Finance general investing
Budgeting, saving, and investing are important aspects of any financial management, be it personal finance, corporate finance or public finance.
Why invest?
Earnings during working life come on a regular basis. These earnings also increase annually to cover any inflation and leave some surpluses in the hands of the employee. Once the employment ceases, this regular income stagnates. Inflation, however, continues on its course.
One way to counter this is to have adequate savings. But even savings lose their purchasing power over time due to inflation. This is the reason the available funds should be invested judiciously.
Invest where?
These days there are ample tools such as Microsofts Excel sheet, to plan for comfortable retirement. In addition, there are more investment opportunities as well. Information about investment options is available on Internet, and in many instances, such investments are also rated or ranked. This makes it easier for the investor make informed decisions.
Types of investments as per duration
Broadly, personal investments may be classified into three categories. These are short term, medium term, and long-term investments.
When preparing annual budgets, the funds required during the year are listed and so are the sources. Some of these requirements are merely provisions, such as medical needs, and some amounts are required almost 9 to 10 months down the year. These funds may be invested for short-term with banks earning a few additional bucks that can come handy.
Funds that are required after a year or two are invested in medium-term investment options. Banks do have such fixed deposit schemes, so also a number of business enterprises. Some government securities and bonds also qualify as medium term investments. The amounts in medium-term investments are generally more than the amounts in short-term investments. The returns are also higher than those earned on short-term investments.
Long-term investments are essentially large commitments. At times the bulk amounts are paid at one go, and at other times these large amounts are borrowed and paid through periodic (generally monthly) installments. The returns on these are obviously more than what can be earned on short-term and medium-term investments.
Types of investments based on risk
Most people believe that returns on investments are directly proportionate to risks. This is not always true. Long-term investments are less risky for the investors, but returns thereon are much higher. Any investment option, however, must be examined closely instead of taking the terms at face value.
Low risk investments are generally the government securities and bonds. Term deposits with banks too qualify for such classification. However, the risks on investments with banks are slightly higher. Within banks, investments with private banks or co-operative banks, credit unions, etc. , entails higher risk when compared to investments with public sector banks (i.e. , banks in which governments have substantial shares).
Deposits in business enterprises, and investments in mutual funds qualify to be termed medium-risk investments. Here, the risk is slightly higher. So are the returns. However, the investor is assured of getting back the principal invested or at least a part thereof. Within this category fall a number of long-term investments. These include investment homes. The reason investment homes do not qualify as low risk investments is that the probability of natural disasters striking the homes is higher than the probability of the government going kaput. Investments in bullion also fall under this category. Because gold can be robbed the risk is higher. However, the value of gold will never be nil, unless the aliens takeover the earth and have a better option.
High-risk investments are investments in stocks. The returns here take a roller-coaster ride.
How much should be invested in each type of investment?
Presuming a person is able to spare 20 percent of the monthly income, investments as per term should be
- 5 percent short-term
- 5 percent medium-term
- 10 percent long-term
There is no hard and fast rule, though. Variations in the above ratios are not necessarily bad.
Investments based on risks would be
- 5 percent in low risk investments
- 10 percent in medium-risk investments
- 5 percent in high-risk investments
These ratios are merely suggestions. These investment ratios need to be varied based on age of the person, income levels of the person, and other family responsibilities of the investors.
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