If you have read Rich Dad Poor Dad by Robert T. Kiyosaki, you should know the difference between two dads. The Poor Dad is always spending while the Rich Dad is investing. That’s the essence of Rich Dad Poor Dad.
If you’re only spending what you earn, you will never be rich. That’s a fact.
Think about it. Your financial well-being depends on the amount of money you get to keep for yourself. If you continuously spend whatever you earn, you will always have to work hard to earn more. That’s going to continue like a vicious cycle. The only way to be rich is to find a way to make money while you’re sleeping and you can do that by investing. (Investing is not a get rich quick scheme. It’s a long-term process that needs patience and learning. We’ve got the learning part covered. All you need is patience.) Before learning about investing, you need to understand the difference between saving and investing.
What is the difference between saving and investing?
Even though most of us use saving and investing mutually, there are fundamental differences in them. Saving is a practice where you put aside an amount of money to access later. That’s what most of us have practiced for all this time. We put aside an amount in a bank for later access. Yes, we will earn an interest when saving but it’s more of a passive (laidback) approach.
Investing is going a step further from saving. Investing is all about trying to grow one’s money and build wealth. Investing is an active process where you try to grow your money. In a way, saving also falls under investing. Saving is more like the younger brother of investing.
So what about risk?
Before talking about investing, you need to understand what risk is. Why? Because risk is involved in every investment.
Simply put, risk can be defined as an unexpected loss. In investing, there are instances where you might lose your money or you may not get the expected returns. That’s risk in a gist. In different investment opportunities, there are different levels of risk. Some have low risk and some have high risk. If you’re going to be a great investor, you need to understand what you’re getting into. That way, you can strategically minimize your risk and grow your money.
What is this post all about?
This post is for any Sri Lankan who has no idea what to do with their money or where to invest them. I’m going to cover the popular investment opportunities available for any Sri Lankan so that you get an idea of the bigger picture. Keep in mind that this post is an introduction to broader investment opportunities out there. I’m planning to cover everything in detail in the future. Some topics have already been covered and I have linked them for your convenience.
Bank Deposits (Savings & Fixed deposits)
If you’re saving your money in a bank, they fall under bank deposits. Mainly there are few categories of bank accounts and we have explained savings and fixed accounts (most common) for your benefit.
Savings – I don’t even have to explain this. This is the good old savings accounts that you get in commercial banks. Most bank accounts fall into this category. You can withdraw your money any time you want and the bank pay you a very small interest rate for your deposit.Savings accounts are not a great investment because the return you get is really low. And if the inflation rate in the country is higher than the interest rate, you will actually lose money! Read our post on Why you should not save money to understand how inflation and interest work.
Fixed deposits – This is also a common investment among Sri Lankans. Fixed deposits are better than savings accounts because they provide a higher interest. These are also provided by banks and other financial organizations. But there is a catch to fixed deposits. You have to keep the amount in the account until the maturity. Terms and conditions can differ from bank to bank but it’s the same concept more or less.
Stocks (Also known as equity or shares)
A stock is a small piece of a company (don’t take the literal meaning. Of course you’re not getting a “real” piece of the company). It’s a small piece of ownership to a company. If you have one stock from a company, you have a small claim to its assets and earnings in the future. Whether you say shares or equity, it all means the same.
Companies which are listed on the Colombo Stock Exchange can issue stocks to the public (to people just like you and me) and find money for various needs. In payment of money for a stock, we get the ownership of that company. That’s the simple explanation of a stock.
So how can you make money? Because you bought the stock, the company will pay dividends for each stock. Also if the stock price rises, you get to sell them and make a capital gain in the future.
Want to learn more about investing in stocks? Read our in-depth article on How to make money in Sri Lankan stock market. Basically, we have covered everything you need to know.
EPF & ETF
If you have ever worked in a company I’m sure you have come across the terms EPF & ETF. Remember filling a huge cardboard form and stamping it with your thumbs? Well, that was EPF & ETF. First, let’s get to know what these are. Then let’s see how these can be an investment opportunity for you. EPF & ETF are both retirement plans. This is only available for private sector company employees and certain government organizations.
EPF (Employee Provident Fund) – EPF is considered as the largest Social Security Scheme in Sri Lanka and this fund is handled by the Labour Department of Sri Lanka and the management is done by the Central Bank of Sri Lanka. According to EPF Act, an employee (that’s you) has to contribute 8% from your monthly salary and employer (your company) has to contribute 12%.
If your salary is Rs. 100, 000, you have to contribute Rs. 8,000 (8%) and your company have to contribute Rs. 12, 000 (12%) each month. In case if you were wondering why you don’t get the entire salary you were promised every month, it’s because they deduct your contribution. In this case, your take home salary will be Rs. 92, 000 (Rs.100, 000 – Rs. 8, 000). A total of 20% (Rs. 12000+Rs.8000) is sent to the EPF on your behalf.
ETF (Employee Trust Fund) -This is also another Social Security Scheme, something similar to EPF. All the government employees who are not getting the government pension and all private sector employees are members of this fund. Unlike in EPF, only the employer (your company) will contribute 3% of employee’s monthly gross salary.
