Sitting idle does more harm than good. So is it with cash. Accumulating cash in your savings account and watching it grow over the years can give you a sense of security. But that can be deceptive. On closer scrutiny, you’d realise that you may be losing money without even realising it?
Idle cash loses value
Inflation eats into idle cash.
Consider the following scenario: A cup of tea costs Rs 10 today. You have Rs 100 with you. With this amount, you can buy 10 cups of tea. But you decide to save the money with your bank for a year. Fast-forward a year, a cup of tea costs Rs 12. That means you can buy no more than eight cups of tea. You realise that the value of a hundred-rupee note has diminished. This is the impact of inflation.
You might argue that the money in your savings account earns regular interest. But, that can be negligible in the face of inflation. If your savings account earns an interest of 3.5% and retail inflation is at 4%, you are actually losing money. To put it simply, you are losing the potential to earn more by letting cash sit idle.
Investing money in mutual funds
Just like you work to earn money, your money should work to earn money for you. You can put your money to work by investing it. There are multiple avenues where your money can earn higher returns for you. Mutual funds, for instance, is a good place to start. This is a good option for people who are new to the world of investments.
Benefits of investing in mutual funds
The advantages of mutual funds are aplenty. The risk level is quite low – especially in options such as debt mutual funds – and the returns are pretty good. For example, the interest rate on a fixed deposit is around 6.5~7.5%; saving account interest rates range between 3 and 6%. In comparison, mutual funds offer anywhere between 10-15%.
They also have the potential to earn you more as they dabble in a variety of financial instruments such as stocks, bonds, and other money market instruments.
There are different types of mutual funds available such as debt funds, equity funds, balanced funds, sectoral funds and so on. You can invest in any of these funds based on your investment goal. For instance, if you are interested in long-term investment growth and high returns, equity funds are a suitable choice. Equity funds invest a major portion of the money in stocks.
Similarly, the core holdings in a debt fund are fixed-income investments. Since the main goal of debt funds is capital preservation and income generation, these funds are more suitable for those who are risk-averse.
Although some element of risk is involved in mutual funds, the threat of negative returns is not very high. That’s because fund managers invest in a range of stocks and bonds, rather than focus on just one. This enables fund houses to hedge its risks. Another upside is that the minimum investment in mutual fund is as little as Rs 500 per month.
To sum up
Cold cash is always important, but asset management is equally crucial. It is important to keep a chunk of money in your bank in case of emergencies. But, if you want to your money to expand, investing in financial instruments such as mutual funds are a good option.