How does one make a good investment?

In our last column, we saw that the way to grow the money faster than inflation is by investing. But what exactly is this concept called investing? How is it different from saving your money in a bank?

Let us assume that your family has saved up a good chunk of money. You find that there is a small plot of land next door that is available for sale. Your family is faced with two choices — either to keep the money in a bank fixed deposit and earn nine per cent interest or “invest” in the plot of land next door. Let us explore what can happen if you buy the plot. First, it does not pay you any interest, unlike the bank deposit. Second, it’s value fluctuates. In other words, a few years down the line, it’s value may go up. It is also possible that its value remains the same, even several years after the purchase. And finally, the value of the plot can actually come down for any number of reasons. Thus, any of the three outcomes is possible. And you will be better off buying the plot compared to the bank deposit option in only one situation — when the price of the land goes up so much that what you get from selling it is more than the sum of the principal and interest that you get from the bank.

Up or down?

Yet, you find that investing in land is a pretty good idea in India. Why so? There is a good chance of land actually appreciating in value at a rate faster than the inflation rate or the interest rate provided by the bank deposits. So people are willing to take the risk of the land price going down, in order to make more money. Confusing?

Let us say that you are selecting an international test match team. Jacques Kallis averages over 57 runs, as a batsman. Does it mean that he scores 57 runs every time he bats? No. In fact there are times he gets out at zero. However, over several innings, he scores several hundreds so that on an average he scores 57 runs per completed innings. In this case, if you select him as a batsman, there is the risk of Kallis getting low scores on any given innings. But over a longer period, he is quite productive. As a selector, you always have the risk of Kallis not scoring in the next game or two, but you are not concerned as you have a long term perspective in mind.

In the next column, we will see how the risk varies from one investment to another.

Money Trivia : Land Fever

Do you know that one of the best ways to get rich in India is to purchase land at attractive prices? There are a number of areas in the country, where land value has appreciated a hundred times, in the last 15 years?

Young World Money-Wizards Quiz #14

This American business man, is the founder and chairman of the real estate company Equity Residential, the largest apartment owner in the whole of US. Can you identify him?

Email your answers to youngworld@money-wizards.com. The first five correct answers within seven days will each be awarded flipkart evouchers worth Rs. 250. The results and the answers will be published at www.money-wizards.com.

RELATED NEWS

High risks and fast scoresDecember 10, 2012

Make your money growOctober 8, 2012

Smart savingsSeptember 10, 2012

Get started earlyAugust 13, 2012

Power of compoundingJune 11, 2012

Watch it growJuly 9, 2012