of investing money
"Money that is nowhere must be somewhere"
so goes the saying. As we all know there is money in circulation
in the country's economy. Where do we find this money? Is it in
the people's hands? People hold money in their hands for two good
reasons - namely for their day-to-day consumption needs or sometimes
as a precautionary measure for sudden expenses. In addition there
are fortunate people who have a surplus. What do they do with that
surplus? If they keep that money in cash they get no income and
inflation will eat up this surplus money. They go for investments
bringing them income mostly in the form of interest.
investment is a difficult one and it should be done in a prudent
way. The most important factor is that the investment should cater
to the needs of the investor and should suit him or her. He must
be clear in his investment objective. For example, one may prefer
high current income; or liquidity; or want protection from inflation
and taxes or consider long-growth and so on.
The basic principle
in investment is the placing of a capital sum in order to obtain
an annual return thereon in the form of net income. The investor
exchanges his capital sum to a future flow of income to him.
In a modern
day economy there are various investments. For example, Savings
Accounts, Fixed Deposits, Treasury Bills, Stocks and Shares, Unit
Trusts, properties and many more.
At any given
time there is a certain amount of investment money available in
the economy for investments. Each of the above investment outlets
competes with each other to attract the available money in the investment
market. The sub-divisions in each category compete with each other
to get the money into their hands.
should be concerned only in the net income he is able to derive
from the investment. He is not bothered with the gross income. For
example if you invest in a residential property your income is in
the form of rent, which is a gross income. The investor will be
bound to spend out of this gross income certain outgoing such as
maintenance costs, rates and repair payments, costs of letting,
insurance, etc. which have to be deducted from gross income to arrive
at his net income.
ago people used to hoard money -- that is they kept their money
in cash at home or other safety places. As people became aware of
investment opportunities they started depositing surplus money in
Savings Accounts beginning with the popular Post Office Savings
Bank of yesteryear. Today savings are highly institutionalised.
With the recent
collapse of a bank, people are disturbed and are now in search of
safe investments. They all blame the Central Bank for this catastrophe.
The Central Bank may have had a say in this. But the primary cause
is that these depositors have not been prudent and gone after higher
returns. Income return is not the sole criterion of a good investment.
The investment should meet the needs of the investor. For example
one may want his investment to be highly secure or one may want
high liquidity and so on. Certain people may go for the highest
return irrespective of other criteria. Security of the money invested
is very important. This is why many small time investors prefer
the state-owned National Savings Bank (NSB).
Institutions like this could attract investment at low rates. The
principle is -- higher the security, lower the return. People are
satisfied with this return because they know their money is in safe
If other financial
institutions want to compete with the NSB to attract investment
money they have to pay higher interest rates because people consider
the NSB with government backing a safer haven for their money.
rank next to the NSB in terms of security with private banks and
private financial institutions following.
the investment is important. Equally important is the security of
the income from the investment. If the invested money is safe, income
is also sure and safe. But there are investments such as property
where income cannot be depended upon.
The next test
an investor should look into is liquidity of the investment. By
liquidity we mean how soon your invested money could be converted
into liquid cash. Next in rank is money in savings accounts, for
such money could be withdrawn almost immediately over the counter.
The principle is -- higher the liquidity, lower is the rate of interest.
A fixed deposit
is the placing of a capital sum for a specific period in the hands
of a financial institute. The specific period may vary say from
three months to even up to about six years. The money one has placed
in a fixed deposit cannot be withdrawn until the expiry of the period
of the deposit. Of course payment of interest could be arranged
monthly, quarterly, bi-annually or at maturity.
The next factor
is management of the investment. For example investments in savings
accounts, fixed deposits, stocks and shares have minimal management
whereas investments in property entail high management. This is
why pensioners and older people prefer to invest their monies in
investments that have no management. They cannot bother about management.
or depreciation of the investment is very important. For example,
there is no capital appreciation or depreciation in savings accounts
or fixed deposits. You enjoy the interest regularly but the invested
capital sum remains the same with inflation eating into the capital
in quoted shares of companies can bring in capital appreciation
or depreciation. Dividends are paid but the market value of the
share can go up or down. If it goes up the investor is lucky for
when he converts his investment to liquid cash by selling the shares,
he gets a sum in excess of what he invested. If the share prices
go down, the investor stands to lose. If one is not conversant with
the share market he should not attempt to invest in shares. Unit
Trusts are better for such persons, because the professional expertise
could be obtained directly by the investor.
an investment of high security. The disadvantages are low liquidity
and high management. But the plus factor is capital appreciation.
During the past two decades property values have escalated to enormous
levels bringing unthinkable capital appreciation to investors. Even
if one has bought a bare block of land and kept it idle over the
years, capital appreciation outweighed the interest he would have
got had he invested in a savings account or fixed deposit.
For this reason
property is considered a hedge against inflation. Inflation affects
all investments but the capital appreciation in property conquers
been the foundation of many successful men throughout the world.
But no one should invest in property if he cannot manage it or wants
high liquidity of investment. Risk always brings in better returns.
One cannot have high returns if he is not prepared to risk his money.
attempt prudent investments. Risky investment is for those who couldn't
afford to take risks.