Welcome back to the 40-day financial transformation series, where we’re about to take a leap into leveling up your financial knowledge. In this journey, we’ve covered a multitude of financial topics, and today’s blog is all about making your money grow. We’re stepping into innovative investments that you might not be aware of, expanding your financial horizons.
To start this journey, the first step is to cultivate the mindset of seeking returns on your money. The percentage of returns you aim for is crucial, but it’s equally important to understand the risk associated with higher returns. We’re not going to delve into the stock market or its related instruments today, as they come with a degree of volatility.
Investing in the stock market can offer substantial returns, but it also exposes you to market fluctuations. Your investments may rise or fall with market conditions, making returns uncertain. So, in this blog, we’ll explore investment avenues that aren’t tied to the stock market, offering a sense of fixed returns and potentially lower risk.
The goal is to make your money work for you, with an element of predictability in the returns you can expect. We’re not here to provide a one-size-fits-all solution, as financial decisions are highly individualistic. Instead, we’ll discuss various avenues and methods that can potentially help your money grow.
For instance, if you have 1 lakh rupees today, it’s essential to understand how to put it to work. We won’t prescribe a specific path for your money, but we’ll introduce you to a range of options that you can explore further to align with your financial goals.
Let’s dive into a vital concept, compounding. Imagine you’ve invested in a product with a fixed return of 12% or even 13%. If we take 13%, after one year, your initial 1 lakh rupees wouldn’t remain the same. It would grow to 1,13,000. The real magic of compounding lies in how your money accumulates over time.
In simple terms, the next year, you wouldn’t earn interest on just 1 lakh. You’d earn 13% on the increase of 1,13,000. That’s the beauty of compounding, where your returns build on your returns, creating exponential growth. This is what we’ve been emphasizing throughout the financial transformation series. Whether you’re investing in SIPs or other instruments, compounding is at work, making your money grow over time.
Now, let’s explore the impact of a mere 1% change in returns. Suppose you’re investing 20,000 rupees monthly through SIPs for 30 years with a compounded return of 12%. In this scenario, your total wealth would be approximately 7 crores. But if those returns increased by just 1%, your wealth would jump significantly, reaching around 8.8 crores. This slight 1% difference made a staggering 1.7 crores in extra wealth.
It’s important to understand that with greater returns come higher risks. However, it’s crucial to consider your age and risk tolerance. For someone like Rahul, at 18 years old, who has time on his side, taking on more risk may be justifiable. But for someone closer to retirement, a conservative approach may be more suitable.
Investment decisions depend on various factors, including your age, financial goals, and risk appetite. The bottom line is, that compounding plays a vital role in making your money grow, and understanding the nuances of returns is crucial for smart investment choices.
Now let’s explore an innovative investment idea – Peer-to-Peer (P2P) lending. P2P lending is a concept where you can potentially earn attractive returns by lending your money to individuals or businesses through online platforms. While I will introduce you to this concept, please note that this blog is not sponsored, and I’m sharing this information for educational purposes.
Here’s how P2P lending works. There are various P2P lending platforms such as Money Quick’s Extra and Credit Mint, to name a few. Let’s take Money Quick Extra as an example. On this platform, you can earn up to 12% returns with no lock-in period, providing flexibility to withdraw your funds when needed.
You might be wondering about the legitimacy and regulation of P2P lending. These platforms work as technology companies, connecting investors with RBI-approved P2P lending companies. For instance, Lending Club is one such company. These tech companies facilitate the lending process, allowing individuals like you to invest in loans provided by the RBI-approved lending companies.
So how does it work? Imagine you invest, say, Rs 10,000 on a P2P lending platform, and you’re not alone. Many other investors like you are participating. The funds collected from investors are then provided as loans to borrowers. These borrowers could be individuals or small businesses seeking loans. This diversification among numerous borrowers reduces the impact of any single default on your investments.
But what if a borrower defaults on their loan? P2P lending platforms assess the creditworthiness of borrowers and offer loans at higher interest rates, sometimes up to 25%. This interest rate differential acts as a cushion against potential defaults. In essence, even if a few borrowers default, the higher interest rates charged to other borrowers help mitigate the impact on investors.
P2P lending offers an opportunity to potentially earn attractive returns, but it’s important to do your due diligence and understand the risks involved. While it’s a promising investment avenue, it’s essential to remember that returns are not guaranteed, and the risk of borrower defaults exists.
