What is Investment?

Table of Content

1. Objectives of Investment

2. Why Should You Invest in Investment Plans?

3. Why You Should Begin Investing Early?

4. Key Benefits of Investment

5. How does an Investment Work?

6. Types of Investments

7. Categories of Investments

8. Types of Investments Based on the Risk Profile

9. Investments and Risk

10. Why are long-term investments important?

11. The Difference Between Savings and Investment

12. Factors to Consider Before Investing

13. How to Start Investing?

14. How do Investment Plans in India Work?

15. Why is your Choice of Investment Asset Important?

16. What is the Importance of Investment?

17. Investments as Per Life Stages

18. Conclusion

19. FAQs about What is Investment?

Objectives of Investment

Before investing, it’s important to understand why you are investing. While everyone’s individual objectives may differ, the overall goals of investing money may include building wealth, saving for retirement, or creating a financial cushion.

Here are some reasons why you should invest:

To maintain financial security:

Ensuring that your money does not erode over time is a key goal when investing. Instruments such as fixed deposits, government bonds, and savings accounts are all suitable for this purpose. They may not offer the highest returns, but they guarantee that your capital remains secure.

To accumulate wealth:

Investing money is done with the goal of building a sizeable corpus over time. Capital appreciation is an important long-term goal that helps people plan for their financial future. To grow your money, you need to consider your investment objectives and options that can provide high returns. Real estate, mutual funds, commodities, and stocks are some of the best investments for growth but come with risks.

To receive regular returns: 

Investments can be a reliable source of income. Examples include fixed deposits and stocks of companies that regularly distribute dividends. These investments can help cover everyday expenses in retirement, as well as provide supplementary income during working years.

To minimise tax liability: 

In addition to capital growth or preservation, investors may have other reasons for investing. The Income Tax Act, 1961 provides tax exemption to those who invest in options such as Unit Linked Insurance Plans (ULIPs), Public Provident Fund (PPF), and Equity Linked Savings Schemes (ELSS). This type of investment can be deducted from one's total income, resulting in a lower taxable income and a lower tax liability.

To prepare for retirement:

Preparing for retirement is essential. Having a sufficient retirement fund is important to ensure financial security during your later years, as you may not be able to continue working forever. Investing your income wisely can help your funds grow, giving you a comfortable retirement.

To achieve your financial objectives:

Investing can be an effective way to reach your short-term and long-term financial objectives without too much effort or strain. Some investments, such as those with a short lock-in period and high liquidity, can be ideal instruments to store your funds in if you want to save up for near-term goals like financing home renovations or setting up an emergency fund. Meanwhile, investments with a longer lock-in period can be great for saving up for long-term objectives.

Why Should You Invest in Investment Plans?

Investment plans can offer you high returns over time to build wealth and cater for your long-term objectives. Having a good savings plan is important, but it is not enough to guarantee a secure financial future. Investing your money can help keep up with inflation and increase your wealth over time. For example, something that costs Rs 10 today may be worth Rs 50 five years from now. Therefore, merely saving your money is not enough. You need to invest it to ensure that your funds grow with time. Investing in the right plans can offer you strong returns over time to create wealth and achieve your long-term goals.

Investing means putting your money into a investment plan that can increase in value or produce income. As responsibilities rise, greater amounts of investment will be necessary. These are some of the primary objectives for investing:

Why You Should Begin Investing Early?

The advantages of investing early are:

Power of Compounding

Investing early in life gives more time for your money to grow. You can benefit from the power of compounding, i.e., the returns earned are reinvested to earn further returns. As a result, your capital may double over a period.

Stay Ahead of Inflation

Inflation increases the cost of commodities in the future. A Rs. 10 product may cost Rs. 50/- after 5 years. Investing early helps earn better returns to cope with inflation. 

Take More Risks Comfortably

Your responsibilities are less when you are younger, and you can take more risks comfortably. You can sustain short-term market downturns and remain invested longer to earn substantial returns. At the same time, having a life cover ensures that your dependents remain financially secure regardless of market outcomes.

Reach Financial Goals Sooner

Investing early in life will fetch desirable returns early. You can fulfil your financial goals, such as building a home or retiring early, sooner in life. Including life insurance in your portfolio ensures these goals aren't derailed by unforeseen circumstances.

More Time to Handle Market Ups and Downs

Market-related assets are high-risk investments with returns affected by short-term market fluctuations. Investing early gives you more time to handle market ups and downs and derive higher returns in the long run.

Key Benefits of Investment

• Protect your money by investing:

Keeping your money in an interest-bearing asset will shield it from unnecessary spending and inflation. Investing helps you stay ahead of inflation and ensures that your money continues to be worth the same value over time.

