1. The Need to Invest

1.1 – Why should I invest?

Before we address the above question, let us understand what would happen if one chooses not to invest. Assume you earn Rs.50,000/- per month, and you spend Rs.30,000/- towards your day-to-day living; this can include expenses like housing, food, transport, shopping, medical, etc. The balance of Rs.20,000/- is your monthly surplus.

For the sake of simplicity, let us ignore the tax effect in this discussion.

To drive the point across, let us make a few simple assumptions –

1. The employer is kind enough to give you a 10% salary hike every year.
2. The cost of living is likely to go up by 8% yearly.
3. You are 30 years old and plan to retire at 50, this translates to 20 working years.
4. You don’t intend to work after you retire.
5. Your expenses are fixed, and you don’t foresee any other expenses.
6. The balance cash of Rs.20,000/- per month is retained as hard cash.

Going by these assumptions, here is what the cash balance will look like in 20 years.

Years	Yearly Income	Yearly Expense	Cash Retained
1	600,000	360,000	240,000
2	660,000	388,800	271,200
3	726,000	419,904	306,096
4	798,600	453,496	345,104
5	878,460	489,776	388,684
6	966,306	528,958	437,348
7	1,062,937	571,275	491,662
8	1,169,230	616,977	552,254
9	1,286,153	666,335	619,818
10	1,414,769	719,642	695,127
11	1,556,245	777,213	779,032
12	1,711,870	839,390	872,480
13	1,883,057	906,541	976,516
14	2,071,363	979,065	1,092,298
15	2,278,499	1,057,390	1,221,109
16	2,506,349	1,141,981	1,364,368
17	2,756,984	1,233,339	1,523,644
18	3,032,682	1,332,006	1,700,676
19	3,335,950	1,438,567	1,897,383
20	3,669,545	1,553,652	2,115,893
Total Income			17,890,693

If one were to analyze these numbers, a few things become obvious –

1. After 20 years of hard work, you have accumulated Rs.1.7Crs.
2. Since your expenses are fixed, your lifestyle has not changed over the years.
3. After retirement, assuming 8% inflation, the corpus will last only ~8 years post-retirement.

Now let’s consider the same scenario with investments yielding 12% annually. The result will be significantly different.

Years	Yearly Income	Yearly Expense	Cash Retained	Retained Cash Invested @12%
1	600,000	360,000	240,000	2,067,063
2	660,000	388,800	271,200	2,085,519
3	726,000	419,904	306,096	2,101,668
20	3,669,545	1,553,652	2,115,893	2,115,893
Total cash after 20 years				4,26,95,771

Clearly, investing generates 2.4x more wealth over the same period.

So why invest?

1. Fight Inflation – Cope with rising cost of living
2. Create Wealth – Build a retirement corpus or save for goals
3. Better Life – Fulfill financial aspirations

 

1.2 – Where to invest?

Once convinced about investing, the next step is selecting an appropriate asset class based on your risk appetite:

1. Fixed Income Instruments
2. Equity
3. Real Estate
4. Commodities (precious metals)

Fixed Income Instruments

These include FDs, bonds, and government securities. Low risk, but moderate returns (5%–9%).

Equity

Buying company stocks. Higher risk, but historically 12%–15% CAGR over long periods.

Real Estate

Buying land or buildings. Returns vary, rental yields are 2–3%. Complex process and high capital requirement.

Commodity – Bullion

Gold & silver. Long-term CAGR of 5–8%. Can invest via jewelry, ETFs, or Sovereign Gold Bonds (SGBs).

Example Corpus after 20 years (with investment):

1. Fixed income @ 9% – Rs.3.3 Cr
2. Equity @ 15% – Rs.5.4 Cr
3. Bullion @ 8% – Rs.3.09 Cr

Note: Cryptocurrencies aren’t included due to lack of regulation and investor protection.

Tip: Diversify! Use an asset allocation strategy suited to your age, goals, and risk tolerance. More on this in later modules.