Let’s dive into the concept of invoice discounting, another innovative investment idea. Imagine a scenario where a company, let’s call it Soni, suddenly experiences an increase in demand for a specific product, like large-screen LEDs, especially during a lockdown. Soni decides to purchase 50,000 units of a particular hardware component to fulfill this demand and is willing to pay 10,000 rupees per unit. For the supplier, we’ll call it the ABC company, this is a significant contract worth 50 crores. However, the challenge arises when the ABC company doesn’t have the necessary capital to fulfill the order, amounting to 50 crores.
Now, you might wonder why the ABC company can’t handle such a profitable deal. Let’s break it down. The ABC company is in a lucrative position, expecting a profit of 20 crores from the 50 crores deal with Soni. However, there’s a catch. Soni has offered a credit period, which means they’ll pay the ABC company for the hardware after 90 days. This delayed payment creates a dilemma for the ABC company. They need 30 crores in working capital to manufacture the components, but their funds are tied up for the next 90 days. They find themselves in a financial bind. This situation is where invoice discounting comes into play.
The ABC company can seek the help of an invoice discounting platform, which specializes in providing immediate financing solutions. Here’s how it works. The ABC company uploads its sales invoice to the platform, which is the proof of the 50-crore deal with Soni. The invoice discounting platform evaluates the invoice, checking the credibility of Soni, and offers a discounted value, typically a percentage of the total invoice value. For example, if the ABC company requests a 50-crore invoice, the platform might offer them an immediate payment of, say, 45 crores, assuming a 10% discount. This discount acts as a fee for the financial service provided.
The ABC company now has the option to receive 45 crores in advance instead of waiting for the 90-day credit period to end. This provides them with the working capital needed to produce the hardware components immediately, meet the demand, and keep their operations running smoothly. In this way, invoice discounting allows businesses to bridge the gap between delayed payments and immediate financial requirements.
The invoice discounting platform, in this case, acts as an intermediary, facilitating quick access to funds by assessing the credibility of invoices and offering a discounted value as a solution for businesses facing cash flow challenges due to delayed payments.
While the ABC company receives its working capital upfront, the platform earns a fee for its services. The platform’s evaluation of Soni’s creditworthiness helps ensure a safer transaction for the ABC company.
This concept of invoice discounting benefits businesses by providing timely access to funds, allowing them to manage cash flow more efficiently and seize growth opportunities. It’s an innovative way to address the cash flow challenges that many businesses face when dealing with delayed payments from customers.
It’s important to note that invoice discounting can be an attractive investment avenue for individuals looking to earn returns by financing such transactions. The platform facilitates the transaction, ensuring both parties benefit from this financial solution.
Invoice discounting is a financial practice where businesses can unlock the cash tied up in their outstanding invoices by selling them to a third party at a discount. This concept can be a valuable tool for managing cash flow and ensuring liquidity in a company’s operations.
The process begins when a company, let’s call it ABC, raises an invoice, in this case, for 50 crores plus taxes, and expects to receive payment from a client, in this case, Soni. However, for some reason, the payment hasn’t been made on time. To address this, ABC can take the unpaid invoice and approach a platform that specializes in invoice discounting.
On this platform, the invoice can be sold at a discount. This means that a financial investor or entity on the platform is willing to purchase the 50 crore invoice for less than its face value. In return, ABC receives immediate access to the money it needs. This is especially useful for ABC, as it allows them to avoid cash flow issues and continue their operations without waiting for Soni’s payment.
The reason someone might want to buy the invoice, even at a discount, is that they are willing to invest in it, anticipating a return on their investment. They might be willing to pay 45 crores for the 50 crore invoice. In essence, they are willing to forgo 5 crores in exchange for immediate access to a significant amount of money. This concept of forgoing a portion of the payment for quicker access to funds is where the term “discounting” comes from.
Now, you might wonder where the entity purchasing the invoice gets the funds to do so. Often, it’s from a pool of investors who are looking to diversify their portfolios. They put their money into this platform, and the pool becomes a source of funds for purchasing discounted invoices. The profit generated from these transactions is then distributed among the investors.
However, there are a few key considerations when delving into invoice discounting. First, verification of the invoice’s authenticity is crucial. Platforms typically ensure the invoices are legitimate and not subject to dispute. Second, there’s a risk of default, meaning the client, in this case, Soni, might not honor the invoice, leading to a loss for ABC and the investors in the invoice. This risk must be carefully assessed and managed.