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What is Investment?
Investment is an act of funding an asset to churn revenue out of it. This process is also known as "appreciation of assets". After investing in an asset, as time passes, its value is expected to soar with time which in turn provides a higher return price than what was originally invested. In simple words, investment is the method of spending money to acquire more of it over time. The general purpose of buying an asset as a means of investment is not to exploit or consume that asset but to generate more liquidity.
How Does an Investment Work?
An investment works when you put in your money on an asset through various mediums and platforms available, set it aside, and let it mature over time so as to get a higher return on your initial investment. There are many investment types that are duration specific such as short-term investments, long-term investments, etc.
It is unlike savings, where the goal is merely short term, and the money's exponential growth rate is slow and steady. Invested funds are entirely dependent on the asset's market value. Therefore, it is highly prudent to understand the annual reports and strategies of a company before investing in it.
Types of Investment
There are several types of investment that you can consider. You may choose to invest in just one of these, or you can also choose to diversify your portfolio through asset allocation.
Stocks or equities are security that acts as a fraction of a company's ownership. An investor may consider buying these stocks and, depending on the market value of the company, may yield a profitable raise over their initial investment. The stocks are bought and sold over stock exchanges and other private agencies. There are strict government rules and regulations to be followed while making these purchases.
Bonds are similar to a loan, where investors provide funds to any companies that need financing. Similar to mortgages, bonds also have characteristics where a borrower's company pays the investor a small recurring payment. Once the maturity period is up, the company will repay the investor his complete amount.
Mutual funds are a giant pool of money provided by various investors that go into various companies' shares, bonds, stocks, etc. There are dedicated expert fund managers who move these funds across different organizations shares, bonds or stocks based on their performance, market value, etc. Investors usually get returns based on the contribution they make.
Much like mutual funds, an ETF or an Exchange Traded Fund is a compilation of money sent in by various investors managed by expert fund managers. However, unlike mutual funds, an ETF can be bought on a stock exchange platform like stocks and shares.
Banks in India also provide investors with an opportunity to invest their money in mutual funds and ETFs. Each bank may have its own SIPs or Systematic Investment Plans that investors can choose from.
Options are an exotic kind of investment where an individual can hold an agreement. In this agreement, they will have the right to buy or sell a company's underlying stocks, bonds, shares, etc., at a fixed price. They are worth considering but only after assessing all the risks involved.
Annuities are an opportunity to receive a steady stream of income for a specific period of time. Generally, investors like to have a steady retirement income every month. The contract is signed between an investor and an insurance company where the latter agrees to pay the former a recurring payment. Although annuities offer tax benefits, it may be mandatory to pay a small tax at the start of the settlement.
In recent times, cryptocurrencies have been one of the most popular choices to invest in. They became an ushering sensation that attracted more people to invest with the expectation of huge returns. Crypto is a high-risk, high-return deal that not only gave rise to thousands of new cryptocurrencies but also to various investment platforms and apps. Names such as Bitcoins, Avax, Lucky Block or L Block, Ethereum, etc., are some of the popular cryptos these days.
It is an instrument that allows a certain buyer the right to buy a commodity at a preset cost and date. This contract can be used to reserve the right to buy the commodity on a future date with the current prices. Buyers who have enough expertise on a commodity and its market value can mostly go for such investments as they will be able to take a calculated call on the commodity, irrespective of its future price fluctuations. The trading happens in an exchange with an approved broker.
A futures contract is essentially a contract between a producer and a consumer who happens to have a keen observation regarding a certain commodity and is able to speculate on its future price hike. A futures contract grants buyers to enter an agreement with the producer that they will buy the commodity at a future date but with the current price. Now, if the price of the commodity actually rises, that means the buyers incurred some profits over it. This type of contract has made its mark in the investment industry. Although a little complex, futures are also a great way to invest.
There are quite a few unconventional investment forms usually designed for individuals with high net worth. This is mostly because these investments require higher minimum fund sourcing and fewer authority regulations.
