The law of inertia states that “A body will preserve its velocity and direction so long as no force in its motion’s direction acts on it”. How an object remains in the state of rest until and unless an external force acts on it, so does savings of a person. They remain idle in the bank account until and unless acted upon by the person itself.
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Why do potential investors face this problem?
Here are a few reasons why we face the investing inertia problem.
- Procrastinating: All of us face a starting problem. Let it be going to the gym or investing. We face this problem everywhere. Procrastinating our investment decisions is not uncommon. The initial hiccup can be linked to various reasons like excessive choices to choose from or the fear of making a wrong decision.
- Choice overload: With a lot of investment choices available the confusion of picking the investment avenue that suits you is justified. With the ever-growing investment options, choosing a few out of them is difficult. So people settle for choosing none and leave the money idle in a bank with a justification that they are earning an interest and not losing value. But your money is earning value only nominally as inflation is eating up most or all of it.
- Too many calculations: Scared of math? Well most of us are. To estimate the amount that we might need at retirement or our child’s education taking into account the inflation, risk and market returns are surely a tedious task.
- Fear of making the wrong choice: We often end up doing nothing with the fear of making a wrong choice. We strongly believe in the quote “Known devil is better than unknown angel” when it comes to our investment. So we end up parking our money in banks and earn very less interest when the same money has a lot more potential to give us better returns.
How does it affect wealth creation?
Depositing money in a bank at 4% interest per annum is equal to keeping money idle or even worse losing it. This is because the wealth created by your bank on your deposit is wiped away by inflation. The current inflation return in India is 3.69%. Therefore the real interest you are earning on your money is 0.299%.
Let’s take a small example of depositing Rs 1,00,000 for 5 years in your savings bank for 5 years at 4%. You would’ve earned Rs 21,666 as return and the value of your Rs 1 lakh is now Rs 1.21 lakhs. But this is the return without considering inflation. Taking the current inflation rate of 3.69% into account, the real rate of return is 0.299% per annum. Therefore, the value of Rs 1 lakh deposited for 5 years is Rs 1,01,560.
Now let’s see what the same investment into mutual funds would’ve given you in 5 years. A lump sum investment of Rs 1,00,000 made 5 years back in HDFC Small Cap Fund is worth Rs 2.38 lakhs after adjusting for inflation at 3.69%.
|HDFC Small Cap Fund||Savings Account|
|Value of Rs 1,00,000 before inflation||Rs 2,78,228||Rs 1,21,666|
|Value of Rs 1,00,000 after inflation (3.69%)||Rs 2,38,836||Rs 1,01,560|
|Real rate of return per annum||18.34%||0.29%|
How can one overcome it?
There are certainly ways to overcome investing inertia problem.
- Do your basic research: The internet is loaded with information on different investment products available in the market. All you have to do is to know about them by doing your research. People overstate about investing in the right product, at the right time with the right strategy. All one has to do is do a basic due diligence and check about the product and the issuer.
- Start investing in mutual funds: Invest regularly in mutual funds through SIP to overcome the problem of timing the market. And for lump sum investment, you can choose STP option.
- Take help for things you do not want to do: Determining how much to invest, where to invest and how to invest can be a little tedious when you know nothing about investing. In this case, you can take help of financial advisors. Now with the technological advancements, there are many online platforms that have come up. They do everything for you with zero paperwork. Let them do that math for you while you can sit back and relax.
I’m sure Sir Isaac Newton himself didn’t know that one of his laws can be applied for investments and investors as well. Do not let your savings sit idle in the state of rest and come out of your inertia.
Invest in mutual funds with Scripbox. Happy Investing!