The Need to Invest
The Need to Invest
A Comprehensive Exploration
by PESAWALA
Understanding the
Motivation to Invest
The act of investing is not just about chasing higher returns, it's fundamentally about securing financial stability and building a robust foundation for future aspirations. Let me begin by highlighting the consequences of not investing surplus cash.
If one merely saves money without investing, the corpus accumulated over a working life may only suffice for a limited post-retirement span.
For instance, a hypothetical scenario shows that even with diligent savings, a non-investor might run out of funds within 7-8 years after retirement. (This is what had happened to my father). This underscores the essential role of investment in combating the ever-rising cost of living and ensuring financial longevity.
The Power of
Compounding & Growth
One of the most compelling arguments for investing is the exponential impact of compounding returns. Surplus income, when invested at a reasonable annual growth rate (such as 12%), can multiply far more effectively over 20 years compared to mere cash accumulation.
This multiplier effect signifies the power of compounding: the process where earnings themselves start generating further earnings, leading to wealth creation that can significantly outperform simple savings methods.
Asset Classes and
Their Characteristics
Investment decisions are guided largely by the choice of asset class, each carrying distinct risk and return profiles. Let us categorize assets into four major classes:
(1) Fixed Income Instruments: These avenues, such as bank fixed deposits and government bonds, offer safety of capital with moderate returns, generally ranging between 5-10% as of recent years (2026-27). While they may protect the principal, their returns might lag behind inflation.
(2) Equity: Investing in shares of publicly listed companies carries no capital guarantee but holds the promise of higher returns. Historically, Indian equities have yielded up to 12-20% CAGR over the long term, albeit with higher risk.
(3) Real Estate: Real estate investment enables capital appreciation and rental income but entails complex transactions, large cash outlay, and liquidity constraints. Returns are less predictable and vary greatly by locality and market cycles.
(4) Commodities (Bullion): Investment in gold and silver is considered relatively safe, with long-term returns around 5-8% (10-16% in India recently), but not as encouraging as equity over extended periods.
A note of caution: PESAWALA specifically advises caution with Cryptocurrencies, F&O and Intraday Trading given the lack of regulatory oversight, advocating instead for well-established asset classes.
The Importance of
Diversification
and Asset Allocation
Diversifying investments across various asset classes is recommended to mitigate risk and maximize returns. This strategy, termed asset allocation, adjusts the proportion of equity, fixed income, and precious metals based on individual risk appetite and life stage.
For example, younger investors may lean heavily towards equities, while those nearing or in retirement may prefer safer options like government bonds. PESAWALA suggests a standard allocation (60% equity, 20% precious metals, 20% fixed income) for aggressive investors, and a more conservative mix for retirees.
Essential Considerations
Before Investing
Before embarking on the investment journey, several crucial points warrant attention:
(a) Risk vs. Return: Higher potential returns invariably come with greater risks; thus, understanding personal risk tolerance is vital.
(b) Beating Inflation: Investments, especially in equity, are necessary to outpace inflation and preserve purchasing power over time.
(c) Liquidity and Accessibility: Real estate, while potentially lucrative, may not provide quick liquidity unlike stocks or fixed deposits.
(d) Long-term Approach: Investing should be viewed with a multi-year perspective; frequent trading or seeking short-term gains often leads to suboptimal results.
My Inference
and Key Takeaways
The central takeaway from PESAWALA Digest is the profound impact of compounding and the necessity of selecting appropriate asset classes aligned with individual goals and risk profiles.
Equities are highlighted as particularly potent for long-term wealth creation, but prudent diversification, awareness of inflation, and regular review remain essential practices.
- Jishnu Chatterjee,
Wednesday, Nov. 5, 2025.
