WHY TO INVEST?

To stop this loss of value, he decides to shift the money not required for current expenses into a 3-5 year fixed deposit. Here he is able to get an interest rate of 7% to 8% per annum. By definition this person has invested his money. As he has employed the money in the present, to increase the rate of return in the future.

The aim is clear (to obtain a higher rate of return, that is above the inflation rate), the financial instrument is available (Fixed deposit), the investment risk is known (which in this case is zero) and the person goes ahead and invests.

Let us consider another situation. The person reads many news papers. In each of them he sees a business section. Which has a whole page dedicated to the equity price movement of the previous day, for all the stocks traded in the equity markets. With graphs depicting the movement of the index over the duration of the previous day.

He looks through this page every morning and starts monitoring a particular stock, let's say ACC. He sees the stock at INR 220.00 per share. Over, the next 3 months, he sees it move up to INR 260.00 per share. Now the stock is at a price INR 40.00 higher. This sounds good.

He does a little maths and sees that if he had bought 100 shares of ACC at INR 220.00 per share, he would have invested INR 22,000.00. In three months time he would have brought home a profit of INR 4,000.00, that is a 18.18% return on investment over a 3 month period. This is fantastic!! No bank is going to give this kind of return!

A month later he buys 100 shares of ACC at INR 280.00 per share, investing INR 28,000.00. In the next two months he sees the stock down at INR 250.00 per share. Disillusioned, he sells his 100 shares and books a loss of INR 3,000.00. Promising never to gamble again. After another three months ACC was trading at over INR 350.00 per share.

What went wrong? Well, in this case the person had not considered the 5 questions. He did not have an aim to start with. There was only temptation and probably greed.

The point I am trying to make here is that when we expect a higher rate of return on our investment, we are also exposed to a higher level of risk. That we must respect this risk and take appropriate steps to manage and control it.

Given the situation in our country today, with the ongoing liberalization and globalization process. It would be rational to expect that interest rates would remain at a lower level when compared to earlier years. This lower interest rate (or cost of capital) would enable our industry and services sector to be more globally competitive. Thus, given a lower level of return to individuals from bank deposits and other debt instruments, more funds would be deployed in equity and other financial instruments to increase the rate of return on our assets.