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Financial Investment

Do discussions on financial investment overwhelm you? Understanding the basics of investment is the pathway to choosing the right assets and maximising the returns on your savings. The asset type you choose depends on the nature of your financial goals. It is recommended to allocate funds to assets with guaranteed returns to meet short-term goals such as an emergency fund, children's school fees, a short family trip, etc. ...Read More

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Financial Investment

Financial Investment: Meaning & Types

Financial Investment: Meaning & Types
December 05, 2024

Table of Content

 

What is a Financial Investment?

Financial investment is allocating funds to a financial product to earn a yield on the savings. It is a tactical way to accomplish your financial goals and an important financial strategy implemented to achieve financial goals, create wealth, and ensure financial stability. 

Understanding the financial investment definition is the first step to investing wisely and making your money work for you. It is all about exploring and making the best use of market opportunities to balance the risk involved. Prudent financial planning involves creating a diversified portfolio aligning with financial objectives, risk tolerance, and timeline. 

Awareness about what is financial investment creates a roadmap for smart investment and helps one head towards financial stability. For any financial goal like buying a dream home, building an emergency fund, planning for retirement, children’s education, etc., investment choices to mitigate risks and churn maximum results are available. Make a head start towards wise investments for a robust financial future with the information gathered from this article. 

Why is Financial Investment Important?

The basic importance of financial investment is to create a parallel income source in the event of loss of regular income. It is also essential for wealth creation and to achieve short and long-term goals. Investing in financial products like stocks, bonds, and mutual funds, can not only secure your future but also fulfill your financial objectives. 

Some financial investments also provide ample returns to beat inflation and retain your existing lifestyle. Reducing the tax burden is yet another benefit of investment in products like PPF, ELSS, EPF, etc. They also serve as avenues for a regular income stream post-retirement and make you financially independent. 

Well-planned investments balance financial risks, provide consistent returns, help wealth creation and establish a robust financial future.

Types of Financial Investments 

The financial investment definition is incomplete without learning about the types of financial investments. Here are some financial investments that you can consider:

  • Annuities

An annuity is one of the safest financial investment options. Depending on the type of annuity you purchase, the financial institution promises a steady income stream immediately or for a specified period. You can either make monthly payments or a lump sum single payment. Generally, individuals choose an annuity for retirement planning. 

Best Time to Invest

You can invest in an annuity from the time you are eligible to purchase the plan. Normally, the eligibility to invest in an annuity is between 30 years to 60 years. You can invest any time during this period, depending on your financial goals and retirement plans. 

How to Purchase?

You can purchase annuities from life insurance companies. Evaluating the options is important before making financial decisions. Visit Website- HDFCLife. Check on the different Retirement & Annuity Plans we offer. Decide on the type of annuity, compare the plans, understand the features, choose the service provider, and pay a lump sum or make regular payments depending on the plan.

  • Bonds

Bonds are issued by governments and corporations to raise funds. The investors willing to lend money for a specific period buy these bonds for financial returns in the form of interest. The principal however is paid out on maturity. Government and municipal bonds are a safe option for earning steady income whereas corporate bonds are a riskier version owing to their uncertain financial performance.

Best Time to Invest

The best time to invest in bonds is when the interest rates are high. When there are economic slumps bonds are a less risky investment option than equities.  

How to Purchase?

Investors can register on the RBI Retail Direct app or open a demat and trading account with online stock brokers, participate in the primary bid and buy the bonds directly from the issuer. 

  • Certificates of Deposit

Certificates of deposit are ideal financial investment tools to earn a fixed income. They are government-backed securities issued by scheduled commercial banks and All India Financial Institutions in demat form. Investors earn interest on a fixed amount for a fixed period. The deposit holders are not permitted to withdraw the amount before maturity.

Best Time to Invest

The best time to invest in a certificate of deposit is when the interest rates are high and when it aligns with short-term goals.

How to Purchase?

The process involving purchasing a certificate of deposit is similar to buying shares. Choose the provider, select the type of CD, choose how you want the interest, submit an application, and make the payment.  

  • Exchange Traded Funds (ETFs)

An exchange-traded fund is a financial investment tool that holds multiple assets like stocks, bonds, etc., and the trading is similar to stocks. They carry moderate risk as the returns depend on market volatility and the type of assets. 

Best Time to Invest

It is recommended to avoid investing in ETFs  in the morning. The best time to buy is closer to the middle of the trading day as the volatility is lower and the prices are stable.

How to Purchase?

The prerequisites for buying ETFs are a demat and trading account. Transfer funds to your trading account. Select an ETF depending on your financial goal, add the ETF to your watch list to track the price, place an order, and review and confirm the order. 

  • High-Yield Savings Accounts

High-yield savings accounts are types of financial accounts that earn higher interest than traditional savings accounts. They are among the financial investment options for parking surplus funds to earn higher returns with easy accessibility. 

Best Time to Invest

The best time to invest in a high-yield savings account is when the interest is high, and you have to build an emergency fund. If you already have emergency funds, invest excess funds in the high-yield savings accounts for better returns.

How to Open

To open a high-yield savings account, compare the rights offered by different financial institutions, choose the one that gives the best deal, and either apply online or in person, along with relevant documents.

  • Money Market Accounts

A money market account is a type of savings account that grows your savings with easy liquidity options. The interest rates are generally higher than the traditional savings account. You are allowed to withdraw funds when in need. 

