I am sure you would have come across this question many a times. How would one answer it?

If I draw an analogy, I would cite the example of your very own yearly appraisal. How many of us would be unhappy if the annual increment was less than 10%. Haven’t we got used to even higher increment rates? Anything lesser than 10% would be very disappointing, isn’t it?

Why would it be disappointing? We would cite inflation, higher costs of rent, EMIs, school fees, groceries, daily expenses, discretionary spends etc…

If you think that all your hard work deserves a better increment, why should this not apply to your own investments / savings? After all aren’t we saving / investing for our future goals, wouldn’t these also not experience the same inflationary pressure as we do in our day to day lives.

Hence, only if you can beat inflation can you stay ahead of your monthly expenses. Same applies to your investments.

Don’t you think it’s fair to expect your investments to generate same or better returns than your annual increment rates?

That is why you should always ask yourself, is my Money working as hard as me??

This brings me to the next logical step – defining Savings & Investments. This will help answer the above question.

Savings

Typically means as we learnt when we were kids, money kept aside for a rainy day. Hence this amount would be liquid cash or nearly liquid cash kept aside to meet any eventuality – job loss, medical emergency, short term fund requirement, loan request from friend / family etc.. Typical yardstick is 6-8 months of total monthly expenses must be kept aside in liquid / near liquid form. Cash on hand, cash at bank, FDs, RDs, Liquid Mutual Funds is where one parks this fund.

Since this money is kept aside for short term horizon the returns on this would vary from 0% (cash at home) to a max of 6-8% pre – tax. This would not beat inflation and hence can never be used as a vehicle for achieving your long term goals.

Investments

Investments is channeling funds into instruments that provide superior returns over the long term and beat inflation by a wide margin. This is what helps you meet your long term goals.

Equities, Equity oriented Mutual Funds, Investment in Land / apartments, Gold, Precious metals, art, PPF.

I am a big fan of Equities Mutual Funds (SIP in particular). They are the easiest ways to grow your wealth. Most of the top MF schemes have given over 15% annualized returns over 7-10 year periods. You can start a SIP for as low as Rs.500/-.

One top Equity Linked Savings Scheme has returned 17% annually over last 10 years. If someone has invested Rs.10000/- a month for last 10 years, the investment of Rs.12 lacs would be valued at Rs.32 lacs at this point of time. That is earnings of Rs.20 lacs over investment of Rs. 12 lacs. Additionally, since this is an ELSS fund it also gives one a tax benefit. That is creating wealth.

Now this is what I call making your money work as hard as you!!

Property prices have skyrocketed over last 10 years and have given 20% returns but the question is can it go up any further. Same applies to Gold which in fact has corrected steeply. In current scheme of things, these 2 aren’t a great option.

The best part of Equity MF / equities are that they offer great liquidity and profits are tax free after investing for a year. i.e. selling with a profit after a year of investing attracts zero tax liability irrespective of the profits.

Please be aware – LIFE INSURANCE is not an Investment!!

Most Insurance plans offer at best 4-6% returns. They are simply put, as worse as Savings from a returns standpoint. I shall cover Life Insurance in my future posts.

Hope this post will now make you question your allocation between Savings & Investments. I would also recommend you read this article recently published on MSN…

http://www.msn.com/en-in/money/topstories/7-money-secrets-the-rich-dont-want-you-to-know/ar-AAdYPlF

Happy to answer questions.