What is the Velocity of Money?
The Velocity of Money is the number of times the same money is used for different purposes or to satisfy different needs. In the context of investment, we all keep looking for investment options that are safe and could also give high returns. Knowing that Return is the reward for taking the risk or the higher the risk, the higher the return, which is true to some extent but is not a universal truth. This is where Financial Education and correct implementation of the knowledge gained comes in the picture. What needs to be understood is the point that the money needs to be moving from one asset to another, if & when there is profit in doing so.
Your Velocity of Money
The movement of our funds from one asset to another is very important so as to maximize our returns while taking the minimum possible risk. What usually is seen that people are very reluctant in shifting money from one asset to another especially when the asset is long-term like Fixed Deposit or long term investments, one big reason for the same is the loss of their interest, which is a valid concern. But what many fail to see is the overall return from this decision. Let us try to understand this from an example, If an investor has a huge sum invested in Bank Fixed Deposits for 5 years at a 6% annualized return, and after 1 year, the government issues a bond at 8% annualized return. In such a case, one must consider shifting their money from Fixed Deposits to Bonds. This does not necessarily suggest that you need to shift it, what it means is that the idea should be considered, overall return should be calculated at the end of the period from both the sources taking taxation into account and then the decision should be made accordingly rather than simply being afraid of losing some part of the interest. Now when we talk of risk, particularly in the case of these two asset classes and considering how the economy is experiencing a crisis, both are equally risky.The idea is to be aware of the importance and profitability of the same if one keeps changing the asset classes that they invest in, making their portfolio more dynamic and high-yielding. It is okay to take a step that seems like a big step now but is going to profitable in the long-run. This is what intelligent investors do, take necessary actions on time, while most wait and watch an opportunity into dust.
How can it be done?
Sometimes, it is not one being lazy or reluctant, it is their lack of time that they are not able to take any action or in some cases, their lack of confidence. To solve such a problem, one may look for a professional to do the job for them which of course, will come at a cost and but that will be a negligible amount compared to the profit that one will make. The idea is to not let the money be idle or be in any asset which is giving you less return when you have a better option.