Why You Need To Invest

Added in: Cashonomics
By Gaurav Masurekar | 9th January 2019
money lessons

Why investments?

Today’s world is filled with financial insecurities and earning a decent income is just not enough. It is important to let your money work for you. Investment is how you let your money work to generate wealth and income. Investment is not about savings but creating an infrastructure that is secured with a good financial fence that helps you lead a comfortable lifestyle. With sound investments you not only lead a life of comfort but it helps you in achieving your personal as well as your career goals.

So why do you need to invest

Investment helps you to grow your money though various investment options that lets your earn a good rate of return on the income saved. When you invest in stocks, bonds or deposits you give your money a change to grow and reach its true potential in the long run by yielding you a good amount of return.

Higher rate of returns

Today everything is about ROI. Investments offer you a chance to earn much more than what your would hope to achieve by keeping your funds parked in your savings account.

Elevating your financial status

Investments helps you reach a financial status that brings up your standard of living and makes you feel more secure. Earning money is one thing and generating wealth to maintain a standard of living is another. You do not work only for the three basic needs but your also work so that you can elevate your standard of living. Investments help you to achieve that standard of living and fulfil your financial goals.

Saving tax

Certain investment schemes are such that they help you save on your taxes. The government provides for certain exemptions of tax on certain kinds of investments. These exemptions help you save money and earn higher rate of returns.

Investing in such schemes is a good way to convert your taxes into wealth.

Expanding your business or profession

If you are self employed or are practicing a profession investment is a good way to build capital to expand your business or profession

Retirement planning

It is fact that you cannot work all your life. In every person’s life there comes a time when you want to relax and do only those things that you want to and not because you need to bring dinner to the table. This is the reason why you need investments. These investments will help you lead life with self respect even when you stop earning and wish to retire to a life of your choice.

Today lots of investment options are available that help you plan your retirement and give you the confidence to spend your golden years peacefully.


Types of investment options

In today’s global scenario there are a lot of investment opportunities available for different kinds of investment appetites. Some options are traditional tried and tested ones while others are more novel and can be customised to suit the needs of different people.

Some of the popular options available today are:

Stocks / Equity

Stocks or Equity shares are the biggest capital generating vehicles for companies today. In exchange for funds from general investor public limited companies provide equity shares to such investors. The investors become owners of the company in the proportion of their investment and the company is able to generate a good amount of capital. As the company grows the shareholders can take part in the profit and get a share of the same as per their investments. Investing in Equity shares have infinite growth opportunities and there are possibilities of handsome returns in the form of dividends. Stocks of a good company are ideal for long term investment as they give good return on investment. Stock investment should not be considered the same as stock trading as the latter is highly speculative in nature and come with great risks. Investment in stocks also has certain risks involved for instance, if you fail to pick a good company you might end up losing your hard earned capital.

Mutual Funds

Over the last few year Mutual Funds have gained a lot of popularity among the working masses. Especially with the Systematic Investment Plans provided by Mutual Funds, you can start investing systematically with smaller amounts at a very early stage. Basically Mutual Funds are pool investment funds that provide investors with options to invest in various options such as equity, debt, commodities or combination thereof to minimise risks and maximise profits. Mutual Funds are the current rage due to their higher rate of returns as compared to other traditional interest paying schemes. Though Mutual Funds are the hot options of today, they are subject to market risks so you need to be sure to pick your funds carefully.

Fixed Deposits

Fixed deposits are the safe way to earn a higher rate of return from you bank deposit. The only drawback about Fixed Deposits is that they are not liquid like stocks and mutual funds. Once you put your money in a Fixed Deposit your money is locked for a predetermined period but the returns from Fixed Deposits are fixed. As a Fixed Deposit holder you are treated as the creditor of the bank and it is their duty to pay your interest at the given time and for that specific amount. Fixed Deposits are perfect for investors who believe in playing it safe and do not wish to put their capital in any kind of risk. Moreover, Fixed Deposits are treated as assets and are helpful when you are need of urgent funds as banks often provide quick loans against them.

Recurring Deposits

Unlike fixed deposits where you require to invest a lump-sum to earn a good rate of return in a recurring deposit you can invest a smaller amount every month and use the power of compounding to earn a good rate of return on your systematic deposits. This kind of investment is good for anyone who wants to set aside a small sum every month without having to worry about disrupting his or her budget. Recurring Deposits are long term investments and help you to save as well as earn a higher rate of return on the same.

