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What are the risks of not investing your money?

What are the risks of not investing your money?

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Saving money in cash is the easiest thing to do. There is no volatility involved and you know the exact amount, which does not vary much. Unlike equities, there is no stress involved, due to the fluctuation in prices. But is it the right way to manage money? Perhaps you will realize this after many years when the money does not grow enough to fulfill your financial requirements. There are certain risks associated with investing money in risky assets like stocks, but there is an even greater risk of not investing at all and keeping the money in cash. Saving in cash is a conservative approach that over the years will not benefit much.

Many people keep money in a savings bank account but the rate of interest is very low and after deducting the TDS the final amount is still lower. Similarly, the rate of interest on the fixed deposit is also very low, though it is quite safe with assured returns and the least amount of volatility. But the rate of interest is lower than the inflation rate.

There is high inflation the world over. The prices of food items have increased due to supply chain disruption after the Covid pandemic, and the rise in crude price has also contributed to the increase in inflation. The purchasing power of people has reduced due to inflation and the interest rates on the fixed deposit are too low to make any meaningful impact on their life.

There has been turbulence and volatility in the stock market for the past few months which has come off its peak, and people may think that it is a good time to go for investments that are safe, like the fixed deposit. But due to inflation, the value of goods and services becomes costlier, relative to the value of money over a period of time. You would have often heard from your father or grandfather about how things were much cheaper in the good old days when they were able to manage the household with much lower salaries. This is true and with inflation, the price of items has increased over the years. Rice which was around Rs 90/quintal 40 years ago is now Rs 2500/quintal at the minimum.

When you live in a country that is prone to currency shocks it sometimes pushes up the cost of imported goods which are necessary for survival and this can also push up the inflation rate.

The returns from equities, real estate, gold, and bonds are higher than cash over a longer period of time. People are afraid of the volatility of equity markets. There is no guarantee of returns in the equity markets but over a longer period of time, if we take the returns of BSE Sensex in India, which came into being in 1979, the return is around 16% in a period of around the last 4 decades.

So what are the risks of not investing your savings?

1) When a person keeps all their money in the bank, in the event of a bank failure the person can claim a maximum of Rs. 5 lakhs per account as insurance cover. This insurance cover of Rs 5 lakh is provided by the Deposit Insurance and Credit Guarantee Corporation which is owned by the Reserve Bank of India. Beyond this amount, the person will not be compensated.

2) Inflation always erodes the value of money and the only way to beat inflation is to invest in an asset class like equity.

3) Every individual has some goals in life that they can only fulfill if they have an adequate sum of money. It may be a foreign vacation, purchase of a car, higher education, marriage of children, and comfortable retirement for themselves. The goals can be short-term or long-term; often decades away. To fulfill these goals money is required and investing in stocks and mutual funds can help to achieve them with ease. The volatility does not matter when investments are held for the long term.

4) When the investments are held for a long period of time it will result in wealth generation due to the power of compounding, where the interest is earned on the accrued interest. The amount of money that you invest will generate earnings both on the principal amount as well as accrued earnings from the previous period. This helps in the growth of wealth. 

5) Always choose the investment portfolio with care and it should be well diversified across mutual funds, bonds, gold, and real estate. When one of the asset classes is not performing well the other asset class will make up for the non-performance. Diversification across the asset class reduces volatility.

Investing can generate much higher returns than a saving account or fixed deposits but there is a risk over a shorter period of time. If you are saving for short-term goals and need the funds in the near future you can keep the money in the saving account, but for longer-term goals, you definitely need a good investment as it will provide better returns. The volatility will also not matter much over the longer term. The risk of not investing your money and keeping in cash is definitely much higher which would affect your long-term financial goals.

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