The Financial Pyramid -part 1

Hello Friends ,

Welcome back to letsLEARNmoney - an investor awareness initiative.

In most of my 'Investor Awareness Programs' a topic which I tend to discuss at length revolves around where to invest. Long term equities and equity linked investments give high returns but in the shorter term they may become volatile and hence not appropriate for some investors.

The question often is that with the falling interest rates, should we continue with our bank FDs or such fixed income securities?

The answer is a BIG YES ! A person needs to essentially have a combination of both fixed and fluctuating income investments. Each person usually follows the financial pyramid - and if not yet following it , should start following it!

As you can see - at the base of pyramid is 'Protection' of our assets .

The first and foremost thing which all individuals would want is to protect not only their assets but also their lives and their liabilities. Safety of capital and its liquidity in times of emergency is important and hence these must be planned first! To achieve this one would usually invest in Bank FDs , Life insurance , Debt based mutual funds or even PPF.

However if all or a bulk of your investment is in the above assets, it may be a mistake. Why ? - because safe investments also means lower returns. When we invest in safe investments we actually are just protecting our money from inflation. If you earn interest of 8% and if the inflation is also 8% , your capital is just protected. It does not grow. It just has the effect of maintaining your future standard of living equal to what it is today.

In order to 'beat' inflation and also to improve your standard of living a part of your investment must go in assets which give higher returns than the risk free returns.

What are such investment avenues ? - we shall cover in our next part of this post.

Till then , Keep learning

Find this blog post informative ? Do let your friends and colleagues know by sending them the link.

CA Rajiv D Khatlawala

Author , Financial Trainer and Consultant

#personalfinance #assetallocation #capital