Public Provident Fund

Public Provident Fund or commonly known as PPF provides you with a two fold benefit of tax saving and higher rate of return. It has a long lock in period of 15 years and therefore it is a good bargain if you are thinking long term and wish to saving on tax as well. Also, at the end of the 15 year term the amount withdrawn from PPF is completely tax free and does not attract any income-tax. In India it is one of the go to investment options for employees, professionals and business men alike. Also, similar to fixed deposits, PPF is considered as an asset and banks offer loans against your PPF account. The loan amount is decided as proportionate to the amount in your PPF account and differs from case to case basis.

Municipal bonds

When governments need credit they do not take loans or use credit cards instead they issue municipal bond or munis that are tax free and carry an interest rate which often paid on maturity. The tax free nature and risk free rate of return makes it one of the smart investment options for people looking to invest in risk free instruments.

Moreover, in the case of munis the borrower defaulting is very low as in this case the government is the debtor and it can be accounted for the defaults.

Certificates of deposits

Like bank provides fixed deposits Certificates of  deposits also provide a fixed rate of returns or an investment of a lump-sum. But unlike fixed deposits that are provided by Banks, Certificates of deposits are provided by companies and carry much more risks and there is a risk of the borrower defaulting. None the less the investors who invest in Certificates of deposits become the creditors of the company and the company has a obligation to pay its creditors when the amount of due.

These are a few of the investment options that you can include in your portfolio. But before you invest your money in any such instruments, stocks or deposits make sure to weigh the risks that you be subjecting your capital too.


Now the next big question is what should you invest in and when to start doing so.

There are so many options available today that for the common man it is easy to get overwhelmed with the sheer amount of options available. Especially people who are new to investment, will find it difficult to pick a starting point.

There is no hard and fast rule for picking the investment suitable to you. It is always advisable to start small with low risk vehicles and then seep building your investment portfolio as your income and risk appetite increases.

Start young or play it safe

When you are young you have fewer responsibilities this means you have a chance to be better prepared of when the time comes. When you are young you can think long term and work to build on a solid financial platform to rest your future. But this does not mean you need to take risks. You must first concentrate on building capital through low risk instruments and deposits. This is time when you can also experiment with equity in the form of equity mutual funds. You will have a lot of time to assess, hedge and diversify your portfolio especially when dealing in equity through the mutual fund route.

If you are an older investor try to play it safe and take minimum risks. Investing in FDs, government bonds and treasury bills will be a safe bet for you.

What should be your investment goals?

Investment goals need to be short term as well as long term. For instance you can have a long term investment goal to prepare for your retirement while your short term investment goal could be to purchase an asset or a property. For both these goals you can choose a combination of high, medium or low risk investment options for best returns without risking much of your capital.

For non-negotiable goals such as child education etc. you will need to invest in safe options as you cannot possibility risk the future of your child. For negotiable goals such as travel plans etc. you can always go for high risk high return investments such as stocks as the worst that could happen is your will miss out on that one trip and it would only make you wiser.

It is always better to know your risks before you invest rather than jumping into something that you have no knowledge off, then it is not investment but just pure gambling.

Managing your Portfolio

Unless you are an High Networth Individual (HNI) you will have to manage your portfolio yourself. Make sure that you keep regular tabs on your investments. This is because you will have to liquidate or reshuffle some of your investments from time to time as what may have worked for you 5 years ago may not be such a hot investment options today. Therefore it is always important that your skim off your profits at the right time and exit the scheme of investment at the right time. Do not follow the band wagon and do what your feel is right from the stand point of financial security.


International efforts for developing the investment platform

Recent development by the European Commission to break down barriers for cross boarder investment and accelerate delivery

As per a press release on 12 March 2018, “The European Commission is today taking a major step towards the development of a Capital Markets Union (CMU) by promoting alternative sources of financing and removing barriers to cross-border investments.

While the CMU will benefit all Member States, it will particularly strengthen the Economic and Monetary Union by promoting private risk-sharing.

Building on progress already achieved since the launch of the CMU in 2015, today’s proposals will boost the cross-border market for investment funds, promote the EU market for covered bonds as a source of long-term finance and ensure greater certainty for investors in the context of cross-border transactions of securities and claims. The CMU is one of the priorities of the Juncker Commission to strengthen Europe’s economy and stimulate investments to create jobs. It aims to mobilise and channel capital to all businesses in the EU, particularly small and medium enterprises (SMEs) that need resources to expand and thrive.

Quick adoption of these proposals by the European Parliament and the Council will enable businesses and investors to benefit more fully from Single Market opportunities. The Commission also calls on the co-legislators to ensure the speedy adoption of pending key reforms for the completion of the CMU, such as proposals to strengthen capital market supervision, business restructuring and provide new savings opportunities for consumers. Out of the 12 proposals presented by the Commission to establish the building blocks of the CMU, only three have been agreed by the co-legislators at this stage.

