{"id":923,"date":"2018-02-04T22:29:25","date_gmt":"2018-02-04T16:59:25","guid":{"rendered":"http:\/\/financialfunda.com\/?p=923"},"modified":"2023-08-17T17:43:13","modified_gmt":"2023-08-17T12:13:13","slug":"investment-decisions-are-your-investment-decisions-destroying-your-wealth","status":"publish","type":"post","link":"https:\/\/cacube.in\/?p=923","title":{"rendered":"Investment Decisions: Are your Investment decisions destroying your Wealth?"},"content":{"rendered":"

Every investor wants to create huge wealth by taking the best investment decisions. But sometimes decisions taken to create wealth become responsible for the destruction of wealth itself. Generally, investors are unaware of the Break-even rate of return<\/u><\/strong> which is a minimum return to catch up with inflation and meet our tax responsibilities. At a break-even rate of return, an investor is neither creating nor destroying his wealth. Any return above break-even return is the net return that is going to create wealth for an investor.<\/p>\n

What is Investment?<\/u><\/strong><\/h2>\n

Investing is forgoing some money today to get more money tomorrow. Forgoing money means converting money in some other asset that is going to be valuable in the future. There are a number of asset classes in which money can be invested:-<\/p>\n

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  • The investment could be made in financial instruments like fixed deposits<\/strong> in banks and corporate or debt instruments like bonds and debentures<\/strong>. These investments are generally made to get a periodic return in the form of interest and original capital is returned on maturity. A large portion of the return earned on these instruments is eaten by inflation.<\/li>\n
  • Wealth Creation is also possible with Investment in Precious metal Like Gold, Silver<\/strong>, which has appreciated sharply in past. But this investment does not provide any periodic return.<\/li>\n
  • Real estate<\/strong> is also an attractive asset class for wealth creation. But this requires not only a large amount of capital but also specialized knowledge about property business.<\/li>\n
  • Another widely used month of wealth creation is through investment in Equities in Stock Market<\/strong>. In this category, the Investor has the option to choose between periodic return and growth. In the Stock market, periodic return is in the form of dividend which is exempt from income tax u\/s 10(34) of the Income Tax Act. However Investments in this category are subject to market risk, Hence investor must consult their financial advisor before investing. Investors can choose to invest directly in Equities or in units of Mutual Funds. There are two methods of wealth creation under this category ‘Trading and Investing” (This is further explained in Heading ‘Trading Vs. Investing<\/em>“)<\/li>\n<\/ul>\n

    Investors should not invest their hard-earned money without understanding risk and return of proposals.<\/p>\n

    Now the question arises which assets should we choose for investment? There is no direct answer to this question because each type of investment has some advantages and some disadvantages. It depends on the needs and situation of an investor and which asset class is suitable for him. Investors must consult their financial advisor before investing.<\/p>\n

    Relation between inflation and interest rates:<\/strong><\/span><\/h2>\n
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    • Interest rate is the rate at which interest is charged by the lender to a borrower for using the money for a given period of time. For example interest rate on FD is 7% p.a. Government may control the interest rate in the market by changing monetary policy.<\/li>\n
    • The inflation rate is the rate of increase in the price of goods and services over a period of time in an economy. The inflation rate is controlled by the demand and supply of goods and services in the market. When the demand for goods & Services increases without much increase in supply then Prices will go up. When the demand for goods & services decreases without a cut in supply then Price will decrease. On the basis of prevailing market conditions, Government tries to balance the inflation rate by bringing changes in the interest rate and monetary policy.<\/li>\n<\/ul>\n

      The relation between interest rate and inflation can be understood by analysing the impact of change in the interest rate on inflation. If the interest rate on consumer loans is changed, how inflation will react:-<\/p>\n

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      • If interest rates are decreased then money\/loans will be available at an easy rate to the public. An increase in borrowing will increase the money available to spend with consumers. If more money is available to spend then demand will rise without much increase in supply. An increase in demand over supply will result in an increase in prices and the Inflation rate will be higher.<\/li>\n
      • If interest rates are increased, it will make people cautious to borrow less and save more. Due to this, demand will decrease without any cut in supply. This will result in sustaining or reduction in prices. Hence inflation rate will be lesser.<\/li>\n<\/ul>\n

        Hence the relation between the Interest rate of consumer loans and Inflation is negative. However, inflation has a positive relationship with the interest rate on producer loans. Hence inflation rate may be controlled by bringing change in demand & supply through a change in monetary policy.<\/p>\n\n\n

        History of changes in repo rate<\/strong><\/span><\/h2>\n\n\n\n

        The chart given below shows the history of changes in repo rate by RBI to control inflation and to achieve the objectives of monetary policy:-<\/p>\n\n\n

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