8:25
1. Why should you invest?
Zerodha Varsity
Overview
This video explains the fundamental importance of investing, contrasting it with simply saving money. It uses a hypothetical scenario to demonstrate how investing, particularly in equities, can significantly grow wealth over time compared to letting money sit idle. The video then introduces various asset classes like fixed income, equity, real estate, and gold, comparing their historical returns to highlight why equities often yield the highest growth, setting the stage for a deeper dive into equity investments in subsequent videos.
How was this?
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Chapters
- Osceola McCarty, a washerwoman, diligently saved money throughout her life, demonstrating the long-term impact of consistent saving.
- Despite facing hardships like the Great Depression, her commitment to saving allowed her to accumulate a substantial sum ($280,000) by retirement.
- Her savings enabled her to live comfortably and generously donate a significant portion ($150,000) to a scholarship fund, showcasing the dual benefits of financial security and philanthropy.
- This story serves as an introduction to the importance of financial planning and investing.
Osceola's story vividly illustrates that consistent saving, even from humble beginnings, can lead to significant financial security and the ability to make a positive impact on others.
Osceola McCarty saved money from her earnings as a washerwoman, storing coins in her doll buggy, and eventually accumulated $280,000 by retirement, from which she donated $150,000 to a scholarship foundation.
- A hypothetical individual earning ₹50,000/month with ₹20,000 in monthly savings over 20 years, assuming a 10% salary hike and 8% inflation, would accumulate approximately ₹1.8 crore if savings are kept idle.
- This amount, even with a 12% annual return on investment, would only cover about 8 years of retirement expenses.
- When the same ₹20,000 monthly savings are invested to earn a 12% annual return, the corpus grows to approximately ₹4.27 crore over 20 years.
- Investing the savings yields a significantly larger corpus (2.4 times more) than simply saving the money, highlighting the power of compounding returns.
This comparison starkly demonstrates that investing is crucial for wealth creation and achieving long-term financial goals, as opposed to merely saving money which loses purchasing power over time due to inflation.
Investing ₹20,000 monthly for 20 years at a 12% annual return results in ₹4.27 crore, while simply saving the same amount yields only ₹1.8 crore.
- Different asset classes offer varying risk and return profiles, with historical data from 2009-2021 used for comparison.
- Fixed income assets (like government bonds or fixed deposits) provide steady, lower returns, averaging around 5% annually.
- Equities (stocks) offer potential for higher returns if share prices increase, with the Nifty index showing an average of 14% return during the period.
- Real estate involves buying and selling property, generating income through rent and capital appreciation, but is complex and cash-intensive.
- Gold investments yielded approximately 9% returns during the same period.
Understanding the characteristics and historical performance of various asset classes is essential for making informed investment decisions that align with your financial goals and risk tolerance.
Between 2009 and 2021, fixed income returned about 5%, gold about 9%, and equities (represented by the Nifty) averaged around 14%.
- A direct comparison of the hypothetical investment scenario shows significant differences in final corpus size based on asset class returns.
- Investing in fixed income (5% return) would grow the corpus to approximately ₹2.48 crore.
- Investing in gold (9% return) would grow the corpus to approximately ₹3.3 crore.
- Investing in equities (14% return) would grow the corpus to approximately ₹5.07 crore, making it the highest performing asset class among those compared.
- The substantial difference in outcomes underscores the advantage of investing in higher-growth potential assets like equities for long-term wealth accumulation.
This comparison clearly highlights that equities have historically provided superior returns compared to fixed income and gold, making them a primary consideration for maximizing long-term investment growth.
Over 20 years, a 14% annual return from equities resulted in a corpus of ₹5.07 crore, significantly outperforming fixed income (₹2.48 crore) and gold (₹3.3 crore).
Key takeaways
- Consistent saving, as exemplified by Osceola McCarty, is the foundation of financial security.
- Investing is essential for wealth creation because it allows money to grow through compounding, outpacing inflation.
- Simply saving money leads to a loss of purchasing power over time due to inflation.
- Different asset classes (fixed income, equity, real estate, gold) have distinct risk and return profiles.
- Equities have historically offered the highest returns among major asset classes over the long term.
- Understanding historical performance is key to selecting appropriate investment vehicles.
- The choice of asset class significantly impacts the final wealth accumulated over a long investment horizon.
Key terms
SavingInvestingCompoundingInflationAsset ClassFixed IncomeEquityReal EstateGoldCorpus
Test your understanding
- Why is investing generally more effective for long-term wealth growth than simply saving money?
- What is the primary difference in outcome between investing savings at 12% and letting them sit idle over 20 years?
- How do fixed income, gold, and equity asset classes compare in terms of their historical average annual returns?
- What are the two main ways to earn returns from real estate investments?
- Based on the video's comparison, which asset class demonstrated the highest potential for wealth accumulation and why?