Unit 10: Systematic Savings and Investments PDF

# UNIT 10: SYSTEMATIC SAVINGS AND INVESTMENTS In this unit we will learn about; - What is Savings? - Investments and types of investments? - Time Value of Money - Systematic Investment Plan - Net Asset Value ## 1. Savings Saving is the activity of setting aside a part of cash/kind for further u...

# UNIT 10: SYSTEMATIC SAVINGS AND INVESTMENTS In this unit we will learn about; - What is Savings? - Investments and types of investments? - Time Value of Money - Systematic Investment Plan - Net Asset Value ## 1. Savings Saving is the activity of setting aside a part of cash/kind for further use. The loss to saving could be wasteful expenditure or non-economical spending. For example, when a particular sum of money is intended for buying all your stationary requirements, it is a wasteful expenditure if you use the money for buying chocolates and ice creams and it is a non-economical spending if you only one note book by using the entire money. You may ask questions like- How can buying chocolates could be a wasteful expenditure? How can buying one note book could be regarded as non economical spending? When you are given money to fulfill all your stationary requirements, if you spend that money for some other purpose, it is wasteful and if you buy only one costly note book, it is non economical spending. I.e., (value of money is not realized). Savings can be defined as "the portion of disposable income not spent on consumption". Many of us use the words “saving” and “investing” interchangeably. But they are quite different. Saving is storing money safely like putting cash in a bank or locker in your house or purse etc. to meet out upcoming expenses or emergencies. But, this kind of “saving”, you earn nothing or a low, fixed rate of return and you can withdraw or have access to your money, easily. Saving is the first step to investments. Since, without savings, investments cannot take place. ## 2. Investment Investment means employment of funds in Financial or Real assets with an element of risk involved in respect of return and the principal amount with the hope of deriving future benefits. An investor is expected to be compensated for: - Sacrificing current consumption - Effects of inflation and - Risk taken Investments can be made in any one of the following assets. ### Financial assets: - Equity shares - Preference shares - Share Warrants - Exchange Traded Funds (ETFs) - Global Depository Receipts (GDRs) - Units of mutual funds - Debentures - Debt securities - Commercial papers - Deposits with companies and banks - Post office savings certificates - Provident Fund investment(PF) - Insurance policies ### Real assets: - Real estate - Gold - Silver - Diamonds - Art pieces/Artifacts - Stamps - Coins - Antiques ## 3. Speculation Short term investments are known as speculation. In speculation there is an investment of funds for a short period to get some returns. The speculator makes use of the fluctuations in the movement of price of an asset and has high risk. There are two main categories of speculators in stock market namely bulls and bears. ## 4. Why investment? Anyone can choose investment with the objective of the following: - To get return on investment in the form of dividend, interest, capital gain and capital appreciation - To earn above inflation. - To safeguard the funds from various theft. - To get tax advantage like deductions and exemptions from income. - To create collateral security for future needs. ### Calculation of return on investment Holding period return = (Sale Value of the price - Purchase price) + Cash received / Purchase Price * 100 **Illustration 1. ** Mr.Surya purchases a company's share for ₹900 and sold it for ₹1000 after a period of 1 year. During the period, he also received a dividend of ₹35. Find out the return. Return = (1000-900) + 35 / 900 * 100 = 15% ## 5. Time Value of Money A fixed sum of money given now and given after a period of time has different values. Time value of money is a concept that addresses the way the value of money changes over a period of time. For example, if you are given an option to receive ₹1,000 today or after 5 years, what will be your choice? Your answer must be receiving the money today. Because, any product you want to purchase today for ₹1,000 may not be sold or made available for the same amount after 5 years. So the money you receive today is worth more than the promise or expectation that you will receive on a future date. ## 6. Interest Interest is a charge for borrowing money, usually stated as a percentage of the amount borrowed for a specific period of time. Simple interest is computed only on the original amount borrowed. It is the return on that principal for one time period. In contrast, compound interest is calculated each period on the original amount borrowed plus all unpaid accumulated interest. The power of compounding is shown below. When a fixed sum of ₹1,000 is invested with an interest rate of 10% per year the returns are as follows. | Year | Returns in when Simple Interest is taken | Returns in when Compound Interest is taken | |---|---|---| | 1 | ₹110 | ₹110 | | 2 | ₹120 | ₹121 | | 3 | ₹130 | ₹133.1 | | 4 | ₹140 | ₹146.4 | | 5 | ₹150 | ₹161.1 | | 6 | ₹160 | ₹177.2 | | 7 | ₹170 | ₹194.9 | | 8 | ₹180 | ₹214.4 | | 9 | ₹190 | ₹235.8 | | 10 | ₹200 | ₹259.4 | | 15 | ₹250 | ₹417.7 | | 20 | ₹300 | ₹672.7 | | 25 | ₹350 | ₹1083 | | 30 | ₹400 | ₹1745 | | 35 | ₹450 | ₹2826 | | 40 | ₹500 | ₹4526 | | 45 | ₹550 | ₹7289 | | 46 | ₹560 | ₹8018 | | 47 | ₹570 | ₹8820 | | 48 | ₹580 | ₹9702 | | 49 | ₹590 | ₹10672 | | 50 | ₹600 | ₹11739 | **Illustration: 1. Calculation of Future value of one time investment.