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Investment

Finxpert - Investment

Growing your money without magic

Have you seen a magician put Rs. 10 into your pocket and pull out a Rs. 100 note? Don’t you wish that your money could grow like that too - just slip a Rs. 500 currency note between the pages of a book and hope it grows to Rs. 5000 someday. You must have definitely heard your father or mother say something on these lines! Yeah, that's just wishful thinking.

Investing is a way for you to grow the money you have by putting it in different sources that pay you interest.

Remember how in the previous chapter, we spoke about putting your money in a bank and earning interest on it? That’s one way of investing. There are other ways to invest your money which we will cover in the later part of this chapter.

But what if you were told there was a way to grow your money over time. Doesn't that sound intriguing?

Although it is unlikely that your money will multiply in a notebook or a piggy bank, there is a way to make your money grow with time. Wondering how? Well, by INVESTING!

You may have heard conversations about investments at your own dinner table. Your parents may have spoken about investing in the stock market or buying property.

Two things can happen when you invest money:

  • Either you lend your money to someone, who then pays you interest. Which means, now you not only get back the money you paid but also the interest
  • Or, you put your money in an asset, which is a valuable thing in the financial world, and its value goes up, thereby increasing the money you invested.

Saving protects your money; Investing grows your money

Savings safeguard your money. For instance, if you put away Rs. 1000 every month in a safe at home, you will have savings worth Rs. 12,000 at the end of the year. Instead of spending the money you had in hand, you decided to put it away for later.

Investing is making that money grow. Sitting in your safe at home, the money may stay intact but it won’t multiply. Put that same Rs. 1000 in a bank for 12 months and at an interest rate of 6%, it will be Rs. 12,395.

Why should you invest?

Hmm…more money for starters.

  • You get financial independence. You don’t have to go running back to your parents for everything. You can make your own money.
  • You will get a head start on how to make money work for you. In the long-term, this will help you generate wealth for your future needs.
  • It’ll help you achieve your financial goals faster. Like, you can get your hands on that new gaming console sooner or go on that trip you want with your friends or use it for anything else.

How did we arrive at that? Recall all that you learnt about Interest.

For the first month, you would earn a 6% interest for a month on Rs. 1000, that would amount to Rs. 5 (Rs. 1000 x 6/100 x 1/12). Next month, you would put in another Rs. 1000, so your principal becomes Rs. 2005. So, you would have earned Rs. 20.05 interest (Rs. 2005 x 6/100 x 2/12) in the second month. You would have Rs. 2020.05 at the end of two months and so it goes on for the next 10 months.

Had you put the money in a box at home, you would have lost out on the interest of Rs. 395. By investing your money rather than simply saving, you can have more money! How cool is that?

Who can invest?

There’s one hitch with investing as a teen though. Minors i.e. anyone below the age of 18, can’t make investments without adult supervision.

You will need a guardian’s approval to open a bank account in your name or a demat account for investing in shares.

Ask your parents for help. They’ll be more than thrilled to support your financial dreams.

Some places where you can invest

  • Bank deposits: Putting your money in a bank savings account may earn you a small interest, but if you put it in a fixed deposit or a recurring deposit, you can earn more. In a Fixed Deposit you put a lump sum money in the bank for a specific period of time and earn interest on it. A recurring deposit is where you put a money in the account every month and earn interest on it.
  • Silver or Gold: Buying silver or gold is another way to invest your money. Here, you don’t earn an interest, but the value of silver or gold you buy may increase with time.
  • Stocks: Buying shares of a company is yet another way to make your money grow.

To invest in bank deposits, stocks and mutual funds, you will need the help of a guardian.

How do you make returns?

You can make returns on your investments in two ways:

  • Earn interest on your investment, like in bank deposits
  • Have the value of your investment appreciate, as in stocks, mutual funds, silver and gold
  • Mutual funds: Mutual funds are financial instruments where someone else does the investing on your behalf. You give money to a financial manager who then invests in stocks of different companies that are listed on the stock exchanges or in other financial instruments such as bonds. This can save you the trouble of monitoring how the market works.
  • Business: Another way to invest is to put money in a business. Say your friend wants to start a home-baking company and wants to buy an oven for it. He doesn’t have enough funds. You can offer to buy the oven for him as an investment and in turn, get a share of the profits he makes on selling his baked goods. Instead of earning an interest, you will get a share of the profit.

Action Points

  1. Investments are a way to make your money work for you. It’s always better to invest your money rather than simply save.
  2. Always do your research before investing. If you don’t understand how the stock market works or how mutual funds function, ask an adult to explain it to you.
  3. Get your parents in on your plan so they can help you with any paperwork needed to open accounts.
  4. Start with a small amount so you know you are on the right path and then scale up as you learn more.