We all know the actual definition of the word investment. It is nothing but putting your money in some product to grow. However, in this post, I will try to explain 5 unknowing meanings of investment.
What is the difference between Savings and Investment?
Let us first understand the basic difference between savings and investment. Many of us will not find any difference in it. Let us understand the difference.
Savings means just keeping aside part of your income whereas investment means putting that money in any financial products to grow that money. For example, keeping money in your savings account is called as savings. However, putting the money in any product like RD, Fixed Deposits (FDs), Mutual Funds or Bonds to earn additional income from that money is called investment.
We Indians, are great savers but poor investors. By doing so, we diminish the value of our own money.
This is the basic definition of investment which many of us know already. However, there some other definitions of investments, which you must know. These 5 unknown meanings of investment.
5 Unknown meanings of Investment
1. Investing requires CALM and composed MIND
Yes, investing requires calm and composed mind than looking at your portfolio frequently or taking actions on some good or bad news. We often look at our investment return whenever there is a fall in the market. Unable to understand the volatility nature of equity market, we often commit mistakes. Mistakes may be like withdrawing the accumulated corpus or switching to some other product or fund.
It is easy to say but hard to practice. But this is how the wealth can be created. We humans are typically loss averse in nature. This means we forget the returns which we gained but repent more about loss. Also, the meaning of loss will be real only when you liquidate or come out of the investment.
Refer this Wikipedia article on human behavior of Loss Aversion.
To be a calm and composed investor, you must avoid the news based items related to investment. Review your investments once in a year is enough. Never try to follow or compare your friend portfolio or products he/she investing.
2. Investing is the process of randomness but not precise
Let us take an example of retirement planning. You assume many things to arrive at retirement corpus and those are as below.
Your tentative retirement age, inflation of your expenses, life expectancy, return on investment, lifestyle change during retirement, taxation during retirement and many more.
Look at these numbers. You notice that all are ASSUMPTIONS. Nothing is precise. Then how to achieve your financial goals?
None can say that his financial plan or investment is PRECISE or perfect. It is based on some assumptions which may change over a period of time. Hence, never be in a wrong belief that by buying a product or investing in a product means you are investing in the BEST product available in a market.
You have to be ready for many changes like a product you are investing today may be a worst product after few years. Hence, investing is the process of adjusting to changes rather than assume to be PRECISE.
Especially if you are investing in a product which is volatile in nature, then you must be ready for that randomness than precise. None can predict so surely about future volatility.
3. Investing is SIMPLE but not rocket science
Yes, investing is simple. But these so-called finance professionals made it complicated that you MUST rely on them to invest. Keeping it simple will make sure that you understand of what you do.
For example, keeping one savings account, one credit card (if you feel really a NEED), one term insurance, one health insurance or 2-3 equity mutual funds and 1-2 debt products to manage your investment. But look at many and see how they complicated it.
Spending 1-2 hours a week is enough to manage your own money. Investment is nothing but common sense rather than anything.
4. Investment is boring and lazy exercise
Investment does not mean that you must look at your portfolio or product performance on daily or hourly basis. But it requires boring and laziness. However, see the data of equity mutual fund investors in India. Only around 40% equity investors hold more than 2 years. Rest 60% will either switch or withdraw money within 2 years. Strange realities but these are facts published by AMFI data.
There are wonderful benefits of being boring and lazy! You hardly look for peer comparison. You just ignore news based actions with your investments. Like if the market falls today, then you never bother but keep on investing systematically.
Therefore, never track news items and act. Instead, always follow the basic principles of investments.
5. Investment does not require intellectual super human brain
Your IQ or professional expertise in your field is nothing to do with wealth creation. All it requires is the life of living within your reach. Understanding the basics of creating wealth. Investing in right product to reach your financial goals. Common sense prevails over your IQ or professional expertise in your field.
Theories, thesis, a super computer brain will not create wealth. But a simple logics of what I explained above are enough.
Refer this post of Forbes, where they say “Research carried out by the Carnegie Institute of Technology shows that 85 percent of your financial success is due to skills in “human engineering,” your personality and ability to communicate, negotiate, and lead. Shockingly, only 15 percent is due to technical knowledge. Additionally, Nobel Prize winning Israeli-American psychologist, Daniel Kahneman, found that people would rather do business with a person they like and trust rather than someone they don’t, even if the likable person is offering a lower quality product or service at a higher price.”
Any other points to add? Agree or disagree? Use comment section for sharing your views.
29 Responses
Dear Mr.Basu,
1) Is term insurance a necessity in today’s life?
2) If yes, which is the best one you suggest? I’m a working women of 46 years old
3) Can you please tell me which are the best performing equity and dividend funds?
Thanks in advance
Rajee-1) Yes, if you have financial dependents.
2) Refer my post “Top 5 Best Online Term Insurance Plans in India in 2017“.
3) Refer my post “Top 10 Best SIP Mutual Funds to invest in India in 2017“.
Dear Mr.Basu,
i)I have a Wealth builder -II plan with ICICI, with a premium of Rs. 101000 yearly. I have paid 4 premiums out of 5.
Please suggest me whether i should withdraw it after completion of 6 years (bank people told i can do so) or continue till tenth year.
ii) I have another plan of birla sunlife’s income assured plan. Now i feel i had taken a bad decision. premium term is 10 years with a premium of 98000 rs. yearly. I have paid three instalments.Should i continue paying 98000 rs. for 7 more years now, or should i stop and wait for ten years?
Please suggest.
Rajee-1) Better to close after 6th year.
2) Better to come out once the surrender charges are NIL.
Thank you very much.
Dear Basu ,
I have invested HDFC Life Click 2 Invest with premium 5000 per month for 5 years ( 60 months) . Can you please help whether this is right decision or not because I have did myself with my own assumptions .