• Build your wealth:

Investing is the only way to make your money work for you. It allows your money to accrue interest, and if you reinvest that interest, it will start to generate even more interest.

• Create funds for emergencies:

Creating funds for unexpected expenses can help you weather the storms of life. When you are in a good financial position, it's important to set aside money for difficult times. Having these resources at your disposal can help you manage any challenges that come your way.

• Ensure a stress-free retirement:

After your working life is over, you will no longer have a regular income to rely on. Retirement planning will give you the financial security to enjoy your retirement years without stress.

• Maximize savings:

Investing in tax-saving instruments, including life insurance plans, ULIPs, PPF, NPS, etc can help you to deduct from your taxable income. Such investments also provide you with a tax-free return at maturity. Thus, by investing in the right assets, you can significantly reduce your overall tax liability.

• Invest in life's bigger dreams:

Your salary alone is unlikely to be sufficient for you to buy a car or a house for your family. Nevertheless, by investing a small amount of money in saving schemes, you could make these objectives achievable in a few years.
 

How does an Investment Work?

Investments put your idle money to work and create a corpus or a regular income stream based on the investment type you choose. Understanding how to invest is pivotal before you start the journey. A good knowledge of managing finances to balance risk with rewards minimises your losses. 

The returns on investments are guaranteed or fluctuating, depending on the investment choice.  If you opt for assets like fixed deposits, PPF, recurring deposits, etc., the returns are determined when you start the investment. In market-linked assets, such as stocks, mutual funds, bonds, etc., the returns depend on market conditions. Prudence in investment lies in diversifying your portfolio and choosing the best plans that align with your risk tolerance level and financial goals. 

The key to the best financial planning is to set economic goals depending on the time horizon. Create an emergency fund by putting funds in assets with easy liquidity, such as fixed deposits, certificates of deposits, money market accounts, etc. Assess your existing financial status by factoring in your income and expenditure. Arrive at the surplus available for investment. Choose plans according to your financial goals and budget. Review your portfolio and adjust it according to changing circumstances and needs. 

Types of Investments

In order to understand ‘what is investment’, it is important to first understand your financial goals, and then decide where to invest based on those goals. Apart from investing in physical assets such as real estate and jewellery, there are two main types of investments: equity and debt. Equity investments offer the potential for higher returns but also come with more risk. On the other hand, debt instruments are safer but offer lower returns. Further, understanding the meaning of investment can also be determined by how investments are obtained.

The following are different types of investments in India:

Stocks:

It involves owning shares of a company and earning dividends.

Bonds:

Investing in bonds means lending money to a government or other institution. In return, you will receive regular, fixed payments of interest and the original amount of money at the end of the bond's term.

Mutual Funds:

When investing in mutual funds, money from different investors is collected and managed by a professional fund manager. Depending on your risk appetite, desired investment period, and expected returns, you can invest in Equity, Debt, or Hybrid Mutual Funds. Moreover, investments made into ELSS (equity-linked savings plan) mutual funds qualify for deductions under 80C.

ULIP:

ULIPs, or Unit Linked Insurance Plans, are a combination of life insurance and investment. A portion of the premium is invested in different funds which allows the investor to earn market-linked returns. This plan also offers tax benefits of up to Rs. 1.5 lakh under Section 80C.

Public Provident Fund (PPF): 

 Public Provident Fund (PPF) is seen as one of the best long-term investment choices for those searching for guaranteed returns. It is a government-backed program and there is nominal risk to the primary amount invested.

To make the most of the tax benefits, you should investigate investment options for tax saving and allocate funds accordingly. When considering the implications of investing, consider adding term plans and health insurance plans to your portfolio to protect your family.

Real Estate

Investing in real estate means buying land, houses, or business places to make money. It could bring in rental income, save you on taxes, and help your money grow over time. It does, however, need a lot of money and comes with risks like market changes and upkeep costs.

Savings/Endowment Policy

Savings or investment plans, such as an endowment policy, are types of life insurance that offer both insurance protection and tax benefits. At the end of the insurance term or when the insured dies, whichever comes first, they pay a lump sum. These plans are good for long-term financial planning because they offer sure profits and death payments.

Categories of investments

The categories of investments are:

• An investment in Lending

An investment in lending refers to giving money to borrowers through bonds, treasury bills, etc. Investors investing in bonds allow corporations or governments to utilise their money with a promise to pay back the borrowed funds with interest after a predetermined period. 

• Cash Equivalents

Cash equivalents are highly liquid and can be converted into cash easily when needed. The best options are certificates of deposit, commercial papers, money market funds, etc. These are low-risk, short-term investment options with a maturity period of 90 days. 

