In the backdrop of ongoing pandemic, which among other things has triggered sweeping changes in the financial landscape, I have been discussing the importance of honing the money management skills in some of my previous columns at regular intervals.
It's important to understand that 'savings' and 'investment' are two different concepts. Let me explain. In the given culture coupled with our financial landscape, almost every one of us at our own level get into money management activity every month. We distribute our monthly income which we earn either in the form of salary or business income, to fund our routine expenses like food, clothing, utility bills etc. After paying off expenses from the income, a portion of income is left and this is what we normally call, savings. The saved amount is always a reliable financial cushion for future needs. Thus, the more we save, the better.
Today, when money is fast losing value and prices of goods & services continually goes up, creating wealth out of the money saved makes sense. It is worth mentioning that taking route of a savings bank account is simply ‘savings’ and as good as keeping your money idle. It does earn you interest, but that is too low to help you to keep pace with the rising prices.
So, in contemporary times, saving alone is not enough. It's here 'investment' comes into play. For example, you save Rs. 5000 every month after making expenses towards your needs. If you keep this saved amount idle, over a period of time (say one year) you would find that the saved amount would not be enough to buy you enough things as it would have facilitated you a year ago. This means money loses value over a period of time, while as prices of goods and services soar much faster than the value of money. This kind of mismatch necessitates that you let your money talk and multiply preferably at a pace much faster than inflation. So, if you want to negotiate cost of living, which goes up every year, then investing your saved money into profitable investment instruments is the most appropriate way to build a strong financial cushion for future needs. Precisely, it's the investment which can lend you the help to create wealth.
Here lies the opportunity for you to invest your money in equities (shares) and bonds. While investing your savings into these financial instruments, you need to work out three basic things: safety of the money invested, to get the money back as and when required (liquidity) and highest return on their investment. In this market, returns on investment are high, but so are the risks associated with your investment. However, you can mitigate these risks by investing in variety of stocks. This means, distribute your money among a variety of stocks/shares that may rise and fall at different times. This way you will insulate yourself against those big "hits" that your entire investment portfolio could suffer when one class of stock is hit hard.
Meanwhile, I have been consistently advocating that parents should arm their children with the techniques to deal with the financial matters. Times have changed, exposure has increased and today in this growing age of consumerism our children are primary targets for their money power earlier than ever before. This means parents have an added responsibility to help their children to be more responsible with the money and teach them investment for wealth creation. The financial lessons should begin start by inculcating saving habit in your children and guide them to various financial schemes.
In today’s scenario, till the age of 20, a child only spends money and after that, he starts earning. But he lacks the skill of the most important aspect of managing money. Today’s children know about ATM, credit cards and debit cards. They leave their home for studies much earlier than their parents ever used. They even start earning much earlier through internships and summer jobs, but they still remain ignorant about the money management. There is always the temptation to go in for better living today over saving for better tomorrow.
What is the scope of investment for children in share market?
I have observed that many young minds still in schools and colleges are showing temptation to enter in to the stock market, as they have been hearing success stories through various sources about investors creating wealth.
Since equity investing is a scientific process and not about rolling dice, it calls for our young minds to have a better understanding of market functioning. There is a notion that entering into a stock market needs lot of money. This is not a fact. There is an option available in the market where you can make a humble beginning. Similar to recurring deposit scheme of banks, an investor can use systematic investment plan option to invest in equities (shares) and can stay invested over a long term to earn decent profits. This is the option, which parents can also use for their children to mark their entry into the stock market.
What is this systematic investment plan (SIP)?
Basically, systematic investment plan (SIP) is a facility offered by mutual fund companies paving way for an investor to access equities market. A person with regular inflow of income, particularly salaried class, can use this route to access the share market. The best part is that when you enroll for a SIP, you essentially entrust your money to a professional whose full-time job is to manage people’s money, for which he gets paid. This ensures that your money is looked after all the time. You neither need to track the markets on a daily basis, nor do you need to take calls on individual stocks as you have opted for a professional fund manager.
Some major benefits of Investing through SIP include rupee cost averaging, regularity of investments, power of compounding etc.
Rupee cost averaging simply does that by automatically buying more when the price is low and purchasing less when the price is high.
It instills discipline in the investor and helps him stay focused, investing regularly for the long term.
As far as power of compounding is concerned, it is for investments for longer periods of time - small items compounded regularly over longer periods yield big difference in the final results.
So, you as a parent can use SIP as a vehicle for your children to grow financially. Developing early and positive financial skills in saving and investing can add grace to the prosperity of your children. However, I would suggest, always consult a financial consultant before entering into the share market.
Is profit guaranteed in SIP?
There are certain things which you as an investor need to keep in mind. Investment in SIP would yield positive results in a bull or rising market as every new purchase is ultimately valued at an even higher price. As experts put it, market in median range, corrects downwards and then moves up suits SIP to perform well. This is because the investor will get the assistance of the intermediate correction to "lower his average cost".
But do remember, there are also certain conditions like falling market, market in median range, moves upwards and then moves down, under which the SIP would not yield positive results.