After all your blog review , I felt like to check with you once whether this is right decision or not . Hoping the right answer and suggest to go further in future invesments .
Kranthi-In my view it is better to avoid ULIPs. However, you already invested. Therefore stay and look for performance and then take a call.
Hello Basu ,
Please explain in detail of ULIP. What is minimal term to stop this ULIP ? Is there any risk by investing in ULIP ?? If yes , please elaborate .
Thanks,
Kranthi-For ULIPs it is 5 years is the minimum period. Risks in ULIPs are-Low Liquidity, Higher expenses or no historical track record of the product or fund manager.
Hello Basu ,
What would you really suggest to me in this case now ?? What do mean to take a call ??
Dear Basu,
I kept 2lakhs in FD with 9-10% interest in senior citizen fd in my father’s name. I want to invest in something which gives profit then current FD %. The current fd is per annum
Thanks in advance
Ranga
Ranga-Without knowing much about your financial goals, it is hard for me to guide you.
Dear Basu.
I am expecting our baby in may 2017. And a RD sum of 3lakh will be matured in same month. i want to invest wisely for my baby’s future. Please advice me
Sujandasgupta-I replied to your email.
Dear Basu Ji, thanks for another informative article. I want to start SIP in mutual funds 10000/- per month for 15 years for wealth creation. I can take high risk. for better return. I’ve shortlisted 5 funds, one from each category.
a) BSL Frontline Equity Fund 2000/-
b) ICICI Prudential Value Discovery Fund 2000/-
c) Franklin India Smaller Companies Fund 2000/-
d) DSP-BR Micro Cap Fund 2000/-
e) BSL Tax Relief ’96 Fund 2000/-
1. Do you recommend any change to this portfolio?
2. Since I’m investing for long term, I’ve not included Debt funds, is this correct logic?
3. If I increase the SIP amount to 15000/- any portfolio change is required?
Pradip-Why DSPBR and Franklin funds? Do you feel high risk means ready to loose your own principal?
Because they are from SmallCap & Midcap segment. And for long term (15 yr), small & midcap gives better returns over Large cap. Am I wrong?
If so, can you please help me create my portfolio for Term- 15 yrs, Risk- high, Return- High, SIP- 10000/- pm? How much should I invest in each funds then?
And for SIP 15000/- how it would be?
Pradip-Why I pointed these two funds is, they both still considered as small cap funds (valueresearchonline). Check their portfolio overlap. It shows around 16%. Franklin may be currently bit tilted towards medium. Hence, retaining one is enough. One large cap, one mid cap and one small cap fund enough, whether your investment is Rs.10,000 or Rs.15,000 or Rs.1 lakh a month.
Thanks for the clarification! I’ve rearranged the portfolio now.
a) BSL Frontline Equity Fund = Large Cap = 3000/-
b) HDFC Midcap Oppr. Fund = Mid Cap = 3000/-
c) DSP-BR Micro Cap Fund = Small Cap = 2000/-
d) BSL Tax Relief ’96 Fund = ELSS = 2000/-
I’ve three questions-
1. Is my above choice of funds and money allocation is correct? Or you prefer any other combination (of funds and money allocation) ? I’ve 10k per month.
2. Do I need to consider Diversified Equity Funds and Balanced Funds for long term?
3. ELSS comes in which category? Large/Mid/Small Cap?
Pradip-1) Correct. 2) Do you now don’t have DIVERSIFIED portfolio? What do you mean by Diversified Equity Fund? Balanced Fund required when you are reluctant to add separate debt portfolio.
3) ELSS will not comes under any such category. You have to identify the portfolio of such funds to understand where they more inclined.
Dear Basu Ji, thanks for the explanation.
1) Should I include Diversified Equity Fund (Multi-Cap Fund)?
2) Holding one each of Midcap & SmallCap funds better or having one Multi-cap fund is better of same amount?
3) Would you suggest to reduce 1000/- from SIP of Large cap fund and add that 1000/- to the Small Cap fund ? Keeping overall portfolio amount same.
Pradip-1) The problem with mutli cap is hard to track which side they tilt as they have mandate to move any market cap.
2) I prefer holding one small cap and mid cap.
3) Not required.
Thanks Sir for your answer!
Hi Bash irrelevant to this post I need your feedback regarding term plan insurance. I have bought LICs term plan previous year of SA 80L with premium around Rs 16K. Now I am finding it little costlier than other companies plan. I went through Max Life’s term plan, same is available at ~ 10.5K and also its claim settlement ratio improved drastically since last 5 yr to 96.xx%. I am currently of 28 and single. I am in confusion should I continue with LIC or with other companies plans ? Other than LIC whether other private companies are also reliable?? Please reply.
Pankaj-Continue with LIC. What if after 2-3 years if MaxLife claim settlement ratio drop then again you look for another insurer??
Thanks. I was confused what should I look cheap rate, CSR or brand in selecting a cos for term plan. I selected LIC due to its reputation and name in the market but at the same time it is costlier than other cos plan.
Pankaj-To be frank CSR and brand both does not matter. Yes, LIC is costliest. I too personally avoided because of the price and the service issue with LIC.
Dear Basavaraj,
Greetings!
Many thanks for financial literacy which you are providing through your blogs.
I am a regular follower of your blogs. Currently i am doing an E-MBA and for project work we have choosen personal finance as an area to do some reasearch. You mentioned above in the article that “We Indians, are great savers but poor investors.” Around this line me and my team of 3 have a few specfic set of questionare which we would like to discuss with you and get some insights for our project. We would like to know your opinon and experience on the topic.
Kindly let me know if you would help us in this regard. Thanks.
Thanks and Best Regards,
Raghavendra P
Raghavendra-We already communicated through email.