They aren't generally offered on regular stock exchange markets and are less advertised. An alternative investment is pretty complex to value, not easily convertible to liquid money and is considered highly risky. Some of the most common types of unconventional investments are as follows:
- Private Equity
- Venture Capital
- Hedge Funds
- Managed Futures
- Art and Antiques
- Derivatives Contracts
- Real Estate
Why is Investment Important?
Commodity prices and the cost of living, in general, have witnessed an upward trend over the years. Everyone can agree that the prices at which commodities were sold 20 years ago are not the same anymore. Under such circumstances, idle savings in the bank do not prove to be enough, making way for the need for investments to create a financially stable present and future.
The main reason investment is massively important is that one has to make sure they are financially secure. Moreover, the money saved by a person has the potential to be much more by getting involved in the market cash flow.
- Investment helps in compounding the money over time.
- Smart investment can help achieve goals pertaining to an upgraded standard of living.
- Investing motivates a person to think about their future and instil a sense of cultivating a disciplined lifestyle.
- Smart Investment helps increase a consumer's purchasing power in the dawn of inflation and increased cost of commodities.
- Investments also provide tax benefits which can help a person save a huge amount of money.
How Do I Start Investing?
To start investing, it is extremely important to get a thorough understanding of the market and its related dynamics. You need to do a lot of research on the assets you are or will be investing in to infer its positive market impact in the future logically. Here are a few handy tips for doing so and cultivating smart investing.
- Understand the Market: The first and foremost step will always be to educate yourself. Invest in yourself and in your upgrading of skills. Engage yourself in learning about the subject matter that you will be stepping in. When investing, it is imperative that you have a basic idea of how a certain company functions in the market and how future demand for its products will affect the company's share prices.
- Life Goal: Make a life goal or objective for your future. It may be anything like wanting a relaxed retirement, wanting the best education for your kid, etc. Whatever you feel is worth setting aside your money for, think about it and possibly make a note.
- Decide on the Risk Factor: There are many kinds of investments where risks are varied. The only unavailable combination is low risk and high return. Except for that, you need to decide what kind of risk you are willing to take. It is advised to go for a low-risk, low return plan, which is generally taken for a long-term investment.
- Allocate Your Assets: Another important tip is to allocate your assets. This means you can divide your monetary assets and allocate them to different kinds of investments. It is always believed that never keep all your eggs in one basket for a good reason. Allocating assets will not only help you ensure a good return but also help you in diversifying your portfolio.
Which Investment Option Should You Choose?
Investment should always be chosen after assessing how much risk you are willing to take and what your goals in life are. Out of the many plans available, the best investment plan will completely depend on your expectations for the future. A few suggestions for the best investment plans are as follows.
An easy investment option to consider is allocating your funds to direct equity such as stocks and bonds. Although the return on investment here is not guaranteed, it has a higher chance of a decent return in the long run.
Investing in stocks means that you earn a part of ownership in a company, and whatever profit the company makes will affect the value of your investment. And it goes without saying that a thorough analysis of the company's performance over the years should be done. Stocks in India, which are proposed via stock exchanges, are purchased through a Demat Account.
An investment type typically considered by both beginners and experts is also generally a safer bet to regard. The main reasons for its popularity are that mutual funds are managed by expert investors that analyse and monitor market conditions and invest accordingly.
The fund managers compile money from several investors and engage the money with various assets. Additionally, in mutual funds, investors are free to choose their investment amount, which can be as low as INR 500 a month. They are also easily redeemable and highly liquid.
National Pension Scheme
Administered and managed by the PFRDA (Pension Fund Regulatory and Development Authority), the National Pension Scheme is a pension system that aims to provide a regular income to senior citizens post-retirement.
The scheme was initially introduced for government servants. However, later it was opened to the public as well. The only requirement for investing in the National Pension Scheme is to have Indian citizenship.
