Investment and Inflation: Part 2

Next day, Ravi arrived at Hari’s place at sharp 10 am. Hari could see the excitement of learning on Ravi’s face. They had their breakfast while walking down the memory lane and remembering their childhood. After an hour or so, they shifted to the study room. Ravi repeated his question, “Can I save my money from inflation?” Hari replied, “There are many ways. You could invest your money in the stock market or buy debt instruments or mutual funds or bank deposits or real estate.” Ravi asked, “ So what are these things and which one is the best investment? I have heard about the stock market, mutual funds, real estate and bank deposits but I don’t exactly know how they function”. Hari replied, “Let’s start with the most liquid investment, which is the equities market or stock market. The stock market is a platform where companies ask people to lend them some money and become the owner of the company. It’s like when we both buy chocolate together. I pay some amount and you pay some and we become the owners of the chocolate. While eating it, we both share the chocolate in the ratio of how much each of us contributed. So, when a person invests in a company, he becomes the partial owner of the company and receives a dividend (the share of his profits in the company). Equity investment is highly risky, but it is also highly profitable. Mutual funds are directly linked to the stock market. Remember the time when we went to buy my first bike from my cousin. My cousin knew all about bikes so we gave him the money and he got me my bike. I trusted him with my money because he had a lot of experience with bikes and knew which bike would be the best for me. In the same way, mutual funds take money from the people and invest it in the market with the help of analysts like us”. Ravi questioned “ When I am getting a guaranteed profit from mutual funds, then why would anyone invest in the stock market by themselves?” Hari answered “Mutual funds are dependent on the stock market and the stock market never guarantees profits. As per SEBI, mutual funds are not allowed to promise to return profits. Some people pre..” Ravi interrupted by asking, “Wait, what is SEBI? Is it some kind of institution?” Hari replied, “Yes, Securities Exchange Board of India or SEBI is like the supervisor of the stock market. It protects the market from fraudulent activities and promotes the public to invest. Okay?” Ravi replied, “ Yes. You may continue now.” Hari sighed “Thank you” and continued, “ Now coming to debt instruments. Debt instruments are a bit similar to equities. Debt instruments means lending money to companies and receiving it back after a specific period of time with some interest in it. The interest rates depend from company to company. There are few AAA-rated companies which are guaranteed of returning the principal and interest amount on maturity, and few D rated companies which have already defaulted. Debt instruments carry low risk and fewer profits when compared to equities. Many people balance their portfolio by investing in both equity and debt instruments.” Ravi asked, “I understood everything you said, but how am I supposed to invest practically?” Hari replied, “ No one has ever understood the stock market or any other investment in a day. What you can do is follow the market trends. Stalk the market for days and notice the changes caused because of the slightest news. The most important thing is that you never believe what people say and have your own research before investing. If you ever have a question, you can always find the answer on apps/ sites like Vyolve Paisa. And if you ever need any help, you have my phone number.” Ravi replied, “Thank you so much, man. I owe you a big one.”