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.
