Choosing an investment is a big decision. A good investment, with calculated risk and informed decisions, can make you richer. But, if your decisions go wrong, you might miss out on better opportunities. You could also face financial and mental stress.
Here are eight facts about investments. Some experts underestimate or overestimate different types of investments. They may not consider factors like age, income, and needs. They often give outdated advice that may not suit your goals.
For example, if you want to become a millionaire, mutual funds might not be the best choice. Mutual funds could make you a millionaire, but likely at retirement, which might not fit your plans. You have dreams and goals to achieve at an early age.
These financial influencers (Finfluencers) don’t always give clear ideas for achieving wealth early. Let’s discuss the eight facts about any type of investment.
1) Most sensitive thing in the world is, ‘Market’ (place or area of investment or business) –
Market conditions play a crucial role in investing in securities, commodities, or derivatives. Market conditions also influence returns. Your decision and market conditions determine your investment growth.
The market is highly sensitive. The thoughts of a group can move it up or down. For example, a national budget often includes defence sector allocations. Defence companies benefit from these allocations. Just the thought of this can hype defence companies’ markets.
News like war, tsunamis, earthquakes, or diseases like COVID-19 make the market sensitive. Usually, the market dips with such news. However, news about pro-business governments, economic growth, or winning patents boosts the market. The market can react to any news, weather conditions, sentiments, hopes, profits, or losses. These factors determine your investment growth.
2) Consistency in returns –
You cannot consistently earn higher returns in one type of investment in a short time. This applies to mutual funds, stocks, real estate, gold, or term deposits. Eventually, the value of investments will dip due to sensitive market conditions mentioned above. This is the most important fact about investment.
3) Forceful Investment –
In real estate you will have to pay EMIs consistently. You may choose to pre-pay the mortgage loan. On the other hand, PF in involuntary but still compulsory and it is not under individual’s control. So, no investment, except real estate and Provident Fund (PF), forces you to invest regularly. Think about this.
We will use this point to explain further. Remember this for now. If you lack discipline or your investment doesn’t force you to invest, you might retire with less money than expected. Warren Buffet said, “spend after investing.” To me, this means force yourself to invest first, then spend what’s left.
4) Don’t put all the eggs in one basket –
If this is true, why are people reluctant to invest in real estate? They don’t want to rigorously save a big downpayment. They end up investing only in mutual funds, term deposits, and gold. Most people skip term deposits for the higher returns and liquidity of mutual funds. Gold is expensive in countries like India.
Gold attracts GST (Goods and Service Tax), making charges, and locker fees. These expenses reduce your returns when selling gold. Goldsmiths also deduct evaporation, pilferage loss, and profit when you sell. So, gold bought for 75,000 to 80,000 Rs. (10 grams) may sell for only 60,000 Rs. at the current market rate (as of 21st July 2024). Buying gold at 30,000 Rs. per 10 grams can be profitable. The price increase from 30K to 60K takes over 10 years. Other investments double in 5 to 7 years in India.
Most people end up investing only in mutual funds. If so, where is the rule “don’t put all your eggs in one basket”?
5) Mutual Funds –
Majority of ‘Finfluencers’ (financial influencers) always insist on investing in mutual funds. They often mention fancy figures of 12 to 15% annual returns. They claim these investments will grow to millions over time. The time frame they suggest is usually 20 plus years.
My personal opinion is, who has seen the next 20 years? Who is sure they will survive? What about ‘Seize the day’? Have they considered the investor’s age? What if the person is 40 and asked to invest for 20 to 25 years? What will they use the money for, given their remaining life of 10 to 15 years, often with health troubles?
If the person is 25 years old, are they earning enough to invest significantly in mutual funds? For example, if a 25-year-old earns 30,000 Rs., is it feasible to invest 25,000 Rs. into mutual funds?
Let’s assume a 25-year-old earns enough to invest 25,000 Rs. or more in mutual funds. They still might not sustain this investment. They will face marriage expenses, house renovations, car purchases, and child-related costs.
Why don’t they discuss scenarios like the 2008 global financial crisis, 2013 economic downturn, or 2021 COVID-19 period? Many know investments eroded by up to 70%. If a mutual fund unit was 100 Rs., it could drop to 30 Rs. People lost not only their earnings but also their principal.
Why do these finfluencers never insist on periodically realizing returns and reinvesting in safer assets? Do they even know this? Do they promote investments just to earn money? Do they take responsibility for making investors aware of the risks?
6) Investing in oneself –
Investing in oneself can yield more than mutual funds, such as upgrading knowledge. Another profitable option is starting a business, an outcome of investing in oneself. Business margins can increase by 300%, sometimes 500%, or even more within months. Few speak about this elaborately.
I feel finfluencers deliberately avoid discussing this type of investment may be because of following reasons – They might know little about businesses
– They cannot face queries like “which businesses to suggest.”
-They may have never studied this topic.
-They prefer discussing passive income rather than active income.
7) Investing in business –
Investing in business can make you yield more than mutual funds. In fact, business is an active income which can help you earn more active income and a passive income. The profits can be re-invested in business to grow it. The profits can also be invested in the mutual funds to earn passive income.
The business can make you earn as high as 500% margins over costs. Best example is restaurant business. If the cost is kept well under control and final dish is priced at competitive rates it can make you earn up to this percentage. E.g. a dish costs you 3$ and you sell it for 15$ makes you earn 500%.
Most electronics products produce more than 100% profits to the producers. Same electronic item will make every other person earn nearly up to 10 to 15%. E.g. logistics, distributers, retailers, agents etc. Final cost reaches to more than 200% to the final customers.
Interesting thing is, all this make you earn very quickly unlike mutual funds; where you don’t have to wait until investment grows to substantial percentage. Meaning the earning cycle is relatively lower than mutual funds.
Of course, every business has risk just like mutual funds also has risk. However, like in mutual funds, businessman has to be smart enough to mitigate losses, absorb it or neutralize it. For example, an evaporation loss or pilferage loss should be factored in already in the product and the cost is adjusted accordingly.
8) Game of percentage –
Investing is all about earning a percentage returns. No one invests without knowing the possible returns and risks in respective investment. No one will invest without expecting some return.
It’s up to you if you want to earn 25% on a few thousand dollars or 2% on millions. Let me explain. Choose the best scenario for you from these options. You can select multiple options:
i) Earn 2% on one million dollars ($20,000) – This is common in real estate. In India, earning 10% on ₹1,00,00,000 gives you ₹10,00,000.
ii) Earn 25% on $20,000 ($5,000) – This is typical for mutual funds. In India, earning 25% on ₹10,00,000 gives you ₹2,50,000.
iii) Earn over 100% ($100 on $100 invested) – This is possible in business. In India, you could earn ₹100 on a ₹100 investment.
I think the second option is passive income, which you should follow after earning from the other two options. It lets your money work for you.
The third option is active income. It can make you very wealthy if you work hard and smart. Many big businesses started small.
Anyone can choose the first option. You invest some money, and banks or financial institutions finance the rest. You earn on the money you borrowed. Even after paying interest, you still make a good amount. After selling, you get a significant post-tax profit.
These examples are for explanation. Actual returns may vary. Mutual fund returns shown here are higher than average. Over time, these returns might be accurate or even better. Real estate and business returns are minimum expected and can be higher.