Best Time to Invest

The best time to invest in money market accounts is when the interest rates are high. If you have short-term goals and need a low-risk investment option with financial growth, you should invest surplus funds in money market accounts.

How to open?

To open a money market account, compare the rates with those of different banks. Choose a bank and apply with personal information and relevant documents either online or by personally visiting the bank — deposit funds in the account either by electronic transfer, cash, or by cheque.

  • Mutual Funds

A mutual fund is a trust that gathers money from various investors who have similar financial goals. The fund managers manage the funds and invest the money in market-related assets like equities, bonds, short-term money market instruments, and other securities. It is a recommended financial investment for long-term investors with good risk appetite.

Best Time to Invest

It is suggested to start investing from the time you start earning.  Consult financial advisors to create a portfolio to suit your goals.

How to Purchase?

The initial step to purchase mutual funds is to open an investment account either online or through a broker. or fund provider. Research funds in terms of past financial performance and alignment with your goals and place an order for the desired fund.

  • Retirement Plans

A retirement plan is a savings plan introduced to provide financial independence once you stop earning. It helps build a corpus over a period, ensures a regular income stream, protects your financial future, and helps accomplish your long-term goals.

Best Time to Invest

Start investing in retirement plans when you reach 40 when your income is better as compared to that in your 20s and 30s. If the retirement age is 60 you can invest for 15 t0 20 years and accumulate a sizeable corpus.

How to Open?

The first step to opening a retirement account is to assess financial requirements vis-a-vis your lifestyle. Choose a plan among HDFC Life Retirement or Pension Plan, NPS, PPF, or market assets designed for retirement plans. Compare the deals from banks, fund houses, and insurance companies for the best option. Visit the official website of the service provider, fill in the application and submit the necessary documents. Contribute regularly to create a retirement corpus.

  • Stocks

A stock also known as shares is a security that represents a fraction of the ownership in the company. The shareholders are entitled to a part of the company profits given out in the form of financial dividends. Stock is considered a good investment plan as it has high growth potential.

Best Time to Invest

The best time to invest in stocks is when the financial markets are down and when the growth potential of a company is promising. For those looking at short-term gains, the best time is to buy stocks soon after the market opens or when it is about to close.

How to Purchase?

To purchase stocks, open a demat and trading account with either a bank or a stockbroker. Fund your trading account. Analyse the performance of the company and its growth potential and choose stocks that suit your requirements. Choose the stock through your trading account. Mention the number of shares and place an order.

How Do Financial Investments Work?

To understand the financial investment meaning better, you should also know how it works. The concept is investing your savings to make money either through appreciation or income. For instance, you can buy shares when the market is low and sell when the price rises. In the case of investments like fixed deposits, retirement plans, etc., you generate income by way of interest.

Though there is gain out of investments there is some amount of risk involved as well. You should have an investment strategy for effective results in terms of returns.

How to Begin Investing?

With a good knowledge of what is financial investment and how it works, you can start investing wisely by following the tips given below:

  • Learn from the Right Experts

It is crucial to enhance your knowledge about investment to make informed decisions. Consult financial advisors or browse through reliable online platforms for up-to-date and precise information.

  • Understand Your Risk Tolerance

Risks and returns run parallelly. The returns are higher where the risk is higher and vice-versa. Evaluate the extent of losses you can handle and make appropriate investments.

  • Start Small

When it comes to investments, take a small leap as a beginner. Start with small investments and expand as you gain experience.  Investing a sizeable amount with inadequate in your learning stage may lead to losses and discourage further investments.

  • Learn More About Taxes

Learn about tax implications on investments as they have a role in reducing your tax burden. Consult a tax advisor and make tax-efficient investments. 

Investing and Spreading Your Risk

Diversifying your portfolio is a prudent investment strategy. If you have allocated funds in a single security you may end up with huge losses when there is a dip in the market. Invest in various assets depending on your risk tolerance level balance the risk and minimise losses.

Summary

Financial investment is imperative for a secure financial future and to accomplish your goals. Various investment options are available in the market to help your money grow. But understanding financial investment meaning, how it works, the right time to invest, etc., are crucial for making informed decisions. As a beginner, you can also use an investment calculator to gauge the returns on investment. Consult a financial advisor if necessary to begin your journey of creating wealth. 

FAQs on Financial Investment 

Q. What is the best financial investment?

The best financial investment option depends on your risk appetite and financial goals. For low-risk investments with guaranteed returns, fixed deposits, NPS, PPF, etc., are the best options. For high-risk assets providing significant returns, you can choose mutual funds, stocks, etc

Q. Why invest in finance?

We need to invest in finance to build a corpus for financial stability, fulfil financial goals, generate income, and have access to funds for unforeseen expenses. 

Q. What is finance investment risk?

Finance investment risk is attaining lower returns than expected due to a decline in the value of the asset. The probable loss could be some or the entire capital invested. 

Q. What is the safest investment?

The safest investments are assets that provide guaranteed returns like Fixed deposits, PPF, NPS, EPF, etc. These options focus on capital protection rather than high returns. 

Q. Which investment is best in future?

The best investment in future also depends on your risk tolerance and timeline. For long-term growth, mutual funds are preferred. For guaranteed returns and retirement plans for security, financial instruments like NPS, PPF, etc. are the best options.

Related Articles- 

Reference:

1. https://www.investopedia.com/terms/i/investing.asp

2. https://cleartax.in/glossary/investment

 

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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