What is Investment?
An investment is essentially an asset that is created with the intention of allowing money to grow. The wealth created can be used for a variety of objectives such as meeting shortages in income, saving up for retirement, or fulfilling certain specific obligations such as repayment of loans, payment of tuition fees, or purchase of other assets.
Investment may generate income for you in two ways. One, if you invest in a saleable asset, you may earn income by way of profit. Second, if Investment is made in a return generating plan, then you will earn an income via accumulation of gains. In this sense, ‘what is investment’ can be understood by saying that investments are all about putting your savings into assets or objects that become worth more than their initial worth or those that will help produce an income with time.
Financially speaking, an investment means an asset that is obtained with the intention of allowing it to appreciate in value over time. Generally, investments fall in any one of three basic categories, as explained below.
Categories of Investments
1. Ownership Investments
Ownership investments, as the name clearly suggests, are assets that are purchased and owned by the investor. Examples of this kind of investment include stocks, real estate properties, and bullion, among others. Funding a business is also a kind of ownership investment.
2. Lending Investments
When you invest in lending instruments, you’re essentially behaving like the bank. Corporate bonds, government bonds, and even savings accounts are all examples of lending investments. The money you park in a savings account is basically a loan that you give the bank. This money is used by the bank to fund the loans it gives out to its customers.
3. Cash Equivalents
These are investments that are highly liquid and can easily be converted into cash. Money market instruments, for instance, are excellent examples of cash equivalents. Cash equivalents generally offer low returns, but correspondingly, the risk associated with them is also negligible.
Why Should You Invest?
You may be wondering why to give so much importance to the question ‘what is investment,’ when you can work towards saving more from your earnings instead. Taking a portion of your income and saving each month will only create a reserve fund, which may prove to be inadequate in covering your family against a medical emergency.
On the other hand, now that you know ‘what is investment,’ you will understand that investing your money leads to wealth generation and helps in achieving life goals.
What is Investment in comparison to Savings?
The question, ‘What is Investment? becomes crucial when asked about savings. Savings simply mean putting aside a part of your earnings over time. The saved amount of money is subject to no risk and, therefore, does not help you earn any profits or returns. However, its value appreciation remains more or less stagnant, as there is no addition over and above what you add each month.
On the other hand, Investment is based on the concept of earning returns or profit on the money you first put in a fund or spent on an asset purchase. Remember here that the involvement of risk is what makes them profitable.
When understanding ‘what is investment,’ remember that there is a direct relation between returns and risk, meaning more significant the risk involved, higher are the chances of earning greater returns. That is why you must check the risk profile of ‘what is investment?’ about different options, and review your risk appetite before investing.
When Should You Invest?
Some people waste many years of their life thinking over ‘what is investment’ and how it is beneficial. They hesitate to consider investment meaning for wealth creation because of the involvement of risk. However, many investments are also risk-free, and some carry only little to moderate risk.
When you are young, first understand fully about ‘what is investment,’ and its role and then start. At an early age, you have few responsibilities and, thus, have a better tendency to experiment with different investment investments and leverage those, which suit your requirements best.
Investing early is also better because of the compounding benefits on investments that help grow your money. With more years ahead, you can reap maximum benefits on your investments, provided you first understand and evaluate different aspects of ‘what is investment’ and then start early.
How Should You Invest?
Now that you know ‘what is investment,’ and how it can help you create wealth, the next thing is to understand how to invest. Here are a few vital points you must keep in mind before you decide to invest.
- Analyze Your Financial Needs – Firstly, analyze your financial situation concerning risk tolerance, investment objective and other factors like family size, number of earning members and life goals. You may even take help from a financial professional. It will help you clarify any doubts about ‘what is investment?’ and what options are suitable for you.
- Investment Diversification – Build a diversified financial portfolio by putting your funds in different instruments for maintaining the right balance between risk and returns.
Also, when thinking about ‘what is investment’ and ‘where to invest,’ consider giving priority to those instruments that offer security to your loved ones. It may include life insurance policies like term plan, ULIP (ULIP full form: Unit Linked Insurance Plan) and other such instruments. You may consider what Investment from a return generating objective is.
- Time Period – You should also know that it is difficult to answer what is Investment without considering the time period. That is why, while considering what is Investment, know what time you have before turning your investments into cash. Depending on your requirements, you may choose short-term or long-term funds.
- Periodical Reassessment – Since funds are influenced by market forces, it is imperative that you closely monitor them periodically. You may also consider readjustment if your portfolio is not generating good returns.
Types of Investments
The question ‘what is investment’ is mostly followed by where to invest. Keeping aside investments in real estate and assets like jewellery and all, when it comes to different instruments, another aspect of understanding ‘what is investment’ is to know about different types of investments. The first refers to equity investments, and the second category includes debt instruments. Equity investments offer greater returns and carry relatively higher risk, while debt instruments are less risky, but offer relatively low returns.
Further, what is Investment can also be understood from the perspective of how they are acquired.
Following are different types of investments in India:
1. Stocks: This includes shares of ownership of any company and helps you earn dividends in return
2. Bonds: Wondering what is Investment in terms of bonds? It means lending your money to an institution or government, for which you receive fixed interest at regular intervals and also the face value upon maturity
3. Mutual Funds: In this, funds are collected from different investors and put in a company’s bonds or shares, which are managed by fund managers. On understanding what is Investment, you may choose equity funds or debt funds, depending on your risk capacity
4. ULIP: ULIPs or Unit Linked Insurance Plans are a type of Investment that provides both investment and life insurance benefits. A portion of the money invested into ULIPs is allocated Investment meaning in this plan is that a part of your premium is invested in different funds and helps you earn market linked returns. It also offers tax-saving benefits of up to Rs. 1.5 lakhs under Section 80C.
