What is Investment?

Abhinay
Abhinay
abhinayd@orowealth.com

The term ‘’investment’’ is defined in various ways in different principles and theories. Though the meaning of each definition is alike in nature, it is taken in many contexts.

Meaning of the term ‘’investment’’

Two aspects of investment:

1. In an economic sense, investment is defined as a number of goods purchased which is not used for the present time but are used for the wealth creation in the future.

2. In a financial sense, investment refers to putting aside money with an expectation of future gains on it. Financial investment can be in many forms such as a purchase of bonds, stocks, mutual funds, gold, and real estate etc.
Thus, in simple terms, investment is a human’s common nature of planning for the future by deploying money in assets that have an ability to generate some gains over the period of time. Thus, it is referred to as an asset that you purchase with an expectation make a profit out of selling it in the future.

Characteristics of investment

In any investment, risk and return are the two main characteristics. Risk means the chances of losing some of your invested money. Return means the amount of extra money you tend to gain on your investment. Depending on the market conditions and economic situations, risk-return balance varies for each type of investment. Generally, if you seek a higher return on your investment, you have to be ready to take higher risk. On the other hand, low risky investments tend to deliver lower returns.

Types of investments

We make various investments to stay well prepared for the time of crisis that may arise in the future. Hence, planning is an important aspect while you think of any investments. Specifically, in financial investments, there are various options to explore. Though there is a wide range of investment types available, it’s important to analyze and identify your goal for investing money. Let’s take a look at various investment types available for investment. In India, there are various investment choices available ranging from some traditional investments to newer options. Here are some major types of investments with different risk-return characteristics to suit your diverse investment needs.

1. Bonds

Bond is basically debt security. Purchasing a bond or a debt instrument means as an investor you are lending money to governments or corporates issuing these bonds. Government and the corporates raise the capital by issuing bonds. In which, the issuer of the bond is obligated to pay you interest on the loan at a specified rate until the bond matures. The bond market in India is largely diversified. There are various types of bonds available in India such as corporate bonds, government bonds, mortgage-backed bonds, and municipal bonds etc. Some issuers provide convertible bonds also which gives you an option to convert bonds into equity shares.

Risk-return characteristics: As the bonds pay a fixed rate of interest, they are considered less risky investments. Considered the lower volatility and risk, returns on bonds are considered low on an average. However, bond investments are subjected to various risk such as interest rate risk, credit risk, and inflation risk etc.

2. Equity Stocks

Basically, the stock represents your share in the ownership of a company. Stock price or share price represents the market determination of that company’s value. Equity stocks are common and widely available stocks for purchase. Stocks are offered by companies that are listed on stock exchanges. By investing in equity stocks you buy ownership in that company which allows you to participate in a company’s growth.

Risk-return characteristics: Equity investments are subjected to market risk. Considering the high volatility, equity investments are generally high-risk investment options. But, higher the risk higher is the return. Hence, equity investments also have high-profit potentiality. Considering its high risk-high return characteristics, equity stocks are considered the best long-term investment options that can deliver higher growth over a long period of time.

3. Mutual funds

A mutual fund is an investment vehicle that pools the money of several similar investors who aim to make money out of their investment. Pooled corpus by the mutual fund trust is invested in various asset classes like stocks, bonds and cash equivalents and the money earned on such investments are distributed among investors. Value of your mutual fund investments is determined based on its net asset value (per unit price) derived from the market. The best part is your investments are professionally managed by experts called fund managers. There are mutual funds for every customer type. With thousands of mutual fund options available, choosing the right one is the key.

Risk-return characteristics: risk-return balance in any mutual fund investment depends on the type of investment chosen by you. There are funds that invest in cash equivalents and debt securities that carry very low risk to funds investing in equities that carry a high level of risk. Depending on the degree of risk, return potential also varies in a similar pattern.

4. Real estate

Real estate investment refers to investing in real assets like properties. This means purchasing land or building or any kind of property and then renting it or selling it for profit. Real estate investments are lucrative investment options for many. It is considered as a good long-term investment choice. Now, apart from investing in property directly, there are many choices like real estate stocks and realty funds etc.

Risk-return characteristics: When it comes to risk involved in real estate investment, property disputes and legal risks are a major concern. However, the degree of risk and return percentage depends on the type of property you are investing in, location, time horizon, market condition, and many more factors.

5. Gold/silver

Precious metals are the favorite investment vehicle for many Indians. It is also considered auspicious to buy these precious metals. Gold and silver are traded as commodities. Basically, investment into gold is done as a hedge against inflation. For long-term, gold/silver can be a good investment option. Now, there are many ways to invest in gold such as gold bullions, gold ETFs and sovereign gold bonds etc.

Risk-return characteristics: As gold is very different from other asset classes, gold investments are good portfolio diversifiers that help in mitigating overall risk. Coming to the risk-return profile, it depends on the type of gold investment you choose. Generally, investing in gold carries unique risks such as price volatility risk, currency risk, and risk of government interventions etc.

Apart from the above investment types, there are certain safe traditional investment types or options available that carry less degree of risk. If you are a risk-averse investor looking for safe and long-term investment options, these investment types are ideal choices.

6. Fixed deposits

Bank deposits, fixed deposits, and recurring deposits are the best way to keep aside your money safely for your future (short-term to long-term). The rate of interest on your investment will be fixed for fixed deposit that comes with a pre-defined time period.

7. National pension system

NPS is also a tax-saving long-term investment option wherein you stay invested till your retirement. NPS also allows you to invest in plans that in turn invests in equities. NPS is considered a better return-provider in comparison to public provident fund and employee provident fund. But, the proceeds on maturity are not entirely tax-free.

8. Public provident fund

It is a long-term tax saving investment option that comes with an investment horizon of years. Rates on PPF are decided by the government every quarter. With certain conditions, PPF investments allow you to make partial withdrawals. Maturity corpus is entirely tax free in PPF.

9. Employee provident fund

Employee provident fund is also a tax-saving investment vehicle meant for creating retirement corpus. Rates are decided by the government of India in every quarter. In this, you invest part of your monthly salary into a fund for which your employer also makes his contribution.

Importance of investing

In today’s uncertain world, investing is very important to build a secure future. To fulfill your dreams and financial goals, it’s not just important to earn but also extremely essential to invest the money you earn wisely. Investing has many benefits. Some of them are:

  • It helps you live a better financial future
  • Helps you beat inflation with a better financial well-being
  • Helps you live a peaceful golden day of your life
  • Helps in earning additional income
  • Helps you pursue your dreams and protects your family

How to start investing in mutual funds?

Mutual funds are popular investment vehicle now that helps you invest as per your return expectations and risk profile. There are many types of mutual funds such as debt funds, equity funds, balanced funds, liquid funds to suit your varying needs according to your risk profile. Mutual funds are ideal investment vehicles not just for experienced investors but also for any beginners. Investing in mutual funds are quite simple. There are two ways to start with:

Lump sum investments:

Once you choose the right fund type, you can invest your entire corpus in one go. Depending on the fund type risk-return profile may vary.

Systematic investment option:

Systematic investment option is a disciplined way of investing. In this, you invest a small amount of money regularly on a monthly basis for a chosen period of time. This helps you in averaging the cost and thus reduces the risk to a certain extent.

Lastly, investing is very essential for building a financially secure future. Invest money and build wealth for better tomorrow.

Abhinay
Abhinay
abhinayd@orowealth.com

Abhinay is an IT engineer turned Finance writer. He has over 4 years of experience in content management and has been writing about personal finance for over 2 years. He works as a Marketing Consultant at Orowealth

No Comments

Post A Comment

Pin It on Pinterest