Investment must be rational; if you can’t understand it, don’t do it - Warren Buffet
The basic fundamental of investment is purchasing assets today with the hope that they provide regular income or grow in value in the future. However, understanding where you are putting your money is paramount to successful investing. Many investors assume the meaning of certain concept without trying to understand them in details due to dearth of time and/or inclination. In investments, a small misunderstanding can lead to potential losses which makes the time spent behind understanding certain concepts worthwhile. Here are some concepts to help you get started with your investment journey.
Time Value of Money
This is one of the fundamental principles of investment. It states that the value of money in hand now is always higher than the value of the same amount of money at a future date. There are many reasons behind this principle like inflation eroding the value of money, loss of opportunity to invest the money and earn returns, etc. Hence, people investing their money or willing to forgo spending their money in the present are offered returns that match or better the time value of money at the specific future date.
For example, if you want to invest ₹100,000 for one year and are considering mutual funds or shares, then before you invest look the interest rate offered by banks for the said tenure on fixed deposits. If banks are offering 7% p.a., then the value of your money after one year would be ₹107,000 (considering simple interest calculation). Also, if you consider an inflation rate of 5%, then the approximate value of your funds after one year would be around ₹102,000. This means that for you, ₹100,000 in hand today is equal to around ₹102,000 after a year. Any investment that offers returns better than this can be considered as a good option.
Also, the risk of capital involved with the investment should add to the future value of your funds adjusted according to the amount of risk.