Saturday, 6 August 2011

Investing your bonus money!

Sathya was sitting on the bench and staring at nowhere in particular. She seemed to be lost in thought. Roshni went over, "Hey gal, wassup? You're okay?" The staring at nowhere now turned to Roshni's face and continued.
This was weird. Last evening when she came out of the boss's cabin Sathya was walking as if she had springs fixed to her shoes. She could not stop laughing and joking. The news of her promotion and incentives was the talk of town. However, seems like, Sathya had just slept away all the happiness over night.
Over a cup of tea Sathya opened up to Roshni on what had happened at home the previous evening.
As she stepped into her home, Sathya had gone to her mother in law who was watching TV. "I got a bonus for my performance last year," she softly told her. Her mother in law was thrilled. She hugged Sathya and asked her what she planned to do with the money.
Sathya said, "Invest it somewhere safely. I am thinking of putting it in a bank deposit. Now interest rates have also gone up. I just met the bank manager on my way"
Her mother in law said, "Okay, but did you think about buying gold. The price of gold is going up and I was just seeing some channel where they say gold price will touch the 2000$ an ounce very soon. In my experience gold prices have never fallen. In any case, you have to buy gold for Nidhi (Sathya's daughter). You should buy that diamond necklace we saw last week".

Sathya thought about it, but was not convinced, "Yes mummy, but gold is just a dead investment. It does not earn any income or interest. In addition, what is the point in buying jewellery for Nidhi now? Fashion may change when she grows up".
"May be Sathya, but whenever you can, you should buy gold and safe keep, then you won't have to struggle when Nidhi is ready for marriage. Also what interest do these fixed deposits give? Inflation rates are even higher. Experts say that we are actually losing money investing in fixed deposit", she was speaking from her newly acquired knowledge from watching stock market based TV channels.
Oh! Sathya did not like the idea of safekeeping gold. It was a painful task going to the bank with a key and standing there in the queue to take out and keep your jewellery back in the locker. In addition, the locker costs money and the bank wants some deposit to allot you a locker. However, mom in law was right about inflation rate being almost same as bank interest rate. Sathya was getting confused.
Just then, Sathya's father in law came in overhearing their conversation. Sathya got up and shared with him the official letter. He was overjoyed and said, "Sathya this is great news. You should buy that piece of plot in the suburbs. There are some developers who are creating these land banks and if you invest in them they will give you amazing returns."
She did understand that land was a great investment. Nobody was producing land anymore so the demand is only likely to go up. It is a sure shot way to build wealth. However, she had heard from her friend about pieces of land in the suburbs being occupied by the locals who refuse to leave, of the government taking over the land for building road etc. She was getting really confused now.
Her father in law continued, "Beta, it was only lands that helped me send my son to college and get my daughter married off. Bought at cheap rates, they came in handy when I needed the money. However, you do what you think is the best. Good luck" and he walked off.
In some time, Sathya's husband Suraj walked in.  When she told him, he said, "Oh wow Sathya, I am so proud of you. You know what?  We should just invest the money. The stock markets have corrected and prices of most stocks in my target list are very attractive. We should invest the money in stocks. We did open a demat account in your name, right? Is it still active?" Now, this was the last thing Sathya wanted to hear. One more suggestion for investments and she would start crying.
On the other hand, Sathya was paranoid about stocks. She had seen markets fall to half the previous levels. She has also heard many horror stories about people losing their hard-earned money. She did not intend to become part of those stories now. She said, "Suraj, but stock markets are risky. I could lose all my money and I don't understand it well".
"Baba that way, everything is risky. Can you say your fixed deposit is absolutely risk free? Banks / companies can also default and you are insured for only upto Rs.1 lac. Nothing fluctuates more than gold prices these days? How sure can you be about the land you buy, the credibility of the documents or the price that you pay? Every investment has some risk or the other", explained Suraj. "If you are so scared of the stock market, invest through mutual funds no. That way, it is easy and you can at least be assured that some expert is dealing with your money in the share market. You can earn tax-free dividends. Many people become rich because they invest in stocks", he added.
This was not helping Sathya at all. Her head was hurting. What did she do?
Now, this is what it was. Roshni gave her friend an understanding look and suggested they write down all that they knew and see if it made sense. So, they pulled out a napkin and wrote down...
SafeInterest rate only matches inflation rate
Will earn regular incomeNo real wealth creation
Can liquidate whenever needed without much loss
May earn high returnsCost of safekeeping is high
Satisfaction of owning jewelleryCannot sell, can only convert to another jewellery
Can pledge and borrow against itNo interest, dividend etc
Making cost, wastage etc makes it expensive
Has the potential to create long term wealthHigh investment value. Will be forced to take loans
May earn regular returns — rentMaintenance costs can be high
Cannot sell easily / cannot sell only small portions
Has the potential to earn lot of returnsVery volatile market
May earn regular income - dividendsVery risky - can lose a lot of money
Can also buy through mutual funds easily
Small amounts also enough
Roshni went through it again and said, "Very good Sathya, we have done a great job in finding out that no investment is very good. All investments are good in some way, but are bad too in some other way. Just like all of us. You know what? You should just spend it, mast karo. Go on a holiday, buy new clothes, jewels, shoes. Enjoy it yaar, it is your hard earned money".
"Very funny", said Sathya "I know what to do. I am going to meet somebody who can help me". She remembered one her colleagues mention a financial planner. She fixed an appointment and met with the planner.
This planner explained that she need not really put all the money in any one of the above options. She can actually distribute her money in all the above options to get the benefit of all. That way she also does not have to suffer the drawbacks of any one investment option with all the money. She can "spread the risk". That is what the planner said.
Okay, but how do you decide how much in each investment option?
This was a good question.
The planner pulled out a paper and handed it over to Sathya. He said, "Take a few minutes, think about it and write "What is that you ultimately want to do with this money". I know you want to invest the money. Invest it now so that you can use it later right? So, what will you use it for later? Write down all things in your mind that you want to use this money for" and he left the room.
Sathya thought about it and wrote "I want to invest now so that we have enough money for Nidhi's education and marriage. Our parents are growing old. We want to have some money for any medical emergencies. When we retire, we want to have enough money to take care of ourselves."
The planner walked back into the room, sat down with Sathya and went through her "Want to" list.
He said, "Instead of looking at which investment is the best, which will give highest returns, which will help me save tax etc. look at investments from another point of view. Which investment will help me check off all the items on my "Want to" list. Which investment will help me reach my life goals? Which is the most suitable for me?"
Sathya seemed to be getting some clarity. The planner drew out a detailed plan to invest her money. He suggested that a portion of the money go into fixed deposits for parents' safety and emergency needs. Some money should go into mutual funds and some in gold for Nidhi's future. He also suggested that they set aside some money for down payment of their second home. He wanted them to also start a regular investment plan as this sum alone would not be sufficient. He drew out a goal based investment plan that will enable Sathya and Suraj actually do all that they "want to" do in their lifetime.
She called Suraj, "Let's meet for coffee, I have something important to tell you".  She sounded really excited. Sathya looked confidently into everyone's face now and into the future. The spring returned to Sathya's steps.

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