InvestorQ : Why should one invest money and how does it benefit?
Rutuja Nigam made post

Why should one invest money and how does it benefit?

Arti Chavan answered.
3 years ago

To begin with, investment needs to be understood distinct from savings. While savings are mere parking of funds to earn a small interest, it is investing that helps you grow your money. There are 3 broad reasons why one must invest money in an intelligent manner.

1. Investing helps to grow your wealth gradually over a period of time. Earning 15% per year may sound quite normal But if you consider 15% annual return over a period of 25 years with all the returns getting reinvested, then the actual corpus can grow up to a phenomenally large sum. Even within the ambit of investments, it is equity and mutual funds that actually help you grow wealth over a period of time. Again, equities may underperform in the short run, but in the long run they tend to work out in your favour.

2. You need money for your long term goals. What exactly are long term goals? Planning for your retirement, planning for your child’s marriage or for her education; all come under long term goals. Just keeping your savings in a bank account will not help you meet these long term goals. Savings hardly earn 4% and are much lower net of taxes. You need your money to generate returns and these returns need to generate additional returns. It is only through investing that you can make money work for you.

3. Investing also needs to be looked from a tax efficiency perspective. If you park your money in a savings account, then you do not get any tax benefits. On the other hand, the interest you earn on these savings accounts attracts the peak rate of tax; most likely 30% in most cases. Investing through equities can be a lot more tax efficient. To begin with, dividends are tax-free. Long term capital gains are free of tax and short term capital gains are taxed at a concessional rate of 15%. Alternatively, if you invest in equities through Equity Linked Savings Schemes (ELSS), you get the additional benefit of tax rebate under Section 80C of the Income Tax Act. This makes investing through equities and mutual funds a lot more tax efficient.