This is how you can make your money work for you

All our life we work, work, work for money. How would it be if we can make our money work for us? Great! Right. Let us look at how we can make our money work for us. Money when invested well gives us a return on investment. We can then say the money is working for us by giving a good return on investment.

Here we need to know that money has a time value. Rs100 today can buy more than Rs100 a year from now if the inflation rate is say 7 per cent. So, Rs100 today will be Rs100/1.07 next year if the inflation rate is 7 per cent. That is if the inflation rate is 7 per cent than Rs100 will have to be divided by 1+ 0.07 or 7 per cent =1.07.

This will give us Rs 93.46 as the value of Rs100 today on the same date next year. The value of Rs100 today will be Rs 100/(1.07*1.06) if the inflation is 7 per cent this year and 6 per cent in the next year. Giving us the value of Rs 88.17 of Rs100 two years later if the inflation in year one is 7 per cent and year two 6 per cent. Likewise you can calculate the real value of Rs 100 today in any future year if we know the inflation rates for the intervening years.

This method of calculating the real value of money on a future date is called the 'time value of money' concept. So, if Rs 100 today is worth only Rs 93.46 next year and Rs 88.17 the year after we need to make Rs 6.54 in year one and Rs 5.29 in year two just to be worth the same as Rs100 in the beginning in year one and two. So any return on investment of less than Rs 6.54 in year one and Rs 5.29 in year two we would be worth less than what we started off with in the first place. So any return on investment for any year will have to be more than the inflation rate just to stay even.

After this very important brief on the concept of the time value of money let us look at the various types of investments that we can make. Broadly the various types of investments we can make fall under these categories, stocks or shares, bonds or fixed return investments, mutual funds, real estate, gold and collectibles.

Here I have not included crypto because crypto is clearly not an investment grade asset. Over a very long period say 25 years stocks or shares have proved to be the asset class which gives the highest return. However for shorter periods such as 3 to 5 years real estate and other asset classes have given returns more than the stock market. So, a deft investor who can maneuver between asset classes can earn supernormal returns. This requires an expert's understanding of the economy and the asset classes.

If you want to stick to one asset class and have a long term horizon then stocks or shares are the best option. You can either build a portfolio of few good stocks or just buy the index. The index like the Nifty or Sensex in India or the Dow or Nasdaq in the US. For people who find stock picking difficult they can opt for buying an index linked mutual fund.

In fact, for developed markets like the US the index normally outperforms even seasoned investors. However, in a not so mature market that is India there is still scope for the savvy investor to get returns over and above the index. Over the past 20 years, Nifty 50 has given 14.18 per cent CAGR returns. Over the same period gold has 12.38 per cent CAGR returns, while fixed deposits have given 7.1 per cent average CAGR returns (according to Mirae Asset).

These are long term averages. If one can surf between asset classes or find special opportunities within say stocks or real estate one can make much higher returns. Sometimes even over 100 per cent returns in a year. Though most people suggest the mutual fund route to invest in stocks or bonds figuring out the art of investing well can have superior payoffs.

Even if initially one can't get the investment game right and lose money but, the learning from undertaking the self investment path will result in greater returns eventually making you richer and give you a feeling of accomplishment. Here I would stress the importance of a long term perspective on investment gain and not a trading mentality.

What we don't need is excitement, but a cold focus on returns. We need to work on honing one's investment acumen over a lifetime. It's good to start early���.and now is as good a time as any to start applying oneself to this endeavour.