Laxmiamma has been putting away the Rs500 that she saves every month, under her mattress. This has been going on since 2002. She likes the smell of money whenever she picks up the mattress. She likes to keep counting them. She likes their fading color; it indicates that she has been saving since really long and speaks volumes about her discipline!
Somewhere in her heart, Laxmiamma has the desire to buy back the gold bangle that she had to sell off when her husband took seriously ill some 25 years back and the family needed the money for his treatment. The bangles were a wedding gift from her grandmother and had 25 gms of gold. They were her pride. She felt like a queen when she wore them.
Alas, there is still a long way to go. She only has Rs61,500 (500*12*10yrs3months)under the mattress. Two years back when she had gone to the Jeweller, he told her that it would cost her Rs40,000. When she went with Rs40,000 to him, he said that the price of gold has gone up and it will cost 60,000. Three months back when she went with Rs60,000 to him, he said that now the bangle will cost Rs70,000. “If this is the way the price keeps going up, I’ll never be able to buy those bangles”, thought Laxmiamma with tears welling in her eyes.
This is the story of a lot of us. While prices keep going up, our income and savings do not go up in the same proportion. And this is where Prof. Nicky enters the scene.
Prof. Nicky does not promise to solve all your financial problems or make money grow on trees. Prof. Nicky gives simple tips on money and investment, which might help ease your situation.
Enter Laxmiamma and Prof. Nicky.
Prof. Nicky: Laxmiamma, why do you keep your money under the mattress? Does it grow there? And what if there is a thief in the house one day? Why do you take the risk of keeping it at home? Why don’t you invest it? In this way, the money is not only safe, it grows too! Yes, money can grow if invested well.
Laxmiamma: “You mean keep it in the bank?”
Prof. Nicky: That is the easiest way to invest. You could at least start by putting your money in the bank. In fact, you would have been able to buy your gold bangles by now if you had invested your money in a recurring deposit with a bank every month. By now you would have Rs84,682/- (using 6% p.a. interest and the Future Value of Annuity Formula) in your account instead of Rs61,500/- under the mattress.
With popping eyes, Laxmiamma asks, “Really?”
Prof. Nicky: Really. You might actually have earned even more, if you had invested in other assets like Equities, Mutual Funds, Bonds, and Derivatives. In the past ten years, the Equity indices have given over 400% returns in India. Of course with return comes risk, but one must balance the two and invest in asset classes where they are comfortable with the risk.
Laxmiamma: I understand that I should invest. And I am going to start by putting my money in the bank from now on, rather than under the mattress. But pray do tell me more about risk and return and these other asset classes that you have mentioned.
Prof. Nicky: I will tell you that in this column some other time. Till then, why don’t you think about risk and return in our day to day affairs?
This article was first published in Postnoon on April 6th, 2012