Why Indians needs to invest differently?

image source :- google blog

 

Indian are very conservative when it's comes to their investment plan, people choose to invest in Fixed deposit, plot of land, Gold in form of jewellery, and often keep their money in savings account.

Most people are not aware about better financial products like mutual fund, sovereign gold bond, debt product like Treasury bill and commercial bond. Today, we will explain why Indian needs to invest differently to get more return and diversification on their investment.

 

1) Portfolio Diversification:-

"Don't put all your eggs in one basket"

Diversification means investment in different financial products and not in just one financial product.

Diversification is important for your investment a very simple reason for this is to protect your investment against any down fall or destruction of the investment.

For Example:-

 If you have invested 20% of your portfolio in land then in a land dispute then you could lose your plot of land, which is 20% of your portfolio but if you had invested all of your money in land then you could lose 100% of your portfolio.

HENCE, DIVERSIFICATION PROTECT YOUR INVESTMENT.

 

2) Compounding Effect:-

The power of compounding works by growing your wealth exponentially. It adds the profit earned back to the principal amount and then reinvests the entire sum to accelerate the profit earning process.

The traditional Indian investment product may not provide Compounding effect on investments.

Modern investment products such as stock market and mutual funds provides compounding effect on investment which helps in wealth creation of the investor.

For Example:-

If you invest in share of Infosys which gave

Compound Annual Growth Rate (CAGR) of 30%. This means that if you initially invested 1000 rupees then after year you would get 1300 then in the second year you would get 1300 + 30% = 1690 so on and so forth. After 10 year you would get 13785.85.

Longer you stay invested more returns you will get.

 

3) Liquidity of Investment:-

Liquidity describes the degree to which an asset can be quickly bought or sold in the market at a price reflecting its intrinsic value.

Traditional investment such plot of land, (which can't be sold easily in India) gold (which is seen as last emergency source of fund in India) and fixed deposit (which have penalty charges if withdrawn earlier than term of FD) has little to no liquidity and also they can't be sold in a fractions.

Modern investment such as stock market (where a share in smallest portion can be sold immediately) and mutual funds (which can be sold according to there NAV) have a higher degree of liquidity compared to the traditional investment.

For Example:-

If you have a plot of land and if you need a money immediately by selling this land, since land is not a liquid asset you may not be able to sell this land at market price, you will have to get a discount to buyer for immediate payment of money and of course there are other problems in land sale.

If you have share you can sell that immediately at market price and get money immediately.

 

Thank you :)

Happy Investing

 
References
What is Diversification by investopedia :-  https://www.investopedia.com/terms/d/diversification.asp
The Effect of Compounding by amgfunds :- https://www.amgfunds.com/research_and_insights/investment_essentials/practical/the-effect-of-compounding.html#
 
 
 

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