If your salary is Rs. 100, 000, your company will send Rs. 3,000 each month to the fund. This will not be deducted from your salary.
If you’re employed, you’re entitled to EPF and ETF. So what’s great about these two investment opportunities? First of all, these are retirement plans and your company will invest on behalf of you. That’s like someone else is investing for your future. In these funds, interest rates are higher than other investment opportunities. That’s also another plus. If you have been complaining that you don’t get your entire salary every month, don’t worry. That’s a good thing. You’ll be able to get them when you retire (there also certain exemptions).
We will do a lengthy post on everything you need to know about EPF and ETF in the near future.
Government securities (Treasury Bills and Treasury Bonds)
Imagine that the Sri Lankan Government needs some money. They ask the Central Bank to take care of it. Central Bank of Sri Lanka can issue T-Bills and T-Bonds to the public on behalf of the Government. You can buy these T-Bills or T-Bonds. When you purchase them, the government receives your money.
So what do you get in return? You get the amount you paid + interest for the time period from the government. Read our complete guide on How to invest in Sri Lankan government securities? to learn more.
Mutual Funds (Unit Trusts)
Imagine a basket that’s filled with stocks, bonds, debentures, fixed deposits and other interest-earning securities or investments. They are put together in a portfolio by a fund manager and that fund is called a Mutual fund. These mutual funds can hold hundreds and even thousands of different securities in their baskets. Since mutual funds are a collection of different investment vehicles (like stocks, bonds etc), the risk of losing money is really low because you’re investing in a basket filled with different securities.
If you want to learn more about mutual funds, read our in-depth article on Introduction to Mutual Funds in Sri Lanka.
What is life insurance? The goal of a life insurance is to provide a financial security for your family or anyone who is dependent on you after you die. If you have a life insurance and if you die today, someone who you have named will get the benefits that are in your life insurance policy. To get these benefits, you have to pay a certain amount each month to your life insurance company. This is the most generalized and blunt definition of life insurance.
Life insurance as an investment product is gaining popularity among Sri Lanka. It’s not just about getting insurance so that once you die, your family or someone you name will be benefitted. Most use it also as an investment for the future. So how can a life insurance become an investment? We are planning to do a post on everything you need to know about life insurance in Sri Lanka. Till then, if you’re keen to learn more, you can always speak to a life insurance company. We are currently working on with a preferred Life Insurance company that we can recommend for you. So heads up!
Gold is a physical store of wealth. One can simply purchase gold and hold it for a time until the price increases. Then you can sell it for a higher amount. Most people believe in gold because it has preserved wealth for generations. To understand investing in gold, you need to dig deep into the history of gold. But since you don’t have time, let me give you a quick example.
Imagine you had Rs.100,000 in 1980 and you kept it till 2018. Probably in 2018, you can’t afford everything you could have bought for Rs. 100,000 in 1980. Why? The reason is inflation. That’s why your parents say things like “a loaf of bread was 5 cents back then.” You may find this to be absurd but that’s how money works. Value of money is decreasing over time.
Now imagine you are in 1980 and you had a gold coin. If you have kept it till 2018, the value of the coin could be the same or most likely higher. That’s the benefit of gold. Usually, the value doesn’t decrease over time. (This doesn’t mean that the value of gold is always constant. There are situations where it plummets too.)
There are different ways that you can invest in gold and other physical material that stores wealth. We will do a long post on everything you should know about gold investing in Sri Lanka in the future.
Real estate – Property and land
If you happen to take a look at Colombo and even other parts of Sri Lanka, the construction industry seems to be booming. Wherever you look, you see skyscrapers and fancy hotels. Even lands are been sold by so many property companies.
If you’re rich enough, investing in real estate can be a great source to grow your money. The simple idea is this. You buy something (land or building) and sell it at higher prices after some time. But it’s easier said than done. This involves a higher capital (a lot of money) and the risks can also be high. Some purchase a house and rent it out to another person. That way, you can earn a monthly income too. That’s another way of investing in real estate. We are planning to do a series of posts on investing in real estate in Sri Lanka so stay tuned to our blog.
There are also some lesser-known investment opportunities out there. Sometimes these are hard to find and less accessible than the products mentioned above.
Startups – If you are rich and if you have a high-risk tolerance, you can invest in a startup. A startup is an early stage company. Basically, they are businesses that have just started or still in the concept development stage.
If you have been aware of the local startup scene, you should know by now that there are so many startups that come out. I have no idea about investing in startups and all I know is that it involves high risks and if the startup becomes a success, you will be highly rich too. We are planning to do a post on investing in startups in the future. Till then, if you’re interested, read this post on How to fund your startup in Sri Lanka. This might give you some great insights.
That’s the end of this post. What have I missed? Do you want us to cover anything in specific? If so add your thoughts in the comments below and let me know.
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Like always, investing is a journey that requires learning and patience. We’ve got the learning part covered. All you need is patience.