“How much profits / returns will this investment give?” is a question similar to the “will your dog bite?” question.
It warrants a similar answer too. You bet that is not very reassuring.
But let me rephrase this for you.
“What is fair to expect?” is probably what you really mean.
That…. is an amazing question.
Fair expectation from an investment is a good place to start evaluating your options.
When we consider ‘fair expectation’ that will answer three critical questions for you.
Worthwhile or not?
Why invest money?
If your answer is – “so that I can use it in future” then the minimum your investment should return is inflation rate.
If your investments don’t give you more than inflation you may as well spend the money today and enjoy the good things of life. Why even bother putting it away?
A ‘fair return’ expectation is that which beats inflation.
A big mistake you can do and something most advisers also do is wrongly estimate inflation. How much is inflation do you think?
If you say, 6% or 7% as the government says, you should consider this. The government assumes you spend 50% of your income on food. Tell me, do you do that? 50% on food. Really?
Understand that any government data is based on and considering the average citizen. An average Indian citizen earns Rs.93,293/- a year. That is less than Rs.8000/- a month. And so he obviously spend 50% on food and his inflation is at 7%.
Just look at yourself and on things you spend on.
A careful study on how expenses of affluent Indians like you go up year on year and on things you spend on, shows this figure to be about 12%. The cost of school education, transportation, holidays, club memberships etc. And this is not even including lifestyle upgrades.
12% is how much your investments should return, if investing has to be worthwhile for you.
If you aren’t getting at least 12%, remember you are destroying wealth, wasting time and effort.
Now, let’s go searching for investment options that will give you those returns!
Why will an investment give that kind of returns?
There are two reasons why any investment will gain value
Does the past justify the expectation?
Money speaks the language of mathematics.
Such as the dog that might or might not bite - future is the only thing I can’t predict. However, the past is a good indicator.
Compelling stories of why an idea will be the next big one, how it will change the world and make you a billionaire are nice to hear. Stories don’t add up to the bank balance. Please show me the numbers. Not just the last few months numbers, the numbers from a fairly long past.
Ask for the numbers, the profits from the past, returns over a long period of time, the order book, the cost structure, whatever other relevant number to justify the expectation. This is something your adviser should help with.
Put these together and you have a great yardstick to measure whether the investment makes sense or not.
Three awesome questions to ask your adviser about returns from investments
Good questions you should answer in your mind
You get the drift?
Now, returns don’t only mean what is available to take. It also means, what actually comes to your pocket. Costs and taxes can shrink the size of the money coming into the bank.
Know exactly what you would get from your investments – after paying your adviser, his boss, the regulator, the government, the governor’s dog and the whole machinery that keeps a watch on your money.
Read on here to know..