Business consultant, Pria Masson, shares how you can build your nest through investments.
Last month, I wrote about how you can get started on thinking about building a small nest for yourself with whatever disposable savings you may have. This month, I would like you to convert that discussion into action, by thinking about where you can park the money to give you returns above the basic bank rate – and why you need to do that.
The power of compounding
One of the most fascinating aspects of investing is the idea of compounding interest. For those of you who may not be clear on the idea, it works on the idea that if you invest 100 today and earn 10 percent on that, if you do not withdraw it, the next cycle you’re investing 110 and earning 10 percent on 110 rather. Does it all seem like very small numbers? Look at the table alongside and think again. Do you still think you should not invest to compound your money?
How banks and financial institutions give you an interest at all
Bank rates are notoriously the lowest returns you get from any asset class. The reason is simple – low risk, low return. Your money is very secure – unless the economy you’re living and investing in is itself in trouble. How is this achieved? To understand that, lets first step into how banks give you any return.
Banks accept money from you, they keep it safe and in turn they generate a small interest from that money by placing that money with the central bank of the specific country. This is liquid, which means, it can be withdrawn any time thereby making it secure. If, on the other hand, you want a higher return, you must sacrifice part of that liquidity and promise not to ask for the money for longer – that brings us to fixed deposits. Even within these, the more you sacrifice (longer duration), the higher your return and lower your liquidity on an immediate basis. These are the basics of how any investment product works – understand this, and you will understand why higher returns means higher risk.
Where can you invest?
Based on your risk appetite, you would have options to invest your savings in several ways. I have included a handy table here for you to get an idea of the options and their risk return profiles.
Mutual Funds and Systematic Investment Plans (SIP)
Of these many options, one of the highest returns come from stock markets, because the risk is higher. How do you mitigate that risk? By choosing options where you don’t have to pick a specific stock, you can give the money to an expert to invest it for you through mutual funds. In return, the institution that provides the mutual fund, will charge you fees (usually in the range of 1-2 percent annually). SIPs are specific plans where you can invest a pre-determined amount of money each month. While options for mutual funds have been historically limited, things are changing now. In the UAE and Saudi Arabia, there are opportunities available which even nonresidents can partake in for a minimum amount of BD500. With new products launching fast, more countries are likely to offer these options.
Investment is a game of trust, in yourself in the regulatory environment, banking system and in the published information available to you. These are the ingredients you have, and you must choose what you want to create. You know what each element means to you, but can you accept the final product? Your risk appetite is not really about risk, it’s about a need for reward and understanding what drives you and what you’re willing to give up for that end goal. Choose mindfully.
Pria is an experienced business consultant who works as a business coach and advisor helping clients with their strategy, business plans and idea assessments. You can follow Pria on Instagram @guide_my_idea and learn more about her experience at priamasson.com
