Myths concerning investing tend to be costly. They can lead you to take too much risk, or too little. Worse still, may cause you to avoid investing altogether.
Granted, investing is not an easy endeavour. But by busting certain myths, you can at least venture on the straight path.
Myth I: Saving and Investing are the same
The terms are often used interchangeably, which is an error. Saving and investing are, of course, intertwined and correlated but not necessarily good proxies for each other. They are two different efforts.
Saving is when you do not spend a part of your income but set it aside for future use. Investing is putting that money to work. It involves committing your savings into an investment vehicle with the hope of making a financial gain. So naturally, investing is more of a risk than saving. Having said that, it is worth noting that no one creates wealth by saving. You have to invest the savings wisely to create wealth.
Myth II: Keeping your savings in the bank is a smart move
As mentioned above, saving is one aspect of managing your finances well. Putting that money to good use is mandatory. When looking at any investment, you have to take inflation into account. Your money in a savings account will see its value erode rapidly due to inflation. In fact, it will ensure that you end up with a negative return since the inflation rate is higher than the return on a savings bank account.
Even if you put the money in a fixed deposit, after you take inflation and tax into account, your return will be miniscule.
Myth III: You only earn from your salary
Not if you have invested smartly. There are ways to generate income from sources besides your salary.
Rent: If you have invested in property and have leased it out, you can earn a rental on it.
Dividends: From stocks and mutual funds.
Interest: Bonds issued by companies or financial institutions; fixed deposits from banks, post office schemes and companies.
Capital gains: This is the appreciation you get from your assets when you sell them – stocks, mutual funds, property.
Myth IV: Investing in equity is only for the rich
The stock market is not an exclusive club for the rich. In fact, you can get rich by investing in equity. No one is asking you to short sell or trade. Investing wisely in equity allows you participate in the growth of the company.
Neither do you need huge amounts to invest in equity. With as little as Rs 500/ month, you can invest in an equity diversified fund which will invest in various stocks.
No investor should ignore equity from his/her portfolio.
Myth V: More earnings means more wealth
Not really. You can be earning a tidy sum and letting it all fund your lavish lifestyle. It is not about how much of money you make, but how much you save and invest wisely.
Very few get wealthy by adding up their pay cheques. A high income is certainly helpful but not the sole determinant. Nor are fortunes built through a huge one-time killing in the stock market.
The two fundamental factors that are responsible for individuals’ building wealth are 1) the number of years that an individual has been consistently saving and investing his money; 2) the proportion of his savings allocated to higher return investments such as equity.
This does not mean that stocks should be invested in regardless of the price and risk levels. It is just an indication that if an investor invests wisely, he will get rewarded over the long term. Also read 5 don'ts for equity investors.
