3. What is Investing?
Investing requires you to put your savings in an asset for the purpose of fulfilling your goals and achieving your dreams. Investment goals can include buying your dream house, paying for your child’s education, funding an expensive treatment, going on a vacation, starting your own business or planning for your retirement.
You can invest your money in assets like land, property, savings account in a bank, jewelry, artwork, gold or other precious metals, commodities, mutual funds, stocks or government bonds.
You must be wondering how giving away your money or investing it can help you in achieving your goals? Well, investments can fulfill your dreams in two ways:
- Provide return over your invested money in the form of interest, dividend or rent. When you invest your money in an asset, it tends to provide you some form of additional income or return.
Suppose you lend Rs. 500 to a friend for 2 months. Since you won’t be able to use your money yourself for 2 months, your friend promises you to return Rs. 700 rather than the exact Rs.500. The extra Rs. 200 earned by lending your extra cash is the ‘income earned’ over invested money.
- Investments also tend to increase or decrease in value over time. If you decide to sell the asset you invested in rather than holding onto it, that asset can generate more money than you previously put in to buy that asset. Let’s look at a simple example:
Ali purchased a shop for Rs. 200,000 5 years ago. Today, he decides to sell it and goes to an Estate agent. Fortunately, after a week, the agent informs him that the market value of this property has increased and a party is willing to pay Rs. 500,000 for this shop. In that case, if Ali decides to sell it, he will make a profit of Rs. 300,000 or a return of 150%. In another scenario, the agent may inform Ali that the value of this property is not more than Rs. 100,000. In that case, Ali will make a loss of at least Rs. 100,000. Ali can decide to either sell it or keep it and hope that it’s value may increase in the future. The bottom line is to keep in mind that assets can both increase and decrease in value. Thus, selling these assets can generate either a profit or a loss depending on the condition of the market.