Types of Investments Based on the Risk Profile

There are different types of investments based on how risky they are. When you buy, risk means that you might lose some or all of the money you put in. Based on how risky they are, here are different kinds of investments:

Low-Risk Investments

Investing in things with a low risk means that you won't lose much. Most of the time, these assets have smaller returns but more safety and steadiness.

Medium-Risk Investments

Medium-risk options give you a good mix of risk and gain. They have a modest risk, but they could give you better yields than low-risk assets.

High-Risk Investments

There is a chance of significant losses with a high-risk investments plan but there is also a chance of substantial gains.

Investments and Risk

Generally, higher risk accompanies greater potential rewards. Conversely, a more secure investment may not offer the same degree of return. When making investment decisions, investors must consider their own risk appetite. Some may be willing to take on greater risk in order to possibly reap higher returns. Conversely, risk-averse investors may prefer to stay with the safety of conservative investments that will steadily (but slowly) grow. Investment choices and risk tolerance often correlate with life circumstances.

As someone nears retirement, they may seek out safer investments as they no longer have the security of income. In contrast, a younger person may be more amenable to riskier investments as they have a longer time to recoup any losses.

Why are Long-Term Investments Important?

The advantages of long-term investments are numerous. The longer you stay invested, the higher returns you reap. In a bearish market, it is beneficial to hold the stocks for a longer time to neutralise the price fluctuations. Staying invested for longer minimises the risk from short-term market downturns and allows you to benefit from economic growth. 

Small investments made consistently for a longer period in safe investment plans such as PPF, EPF, NPS, etc, benefit from compounding, where your returns generate returns and eventually help in building a substantial corpus. 

Long-term investments are ideal for goals such as children’s education, retirement planning, buying a house, etc., with a longer time horizon. Besides giving more time for your money to grow,  long-term investments offer potential tax benefits. 

Some of the best long-term investment plans include stocks, bonds, mutual funds, real estate, Senior Citizen Savings Scheme, NPS, PPF, EPF, etc. However, before you start investing, assessing your risk tolerance levels and setting financial goals is important.. Additionally, choosing plans that align with your goals and risk tolerance is crucial to achieving the best results.

The Difference Between Savings and Investment

Investing and saving are two different aspects of financial planning. The following are some key differences between the two:

a) Savings

This is the money you reserve from your income for a particular purpose, like acquiring a vehicle, travelling, being financially prepared for an unexpected event, and more. The risk connected to savings is negligible. However, savings do not provide any noteworthy increase of money.

b) Investment

Investing your money wisely can increase its value and provide you with returns. Your financial objectives, such as purchasing a house or paying for your child's education, can be achieved through investments. However, it is important to note that investments carry an element of risk that may differ from one investment product to another.

Factors to Consider Before Investing

To make sure you are investing in the best option to meet your financial goals, here are a few steps to help you choose the right investment:

Establishing your Investment Objectives:

Everyone's financial journey is distinct, and thus everyone's investment objectives are unique. The initial step you can take is to establish your investment objectives. Doing this will assist you with the following: 

Selecting the best investment option:

Once you have determined your financial goals, choose the appropriate investment option. Your selection should be based on the timeline of the particular event or milestone in life. For instance, if you want to purchase a car in three years, you can put your money into a debt mutual fund to reach your objective. On the other hand, if you plan to buy a house in ten years, investing in equity funds and stocks would be more suitable.

Save on taxes with long-term investment options:

Ensure your family's important goals:

Family goals such as a child's education and marriage cannot be left to chance. For this reason, you should choose investment options that offer growth as well as protection.

How to Start Investing?

Several steps are involved in investing. One of them is given below:

• Do research before investing:

Research the vehicles and instruments being considered and don't rely solely on third-party advice. Use your own judgment to make informed decisions.

• Create a budget:

Before investing, individuals should assess their ability to save. This includes making sure they have the funds for their regular expenses and having an emergency fund. Investing can be tempting, but individuals should first make sure they can cover their daily life expenses.

• Understand How Easy It Is to Access Your Money:

Some investors may not be able to sell easily. Some investments may be blocked for a set time period and can't be sold. It's important to know if any investments can be bought or sold at any time.

• Know the Tax Impact of Your Investments:

Selling an investment quickly may not be tax-beneficial due to unfavourable short-term capital gains tax rates. Investors should consider not only the product they hold but also the tax vehicle they use.

• Understand Your Risk Level:

Investing carries the chance of losses, so invest only the amount you are willing to part with. You can also look into ways to reduce potential losses.

• Seek Professional Advice:

Choosing the right plan can be challenging if you are a beginner with little knowledge about market trends and investment plans. You may have a misconception that you need huge sums to create wealth, and you may be confused about the right investment plan. Seeking professional advice is recommended for an informed decision. 

Professional advisors clarify your doubts regarding the small investments and the plans suitable for you. They understand your financial goals, risk tolerance levels, and affordability and advise accordingly.  

