account is a mandatory tool for managing one's personal finances. A saving account in any bank functional in the country will give you yearly interest of 4% (6% in some select banks) on the amount of money you are saving. A bank account will be the first door that should be knocked for entering into the world of savings and investments.

  • Bank Fixed Deposits (FD) 
  All banks offer their customers a service called fixed deposits in which a customer deposits a sum of money and gets guaranteed rate of interest at the end of the fixed deposit tenure. The bank fixed deposits are the safest tool which will assure fixed returns over invested amount. The rate of interest is volatile in nature with banks increasing/decreasing rates often. Currently, FD interest rates fluctuate between 6%-8% (depending on banks, age group of investor and other misc factors).

  • Bank Recurring Deposits (RD)
Recurring deposits is another variation of a safe investment tool which also offers guaranteed interest rate at specified intervals. You keep depositing a small sum of money each month and earn interest over the money, say, every 3 months. The recurring deposit interest rates are mostly in sync with fixed deposit interest rates. The core of both RD and FD are same from the fundamental point of view but both are still very different when it comes to the purpose of saving.
  • Public Provident Fund (PPF) 
The public provident fund is a safe investment tool supported by the central government. PPF account can be created from any bank. It is irrespective of any bank, PPF account technically is same, no matter through which bank it is opened. Since the public provident fund is backed by the government, the banks only act as the container for the account. PPF offers a fixed rate of interest for long term investment of minimum 15 years. Currently, the rate of interest in PPF is 7.8%.

  • Equities (Stocks) 
Equities popularly known as shares/stock market is a complex investment method in which an investor purchases a few shares of a company at a given price. Over a period of time when the company grows, the value of stocks also grows. Suppose Jai bought 10 shares of XYZ company at the unit price of Rs. 100, his invested Rs. 1000 becomes Rs. 1500 when the share price of XYZ company reaches 15 rupees per share. This can happen in 6 hours, 6 days, 6 weeks, 6 months, 6 years. It may not happen at all and his invested Rs. 1000 can become Rs. 500 if the company shows negative growth and per share price now drops to Rs. 5 from Rs. 10. Investing in Equities directly requires a thorough knowledge of share market as the volatility is very fluctuating in nature. The rate of interest can vary from negative to positive.

  • Mutual Funds (MFs) 
Mutual funds are also part of stock markets but it has better volatility and low fluctuation. When you invest in a mutual fund, you basically still invest in stock market albeit in a different way. For a basic example, understand a mutual fund as a set of stocks of 10 companies instead of 1. When you invest 1000 rupees in a mutual fund, your money is divided and invested across shares of all 10 companies. The core benefit of a mutual fund is that if 3 companies show negative growth, 5 companies show positive growth and other two companies shows a flat growth over a period of time, then the negative growth of 3 companies even outs by the positive growth of 5 companies and does not let reduce your investment. Mutual fund investments do not require an advanced level of knowledge when compared to equities. Due to average out of the invested amount, the rate of interest is mostly positive in the range of 10%-20% or even more depending on the mutual fund.

In future articles, we will discuss in detail on each of the above-listed tools of personal finance and how to invest properly to make the best use of these instruments. There are various other investment tools as well other than the above five that we will discuss at a later date. 

Thanks for reading. Think and Grow Rich! 

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