** What is the future value of today's investment of ₹100 after 5 years if the interest rate is 5% and compounded annually? Formula: FV= PV (1 + i)^N5 FV = Future Value, PV=Present Value, i=Interest rate, N=Number of years FV = ₹100 (1+ .05)^5 FV = ₹100 (1.2763) FV = ₹127.63 **Illustration: 2. Calculation of Future value of series of investment.** A person invests ₹100 at the end of every year which gives him 5% interest compounded annually. What is the future value of this investment after 5 years? **Method 1.** FV = ₹ 100 (1 + 0.05)^5 + ₹100 (1+ 0.05)^4 + ₹100 (1+ 0.05)^3 + ₹100 (1+ 0.05)^2 + ₹100 = ₹552.6 **Method 2.** FV = A (1+r)^n /r FV = 100 X 5.526 = ₹552.6 A = Annual Investment, r = Rate of interest, n = Number of years **Method 3.** It can also be calculated with the use of Future Value Interest Factor for an Annuity Table. FV = A (FVIFA 5% and 5 years) FV = 100 x 5.526 = ₹552.6 **Illustration: 3.** What is the present value of ₹121 to be received after 2 years, when discounted at 10%? PV=FV [ 1 / (1+r)^ n ] or PV = FV (FVIF 10% and 2 years) PV= Present Value, FV=Future Value, r= Rate of return, n=Number of years PV = 121 [ 1/ 1+0.10]^2 PV= 121 [0.82645] = ₹100 ## 7. Systematic Investment Plan (SIP) Investments can be made at one time or at regular interval like recurring deposit. Systematic Investment Plan is the investment of a fixed amount in any of the financial assets at regular interval. It is the simple and timely investment strategy for accumulating wealth and capital appreciation. ### Salient features of SIP - It allows the investor to buy units on a given date every month or every quarter. - The investor is free to decide the amount to be invested - Small amounts can also be invested. - Tax benefits are available for specified SIP schemes. ## Summary: - Saving is "the portion of disposable income not spent on consumption" - Investment is employment of funds with the hope of deriving future benefits. - Short term investments are known as speculation. - Systematic Investment Plan (SIP) is investment of a fixed amount in any of the financial assets at regular intervals. ## Self - Test questions: **Choose the correct answer.** 1. Savings is the activity of setting aside a part of _____ for further use. - Cash/Kind - Life - Investments 2. Savings can be defined as “the portion of disposable income not spent on ______. - Consumption - Expenses - Investment 3. ______ term investments are known as speculation - Long - Short - Medium 4. Time value of money is a concept that addresses the way the value of ______ changes over a period of time. - Life style - Currency - Money 5. ______ interest can be computed only on original amount borrowed. - Compound - Simple - Weighted ## Fill in the blanks. 1. Savings is ____ of income over expenditure 2. Investments are for ____ period. 3. Under Savings people use their ____ money. 4. Investments can be made in ____ or ____ assets. 5. SIP is investment of a ____ amount in any of the financial asset at regular interval. ## Match the following. 1. Saving - Bulls and Bears 2. Investor - Small amounts can also be invested 3. Speculation - Excess of income over expenditure 4. Investment - Sacrificing current consumption 5. SIP - To earn above inflation ## True or false. 1. Currency is a form of Real Asset. 2. Investment is to make losses out of money 3. Savings are for shorter period. 4. A fixed some of money given now and given after a period of time has different values. 5. Tax benefits are not available for SIP. ## Answer the following in one word or in a sentence. 1. Expand SIP? 2. Define Savings? 3. What is Speculation? 4. Define simple interest? 5. What is compound interest? ## Answer the following briefly. 1. List three types of Real assets & Financial assets? 2. What is Investment? What are the objectives behind Investment? 3. Differentiate between Simple Interest and Compound Interest? 4. Calculate the future vale of today's investment of Rs. 100/- after 1 years if the interest rate is 6% and compounded annually? ## Answer in detail. 1. Differentiate between Savings & Investment? 2. What is Systematic Investment Plan? <br> <br> <br> This text was automatically extracted from an image or document and may contain errors.