Sarita a 29 year old, holding her newborn baby girl in her arms, looking at that sweet innocent face, she decides she wants to give her baby girl the best, put her in one of the best schools, send her abroad for her higher education, give her a grand wedding, etc.
These are good dreams, no? But is it enough to only dream?
Sarita has big dreams for her child, but those dreams have costs. It is not easy to fund these goals if you do not save or invest. With the rising inflation, it make it even more difficult, because you have to start saving and investing now, if you want that lavish lifestyle. All parents want what’s best for their children and give them the life they never had, simultaneously they also have to realize that, living the lavish life doesn’t come easy. Sarita has to start planning now if she wants to give her daughter the best. Planning is not only enough, she has to make sure she puts that plan into action. Also, the savings and investments have to be made till the decided time, or there could be a shortfall in the funds required.
Let me just give you a brief explanation of what is a long-term investment. There are 3 types of periodic investments, short term (which ranges from 1 day to 3 years), medium term investments (which ranges from 3 to 5 years) and lastly, long-term investments (which is for 5 years and above). There are also different investment avenues for these kinds of investments. For example, debt is a good option for short and medium term investments, where as equity is the best option for long term investments. Systematic Investment Plans (SIPs) are one of the best options to invest in equity. For those of who do not know what SIPs are, they are nothing but a tool through which you can invest in equity funds, For example, Mr. Sanjay invests Rs.10,000/- per month in an equity fund, this Rs.10,000/- is his SIP amount. SIPs are more effective than lump sum amounts, for 2 reasons:
Power of Compounding:
In simple words it means, when you receive interest on interest. When your first SIP is deposited, it earns an interest, so when you deposit the second SIP, interest is calculated on the first SIP + interest on the 1st SIP + second SIP.
For example, the monthly SIP is of Rs. 10000/-, so if the annual rate is 12% then monthly it will be 1% (12/12). So 10000 X 1% = Rs. 100, so now when the interest is calculated on your 2nd SIP amount, it will be calculated on Rs. 10000/- (1st SIP) + Rs. 100 (interest on 1st SIP amount) + Rs. 10000/- (2nd SIP amount) = Rs. 20100. This is called the power of compounding, and also it’s magic is what makes your corpus grow over the years, so SIP is a good tool to invest through, when it comes to long term investments.
Rupee Cost Averaging:
What if I told that, you can benefit from the equity market when it is low? Thinking how is that possible? Well it is, just like how you go shopping when there’s a sale, the same way, when the market is down, you get to buy more units at a discounted value.
For example: Mr. Ravi invested a SIP of Rs. 1000/-, at an NAV i.e. Net Asset Value, of Rs. 10, so he got 100 units (1000/10), now in the next month, the NAV dropped to Rs. 8, so this time Mr. Ravi’s units have increased to 125 units. So now look at it from a long term perspective, if your SIPs get the benefit when the market is down, when the market goes up, you will have more units, thus increasing your profit.
Many people have this confusion, as to why they should invest for a long term.
Why can’t a short term investment fulfill their goals?
As already mentioned above the power of compounding can make your corpus grow into a nice big amount, as well as Rupee cost averaging.
For your investments to grow into a big fat corpus, it requires a good amount of time, that is why there are certain goals, which you need to start planning for now itself, so that there is a good amount of time for your funds invested to grow.
Let us now look at some of the goals, that requires long term planning and investing:
Buying A House:
This is one of the major goals, that require long term investing. With the real estate prices rising rapidly, it is difficult to buy a house without taking the help of savings and investments.
Is it possible to buy a house with a salary of Rs. 18000/- to 20000/-?
Not possible right?
Some banks, won’t even sanction loans on that income.
Now let us look at the same situation from a different point of view, what if we saved a monthly SIP of Rs. 5000/- for 10 to 15 years, would we be able to buy a house then? Of course we would, because after 10 years, we would have collected a nice big fat corpus to buy that house, though it may not be the full amount, but at least it will be enough to pay half or quarter of the amount, and the rest can be taken on loan.
With your income increasing along the way, you can also increase your SIP amount, which in turn will reduce your loan amount.
How? The bigger corpus you create, the lesser your loan amount will be.
Child’s Education and Marriage:
With the way the education expenses are rising, parents should start planning for it, when the baby is still inside the womb. Some parents might say, when we can take education loans, why should we worry?
Let me ask you this, would you rather take a loan, not knowing at what rate you will have to pay it back and what amount of loan you will need to take, thus, adding a liability to your family or start investing with a small amount and increase it along the way, and create the corpus required for your child and pay it once and for all, without any liability.
So find out what will be the cost of education, when your child reaches that certain age and start investing that amount now, which will create the corpus required at that age.
The same goes for marriage, in olden days, marriages used to come in a budget of Rs.25,000/- to Rs.50,000/
So cheap right?
But at that time, this amount was very big. Now-a-days, parents leave it up to their children, to create funds for their own weddings, but still keep a side amount of money for their wedding. Sukanya Samridhi Yojna, is an investment option, which gives parents a platform to invest for their girl child’s education and marriage, again, that too is for a long term investment.
This itself is considered as a long term goal, and the earlier you start thinking about it, the better it will be for you. Earlier parents were dependent on their children, after their retired life.
Now, people are saving and investing that extra money, to live a free, relaxing and totally independent life. In fact, if you go to see, while the children are busy working so hard to make ends meet, parents are going on international tours, and living their retirement life to the fullest, of course it didn’t come easy, they too had to work hard for every penny earned, this also motivates, children to do the same and start saving and investing from now only.
However, there are still some people out there that have started planning for retirement, but may have left out important factors to be considered. For example, many a times, people forget to consider inflation, which is a major factor that affects the retirement corpus, another factor is the interest earned on the investments, when you are young, you can take risks, because you will have time to cope with risks. So this is the perfect time to invest for retirement. When you grow closer to your goal, you will have to shift your corpus more towards less riskier instruments (debt), so that the corpus you accumulate at the time of retirement remains safe.
Estate To Be Left For Your Loved Ones:
There are some people who wish to leave a certain amount behind for their loved ones. This is just so that the children and spouse do not have to suffer financially. To create that estate one has to know, what amount should be saved and invested, to reach that corpus, at that point of time. When you are in your 50s & 60s, you will not be able to invest much or won’t have the same investing capacity that you had when you were in your 30s or 40s. So, the larger the gap between your investments and goal, the bigger the corpus, you will be able to create.
These are some of the major goals that require long term investments. You may wonder why only equity is considered a good option for long term investments and why not debt?
Firstly, because equity gives better returns than debt.
Secondly, debt market is not as volatile as the equity market, so the investor will not be able to take the advantage of Rupee Cost Averaging.
Thirdly, to beat inflation, a higher return is always better. If inflation is at 7%, which investment will benefit you more, an investment drawing 8% or an investment drawing 12%? Of course the 12% investment. That is why, equity is the better option.
We all want to live a luxurious lifestyle, but don’t want to take the pain of getting to that point. Sacrifices have to be made along the way. You have to take that extra pain to save and invest, for you to have funds that will make your dreams achievable. Nothing comes easy, you have to build your own steps towards your goals, here your steps are your investments, so build wisely, and invest for long term.
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Disclaimer: The views shared in blogs are based on personal opinion and does not endorse the company’s views. Investment is a subject matter of solicitation and one should consult a Financial Adviser before making any investment using the app. Making an investment using the app is the sole decision of the investor and the company or any of its communication cannot be held responsible for it.