5. Public Provident Fund (PPF): Understanding PPF is simple. Itisagovernment offered saving scheme that invests your funds for a specific period and helps you earn returns on the same. It provides an 8% interest rate starting 1st October 2018
For your benefit, you may also find out what is Investment for tax saving and invest in such plans. Also, as discussed earlier, when you ponder over what is Investment and similar questions, consider adding term plans and health insurance policies in your portfolio for securing your family.
After this, put your funds in instruments like ULIP, mutual funds, ELSS (Equity linked savings scheme) and other government plans.
What are the Objectives of Investment?
Before you decide to invest your earnings in any one of the many investment plans available in India, it’s essential to understand the reasons behind investing. While the individual objectives of investment may vary from one investor to another, the overall goals of investing money may be any one of the following reasons.
Reasons to Start Investing Today
1. To Keep Money Safe
Capital preservation is one of the primary reasons people invest their money. Some investments help keep hard-earned money safe from being eroded with time. By parking your funds in these instruments or schemes, you can ensure that you don’t outlive your savings. Fixed deposits, government bonds, and even an ordinary savings account can help keep your money safe. Although the return on investment may be lower here, the objective of capital preservation is easily met.
2. To Help Money Grow
Another common objective of investing money is to ensure that it grows into a sizable corpus over time. Capital appreciation is generally a long-term goal that helps people secure their financial future. To make the money you earn grow into wealth, you need to consider investment options that offer a significant return on the initial amount invested. Some of the best investments to achieve growth include real estate, mutual funds, commodities, and equity. The risk associated with these options may be high, but the return is also generally significant.
3. To Earn a Steady Stream of Income
Investments can also help you earn a steady source of secondary (or primary) income. Examples of such investments include fixed deposits that pay out regular interest or stocks of companies that pay investors dividends consistently. Income-generating investments can help you pay for your everyday expenses after you’ve retired. Alternatively, they can also act as excellent sources of supplementary income during your working years by providing you with additional money to meet outlays like college expenses or EMIs.
4. To Minimize the Burden of Tax
Aside from capital growth or preservation, investors also have another compelling incentive to consider certain investments. This motivation comes in the form of tax benefits offered by the Income Tax Act, 1961. Investing in options such as Unit Linked Insurance Plans (ULIPs), Public Provident Fund (PPF), and Equity Linked Savings Schemes (ELSS) can be deducted from your total income. This has the effect of reducing your taxable income, thereby bringing down your tax liability.
5. To Save up for Retirement
Saving up for retirement is a necessity. It’s essential to have a retirement fund you can fall back on in your golden years, because you may not be able to continue working forever. Additionally, it would be unfair to depend on your children to support you later in life, particularly if they have children of their own to raise. By investing the money you earn during your working years in the right investment options, you can allow your funds to grow enough to sustain you after you’ve retired.
6. To Meet your Financial Goals
Investing can also help you achieve your short-term and long-term financial goals without too much stress or trouble. Some investment options, for instance, come with short lock-in periods and high liquidity. These investments are ideal instruments to park your funds in if you wish to save up for short-term targets like funding home improvements or creating an emergency fund. Other investment options that come with a longer lock-in period are perfect for saving up for long-term goals.
Understood ‘What is Investment?’ Now Get Started
Now that you know ‘what is investment,’ and about a few plans, and its benefits start early for maximum benefits. Choose the right plans and track your portfolio for ensuring high returns. So, find out what is Investment for yourself by putting your money in different options and see them grow.
Investment in market linked investment plans are subject to market risk. We suggest to consult your financial advisor before investing.
Frequently Asked Questions (FAQs)
Q. What do you mean by Investment?
A. Investment is an asset acquired or invested in to build wealth and save money from the hard earned income or appreciation. Investment is primarily made to obtain an additional source of income or gain profit from the investment over a specific period of time.
Q. What are the different types of investments?
A. Following are some of the different types of investments available in India:
- Certificate of Deposit
- Real Estate
- Fixed Deposits
- Mutual Funds
- Public Provident Fund (PPF)
- National Pension System (NPS)
- Unit Linked Insurance Plan (ULIP)
- Senior Citizens’ Savings Scheme
Q. How does an investment work?
A. Investment is done keeping a financial goal in mind. It helps generating income and grow over a certain period of time. Investment includes bonds, stocks, PPF amongst others, which helps in growing money and providing an additional source of income.
As investment helps us in growing our money over a certain period of time, there is a certain risk accompanying the investment. You might get better returns in some of the investment options, but they might also come with higher risk in comparison to other investment options providing moderate returns.
Q. How do I start investing?
A. You need to consider some essential points before you start making investments. Following are 4 key points to know more about how to begin with investments in India:
- Analyse Your Financial Goals
- Diversify your Investments
- Investment Period
- Periodical Reassessment
Q. What are the objectives of investment?
A. Following are some of the primary objectives of investment:
- To Keep Funds Safe & Secure
- To Grow Your Funds Exponentially
- To Earn a Steady & Additional Source of Income
- Minimize Income Tax Burden
- Retirement Planning
- Meet Financial Goals