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What is the Purpose of Investing?
Why should you invest?
The benefits of investment are many and varied. To understand why investment is important, it is necessary to know the difference that investing makes to your finances in the long run. Let’s consider an example to look into this.
Meet Amit. He’s a 30-year old who saves around Rs. 20,000 every month. Irrespective of any hikes in his monthly income and any changes in his expenditure, he diligently saves up the same amount each month.
Now, consider these two scenarios.
- Amit saves up Rs. 20,000 per month, but he doesn’t invest the money.
- So, each year, he saves up Rs. 2,40,000.
- He plans to retire when he’s 50 years old.
- So, at the end of 20 years, when he’s 50, Amit will have Rs. 48,00,000 saved up.
Let’s now consider another scenario, where Amit invests his monthly savings instead of just keeping them idle.
- He invests Rs. 20,000 per month in a scheme that offers a rate of return of 12%.
- Again, he plans to retire when he’s 50 years old.
- But this time, at the end of 20 years, his money will grow to Rs. 1,99,82,958.
That’s almost Rs. 2 crores!
You see, Amit gained around Rs. 1.5 crores (Rs. 1,51,82,958 to be exact) by simply investing the amount that he saved each month.
Purpose of investment
There’s so much talk of investing and investment options these days. But have you ever stopped to wonder about one fundamental question - what is the purpose of investment? The answer is quite simple, really. Investments need to help you achieve your life goals. This includes both short-term and long-term goals.
And they vary from one person to another. One person may want to save up to buy their first house, another person may want to build a retirement fund, while yet another investor may want to financially secure their family. Since goals are so personal and unique, there’s no one-size-fits all investment plan. So, you need to figure out what the purpose of investment is for you, and then create an investment plan accordingly.
So, what’s the point of investing?
Notice how in the example above, investing money regularly brings about a huge difference in how it grows? That brings us to the main need to invest. The fundamental reason to invest your money is to create wealth.
By creating wealth, you can secure your financial situation and meet your short-term and long-term goals. And investing your money helps you do just that.
For instance, by merely saving your money regularly, you could maybe get the car of your dreams in another 10 years. But when you invest your money in the right instruments, your money grows exponentially, so you can realise your goals faster.
And without creating wealth through investments, it may not be possible for you to sustain or upgrade your current lifestyle.
While creating wealth may be the primary purpose of investing your money, it is far from the only reason to do so. In fact, there are many other benefits of investments. Let’s take a quick look at some of the other reasons why you should invest your money.
To meet your life goals
You may have many major and minor goals in life, such as starting your own line of business, buying the car of your dreams, or constructing your dream house. Merely saving up a part of your income may not be enough to meet these targets. Add to that the ever-increasing costs - and paying for your child’s education or wedding a few years down the line may even be impossible with merely your savings.
Here’s where investments come in handy. You’ve seen how it may be possible to earn up to Rs. 2 crores with just a monthly investment of Rs. 20,000. That could be adequate to meet many life goals. And the cherry on the top is that you can meet your objectives without incurring any debts whatsoever!
To save for retirement
There’s no point in working hard throughout your life if you cannot have a financially secure life post-retirement, isn’t it? Regularly investing your savings in a secure, retirement-friendly scheme can help protect you and your spouse from having to live through such a situation.
Like Amit, with the right investments, your investment corpus can grow significantly by the time you retire. So, you could live a secure and debt-free life after you’ve retired. The passive income that you earn from your investments can keep you financially independent and free to pursue your dreams in your golden years.
To be prepared for emergencies
The thing with emergency situations is that you never know when they’ll crop up. But it’s always best to be prepared. As the noted novelist Franz Kafka once said, “Better to have and not need, than to need and not have.” Going by this, it’s advisable to have a set of investments that function as contingency funds, so you can rely on them in case of any unforeseen financial emergencies.
Having adequate emergency funds as backup gives you the confidence to take on any curveball that life might throw your way. And when you invest your savings, you ensure that you’re financially prepared to deal with both medical and non-medical emergencies. This may not be possible when you’re merely saving up.
To deal with the growing costs of living
You’re perhaps already aware that the costs of living are constantly on an uptrend, irrespective of where you live. The cost of everyday requirements, right from groceries to medicines, appear to constantly be on the rise.
As inflation continues to rise, the value of money drops, the cost of goods rises simultaneously and your purchasing power decreases. In such a situation, with just your savings backing you up, you might find it tough to sustain your current lifestyle as the years go by.
However, by investing your money smartly in instruments like equity, you can enjoy a rate of return that may be significantly higher than the prevailing rates of inflation. This allows you to deal with the ever-growing costs of living. What’s more, it can even give you ample opportunities to upgrade your lifestyle as well!
To reduce the burden of taxes
You’ll agree with us when we say that taxes can eat into your savings and your earnings. But what if we told you that by simply investing your money in the right instruments, you can lower your tax burden?
The Income Tax Act, 1961, offers a lot of scope for tax planning. For instance, section 80C of the Act, which is one of the most widely used provisions, permits you to claim the amount invested in certain investments as deductions from your total taxable income. This can significantly lower your tax liability.
Additionally, several investment options such as Equity Linked Savings Scheme (ELSS), Public Provident Fund (PPF) and Unit Linked Insurance Plans (ULIPs) give you a variety of tax exemptions. So, that’s another reason to invest your money.
Now that you know why investment is important, it’s only logical that we move on to the next big question - When should you invest? To discover the answer, head to the next chapter.
A quick recap
- The primary purpose of investing is to create wealth.
- Investments allow you to meet your short-term and long-term goals.
- They also help you lead a comfortable life post-retirement.
- Investing ensures that you’re prepared for unforeseen emergencies.
- Investments like equity can protect your money against the effects of inflation.
- Another great reason to invest is to reduce your tax burden.