Valdis Dombrovskis, Vice-President responsible for Financial Stability, Financial Services and Capital Markets Union, said: “Today’s proposals are part of a broader strategy to strengthen capital markets and encourage investments in the EU. To have a genuine Capital Markets Union in Europe by 2019, we need to advance in three directions: European labels and passports for financial products, harmonised and simplified rules to deepen capital markets and more consistent and efficient supervision.”

Jyrki Katainen, Vice-President responsible for Jobs, Growth, Investment and Competitiveness said: “We want to make it easier and cheaper for companies, especially small and medium-sized ones, to get the financing they need. A deepened single market will help companies to do that and will allow them to grow. The Commission is delivering on its commitment to put in place the building blocks of CMU. The European Parliament and Council must now do their part. The Commission stands ready to work with them to adopt all legislative proposals by 2019.”

Vera Jourová, Commissioner for Justice, Consumers and Gender Equality said: “The new rules will facilitate access to credit by SMEs and promote cross-border investment. We want to provide legal certainty and remove legal risks in cross-border assignments of claims as well as in transactions that are important for SME funding.”


Today’s proposals in details

European covered bonds

The Commission is today proposing common rules – consisting of a Directive and a Regulation – for covered bonds. With EUR 2.1 trillion in outstanding amounts, they are currently among the largest debt markets in the EU. European banks are global leaders in this market, which represent an important source of long-term financing in many EU Member States.

Covered bonds are financial instruments backed by a segregated group of loans. They are considered beneficial not only because they fund cost-effective lending, but also because they are particularly safe. However, the EU market is currently fragmented along national lines with differences across Member States.

The proposed rules are based on high-quality standards and best practices. They aim to enhance the use of covered bonds as a stable and cost-effective source of funding for credit institutions, especially where markets are less developed. They will also give investors a wider and safer range of investment opportunities.

At the same time, the proposal seeks to reduce borrowing costs for the economy at large. The Commission estimates that the potential overall annual savings for EU borrowers would be between EUR 1.5 billion and EUR 1.9 billion.

Cross-border distribution of investment funds

Investment funds are an important tool to channel private savings into the economy and increase funding possibilities for companies. The EU investment funds market amounts to a total of EUR 14.3 trillion. However, this market has not yet achieved its full potential. Just over a third (37%) of UCITS funds and around 3% of alternative investment funds (AIFs) are registered for sale in more than three Member States. This is also due to regulatory barriers that currently hinder the cross-border distribution of investment funds.

Today’s proposal aims to remove these barriers for all kinds of investment funds making cross-border distribution simpler, quicker and cheaper. Increased competition will give investors more choice and better value, while safeguarding a high level of investor protection.

Law applicable to cross-border transactions in claims and securities * [updated on 14/03/2018 at 17:50]

The assignment of a claim refers to a situation where a creditor transfers the right to claim a debt to another person. This system is used by companies to obtain liquidity and access credit. At the moment, there is no legal certainty as to which national law applies when determining who owns a claim after it has been assigned in a cross-border case. The new rules proposed today clarify according to which law such disputes are resolved: as a general rule, the law of the country where assignors have their habitual residence would apply, regardless of which Member State’s courts or authorities examine the case. This proposal will promote cross-border investment, access to cheaper credit and prevent systemic risks.

The Commission has also adopted a Communication to clarify which country’s law applies when determining who owns a security in a cross-border transaction. Enhanced legal certainty will promote cross-border investment, access to cheaper credit and market integration.

The Mid-Term Review of the Capital Markets Union Action Plan reported in June 2017 on the progress made so far in bringing the Action Plan forward and set the timeline for new action. In this context the Commission announced that it would publish in Q1 2018 several legislative proposals, notably in the areas of investment funds, covered bonds and dispute resolution. Today’s package contains these proposals.

Background

The European Commission launched its Action Plan for a Capital Markets Union to help build a true single market for capital across the EU in 2015. The Action Plan is a key pillar of the Investment Plan for Europe, the so-called “Juncker Plan”. A single capital market will be beneficial for all EU Member States, but will particularly strengthen the Economic and Monetary Union, by fostering cross-border private risk-sharing in the euro area. This is crucial to absorb systemic economic shocks.

It is built around the following key principles:

  • Deepening financial integration and increasing competition
  • Creating more opportunities for investor.
  • Connecting finance to the real economy by fostering non-bank funding sources
  • Ensuring a stronger and more resilient financial system”