What is more Important; Return on Investment or Absolute Investment

Posted on Posted in Investment

Investment :

The time of the year, when every one at least looks at the Investment either mandatory under 80-C or future planning, child education or any other objective based investment. Secondly, the only thought comes to our mind, while choosing investment is return that we expect to earn.

My question : Do we really think amount how much should be saved, and thus invested?

The answer could be very simple, I know how much I need to invest, I have my personal financial goals, I am conscious of my Savings etc.

May be true….I think, our decision is mostly driven by surplus available with us or more aptly money available in Bank Account, else, why we do not swap the investment or shift the mutual fund scheme, since its also money available to us for reinvestment, mostly, money that is already invested is never considered as part of our formal kitty of investment and mostly all of us have Status quo bias, whereby we can not force ourselves to review our past decisions. In nut shell, we hardly think about Saving Rate.

Coming back, though, its difficult to anticipate returns on investment unless one is considering fixed maturity/tenure or government investment, still we grapple with all important idea of return. The return in my views, depends upon

Liquidity,

Taxation,

Risk,

Depending upon which order, you look at it. Still, the moot point of the post is not so much about how to maximise the return but is it really important?

All our investment decisions are purely based on rate of return, in the process, we forget the base rate of investment. Every one tries to maximise the wealth, you may also call the ROI or Savings or Net Worth..But, how could we do it…Its very simple.

Wealth = Saving X No of years of investment.

In the process, we forget the amount of Saving. Since, its not the return of investment alone that determines your future Wealth but, the Base Amount and Longevity. If you save additionally, say Rs. 50000/- a year, and assuming your return on investment is say lower by 2%, still in Long Run you would end up making far more substantial money.

Because,

(a) the power of compounding..

(b) Base rate i.e. amount of investment.

I strongly believe that though one must try and maximise return, and it is relevant, (no doubt about it)…but in all the clamour, one should also focus on amount of investment, even if you can increase your saving by say 5% additionally every year, in long run, it would turn out to be substantial amount…And since the actual return would only be known in future, little more focus on amount of investment/ surplus generated by additional saving is equally important, unfortunately, our mind is not trained to think this way…

Now how to increase savings by 5%…thats another question, and answer depends upon myriad factors from Life Style or Philosophy to Actually making that decision..

One thought on “What is more Important; Return on Investment or Absolute Investment

  1. Every individual has a unique investor profile.. Which is basically a combination of their investment objectives, time frame and risk appetite, further supported by investment knowledge and the willingness to participate in investment decisions. Each asset class i.e. derivatives, stocks, ETFs, Mutual Funds, fixed income instruments and cash or a combination thereof can provide us a variety of portfolios on risk-return graph. While traditional forms of investment in India, in my opinion, have always been more secure like a term deposit, or postal savings schemes I am glad that with the advent of MFs and ETFs investors, small and big alike, can participate in broader equity markets and diversify their investments by asset classes as well as geography and also get access to professional fund managers at minimal cost to potentially attain positive REAL rates of return in the long term (I.e. normal return – rate of inflation).
    For the burgeoning middle class it is really a dilemma …with rising income (hopefully rising at a rate higher than inflation) and exponentially increasing ease of availability of short term credit through credit cards .. Should they spend now and pay from future income or should they save now for future spending? Ideally an individual should look at paying himself first from each regular pay check (i.e invest regularly in small amounts rather than lump sum thru systematic investment plans) .. This strategy has 3 fold effect.. (1) cost averaging of investments as you invest regularly during ups/downs in the market (2) investing smaller amount doesn’t put a strain on day to day cash flows (3) leaves you with a net disposable income after you have saved to secure your future.

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