How do Investment Plans in India Work?

In India, investments include putting your money into assets such as stocks, real estate, bonds, mutual funds, gold, etc., to earn returns and build wealth over time. The investment plans are categorised as long-term investments and short-term investments based on the timelines. 

Long-term investments involve staying invested for periods over 5 years. The ideal long-term plans are mutual funds, PPF, NPS, EPF, etc. They benefit from the power of compounding, wherein returns are generated on returns to create a substantial corpus on maturity. These investments are ideal for long-term goals such as children’s education or retirement planning.

Short-term investments involve investing for a period between 1 and 3  years. Fixed deposits, recurring deposits, money market funds, and savings accounts are examples of short-term investment plans. They are low-risk investments with lower returns compared to long-term investments. With easy access to cash, they are ideal for immediate needs like planning a vacation, creating emergency funds, etc.

The key to successful investing is opting for plans that align with your financial and life goals, the time horizon you have in mind, and risk your tolerance level.

Why is your Choice of Investment Asset Important?

When choosing a business, you need to find a balance between these three things:

What is the Importance of Investment?

You may be asking why it is important to understand the concept of investment when you could focus on saving more of your income. Saving a part of your earnings each month will build up a reserve fund, but it may not be enough to cover your family in the event of a medical emergency. Knowing 'what is investment' will lead to an understanding of how investing your money can generate wealth and help you reach life goals.

Investments as Per Life Stages

The investments as per life stages include:

First Job

Since you are new to investing, Equity-Linked Savings Scheme (ELSS), equity investments, and Term Insurance can be good choices. These options are affordable and don't need a significant upfront expense. Also, the risk and return are suitable for someone who is just starting their job.

Marriage

When you get married, having health insurance for yourself and your family is vital. This will protect you and your family from the high cost of health care so you can focus on more important things, like planning your family and job.

Birth of a Child, Buying a House, Child Education

You can use Unit Linked Insurance Plans (ULIPs) and savings plans to help pay for a child's birth, a house, or school. These plans protect your family and help you maximize savings. Your family is cared for financially, and you can set aside money for long-term goals.

Retirement

Money-back plans, unit-linked retirement plans, instant pension plans, and other similar plans work well for retirement. The age benefits can help you keep up the same level of living in retirement as before, and the life protection feature gives your family extra money if something happens to you.

Conclusion

Now that you understand the meaning of investment, and the various plans and benefits, start investing early for maximum returns. Select the right plans, monitor your portfolio, and watch your money grow. However, it is important to note that market-linked investment plans carry a risk of loss due to market volatility. Therefore, it is best to consult a financial advisor before investing.

FAQs about What is Investment?

Q. What do you mean by investment?

Investing is the acquisition of an asset to build wealth and save money from earned income or appreciation. The primary purpose of investing is to obtain an additional source of income or gain profit from the investment over a certain period of time.

Q. What are 3 types of investments?

Investment choices can be divided into three main categories - ownership, loans, and cash equivalents. These products are purchased in the hope of gaining returns, either through income, profits, or both.

Q. Why is choosing Investment Asset Important?

A few primary investment objectives are:

Q. How do I start investing?

In order to be successful in investing in India, it is important to consider the following four key points:

• Identify your financial goals
• Diversify your investments
• Check duration of the investment
• Periodic reassessment

Q. Is gold a good investment?

Gold is a good investment to preserve wealth and hedge against inflation. The returns may not be as attractive as in high-risk investments like stocks, mutual funds, etc. However, including gold in a diversified portfolio will help minimise the risk and balance the losses.

Q. Why invest when you can save money with zero risk?

The growth of your money is dependent on the level of risk you are willing to take when investing. Saving can be hindered by two risks, the lack of growth and the decrease in value of money due to inflation and taxes. Additionally, people often end up spending the money they have available. Therefore, investing can help safeguard your savings from inflation and prevent you from making unnecessary purchases.

Q. Can I start investing with a small amount? 

Yes. You can start your investment journey with a small amount. You can invest Rs. 1000 in NPS or Rs. 500 in PPF consistently for a long period and benefit from the power of compounding to create substantial returns over time. Start investing early in these plans for a considerable corpus to meet your long-term financial goals. 

Q. What is the best investment for beginners?

Beginners can start with short-term safe investment plans like fixed deposits, recurring deposits, and money market funds. Systematic investment plans are ideal for investing small amounts consistently to earn good returns. Novice investors should start small, be consistent, and explore other options after they get an idea about market trends.

Q. Why is investment important for securing your future?

Creating a corpus to accomplish short- and long-term goals and financial independence even when regular income ceases. This can happen only when you allocate some of your income to savings and invest them prudently to derive high returns.

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