Inflation
It is a rise in the level of prices of goods and services in an economy over a specific period of time leading to a fall in the purchasing power. The rate at which the prices go up is called the “rate of inflation”.
Firstly: Do not keep your money idle. If you just keep it in your safe it will loose purchasing power over a period of time. Example: If you have Rs.1000 in your safe today and you keep it there for 10years, it will be worth less after 10 years. If you can buy commodities for Rs.1000 today, you will probably require Rs.1791 at 6% rate of inflation to buy it 10 years down the line. So do not keep money locked up in your safe and always invest money.
Secondly: While investing, you have to make sure that the rate of return on your investment is higher than the rate of inflation.Example : If the price of a commodity is Rs.1000 this year and next year the price is Rs.1060 then the rate of inflation is 6%. So, when you make an investment, make sure that your rate of return on the investment is higher than the rate of inflation.
Power of compounding
The ability of an asset to generate earnings, this addition of earnings to the principal in order to generate their own earnings is called compounding.Example: If you invest Rs100000 at 12% interest per year you would have an interest of Rs12000 at the end of the first year & Rs14400 at the end of the second year, and so on.The real power of compounding comes with time. The earlier you start saving, the more your money can work for you.
Real Fact – Suppose you invested Rs.10,000 in a leading indian company in 1980(100 shares each @ Rs.100) your investment is worth around Rs.458cores today Value of one share on last Friday is Rs.477.
Here is the break up details.
1981 – 1:1 Bonus =200 shares
1985 – 1:1 Bonus =400 shares
1986 stock split to Rs.10 face value =4000 shares
1987- 1:1 Bonus =8000 shares
1989- 1:1 Bonus =16000 shares
1992 – 1:1 Bonus =32000 shares
1995 – 1:1 Bonus =64000 shares
1997 – 2:1 Bonus =1, 92,000 shares
1999 stock split to Rest. 2 face value =9, 60,000 shares
2004 – 2:1 Bonus =28, 80,000 shares
2005- 1:1 Bonus =57, 60,000 shares
2010 – 3:2 Bonus =96, 00,000 shares
Please note that the above data do not capture the dividend income earned during the last 30 years at all. For example in last year the dividend declared was Rs.6 per share. So you would have earned Rs.5.76 cores last year alone as dividend income. Not bad for a Rupees ten thousand investment!
“Simple things take lots of courage and patience to practice”