Only stocks can give significant gains over a very long period of time. Fixed income instruments do not yield real returns in India, in the present market conditions where interest rates are low and inflation presently is around five percent but could go up to 10 percent or even more.
Many people mistakenly believe that stock markets are highly risky. yes they are risky for speculators and people who enter without any basic preparation. Actually risk comes from not knowing what we are doing and the so-called safe investment options can turnout to be not only risky but quite unproductive also.
You have two options before you, as follows:
1. You may learn ‘Value Investing’, in which case please buy the best book, ‘The Intelligent Investor’ by Benjamin Graham and get started immediately. You may visit my blog atValue Investing.
2. If you do not want to spend a lot of time on investing, you may simply invest your corpus in an ‘Exchange Traded Fund (ETF)’ that mirrors a popular index like DAX, Dow Jones, etcetera or any good mutual fund.
Now the most important aspect of investing begins. You simply forget about the investment till 20 years.
Following table shows what your investment could be if it is able to generate a compounded annual growth rate (CAGR) of 15% per annum or 1.25% per month, which is very much possible.
I have assumed an annual inflation rate of 9.96%, which is probable in India, where I live, but in the US it is very unlikely. So, if the inflation rate is 2% per annum, you will end up with a net future value of US$ 911,208, quite a significant sum.
Note: This is a reproduction of the question I had answered
on the website ‘Quora’.
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