Moreover, investors are also required to be in an age group of 18 to 70 with a sound mind. The National Pension Scheme is a great option for a long-term investment with tax benefits. The other similar scheme released by the government of India is the Senior Citizens Savings Scheme (SCSS).
Public Provident Fund
The Public Provident Fund (PPF) is as popular as it is safe. It is a go-to long-term investment plan for individuals that prefer a low-risk, low-return factor when investing. PPF is generally considered for a tenure of 15 years but can be renewed in chunks of 5 years. Investors get the option of depositing a minimum as INR 500 a month. The interest rate usually stays around 7%.
Bank Fixed Deposits
Another popular go-to investment option devoid of any market risks and also guarantees regular interest returns is bank fixed deposits. There are tax benefits, and also special interest rates offered to senior citizens. The interest rates usually vary among banks due to competition.
Initial Public Offerings
Whenever a private company offers its stocks up for grabs to the public, they have to initiate an Initial Public Offerings or IPO. Initial Public Offerings are basically stocks and shares wherein, to generate some funds for their operations, companies allow the public to invest for asset appreciation.
Real estate is a major market for investment where individuals buy and sell/rent properties inviting chunks of income their way. This is a major investment choice because a property bought can go through massive value fluctuations depending on the development of the locality or towns. There are several hot spots around metropolitan areas that are investor-friendly in real estate.
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Frequently Asked Questions (FAQs)
What do you mean by investment?
Investments are a medium through which an individual or a company can put in their money to buy an asset that is expected to have its market value surge in the future. Once it does, the investor can sell the asset he owns to get his money back along with the additional profit that came from the market value surge of his asset.
How do I start investing?
You can start investing by deciding what kind of investment you want to cash in. There are several types of investments, such as stocks, bonds, mutual funds, ETFs, annuities, provident funds, etc. After considering a certain investment type, locate a platform where you can buy and sell these assets. A very common mode of investment for the majority of the working population is SIP ( Systematic Investment Plan), offered by many financial agencies and banks.
Where do I start investing?
The best way to start investing is to invest in small denominations. Although there aren’t any investment plans which have low risk and high returns, beginners can consider investing in mutual funds, stock markets, bank deposits and government schemes. However, it is always imperative to read and understand the risks involved thoroughly.
At what age should I start investing?
Warren Buffett, who started investing at the age of eleven, believed that before he started investing, he was wasting his life. Even though it is not possible for everyone to start investing at a very young age, the 20s are a fairly good age to start investing in small amounts. Consider a low-risk, low returns plan for a longer duration.
How does an investment differ from a bet or gamble?
Investing and gambling have a lot of common areas, such as betting a certain amount of money and expecting a higher profitable return. But Investing is more of a long-term commitment, and there is a sense of certainty involved. While gambling is short-lived and contains unrealistic return expectations. Furthermore, investments are generally made with a thorough understanding of the market and economic movement.
Is investment the same as speculation?
There is a fine line between investment and speculation. Investments are always made after a thorough analysis of an asset’s annual records and stats, investigating management strategies and behaviour, checking the validity of the pursuit, etc. The risk factor is always calculated beforehand. On the flip side, speculative investments usually proceed without any assessment of failure.
What are the different types of investments?
The different types of investment include stocks, bonds, equity, shares, mutual funds, government schemes, provident funds, fixed deposits, recurring deposits, annuities, bank products like SIPs, etc. Investors can consider any of the mentioned types of investments to amplify their cash flow. However, it is important to research these types of investments so as not to lose your money.
What are the objectives of investment?
The objectives of investment include future security, capital amplification and income generation. These objectives are met through various investment types where investors put their money on an asset that can potentially grow in profits.
What are the basics of investments?
Investment is a great way to outsource your efforts to make money. You are, in a way, setting a small amount of your income aside by putting it on an asset that you think will have more value in the future. So, when you decide to take back your money, it will give you a larger return.