What Is Investment

Table of Content

1. Objectives of Investment

2. Why Should You Invest in Investment Plans?

3. Why You Must 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. Why are Long-Term Investments Important?

10. The Difference Between Savings and Investment

11. Factors to Consider Before Investing

12. How to Start Investing?

13. Why is Your Choice of Investment Asset Important?

14. What is the Importance of Investment?

15. Investments as Per Life Stages

16. Conclusion

17. Frequently Asked Questions (FAQs) on What Is Investment

Objectives of Investment

People invest for far more than just making profits. The actual purpose is to meet life’s milestones, protect against uncertainties and create a secure financial future. 

Yet, the unpredictability of life, be it job insecurity, the dream of early retirementor the desire to travel, can make many question the need for long-term planning.

Go through the essential objectives and understand how they play out:

Maintain financial security

If your priority is safety, conservative investments like fixed deposits (FDs), Public Provident Fund (PPF), and government bonds can be your go-to options. These keep your funds safe. Also, tend to offer steady as well as modest returns, which is good for short-term needs or contingency funds.

Accumulate wealth

For long-term goals, equity options (i.e., mutual funds, stocks, and unit linked insurance plans (ULIPs)) offer higher growth potential. Such investments benefit from the compounding effect, meaning the earlier you begin, the bigger your wealth can grow, which is just perfect for creating a considerable corpus over decades.

Receive regular returns

Some investments are designed to give you a steady income stream. Dividend-paying stocks, annuity plansor fixed-income products like corporate bonds can be ideal for retirees or conservative investors who want a predictable cash flow without taking excessive risk.

Minimize tax liability

Tax-efficient investments like equity linked savings schemes (ELSS), PPF, and ULIPs not only grow your money but also help reduce taxable income under Section 80C* of the Income Tax Act, 1961. This infers you save money while creating wealth, two benefits in one.

Prepare for post-retirement life

Beginning early with the national pension system (NPS), pension plans or long-term mutual funds permit you to take complete advantage of the compounding effect. Even meagre contributions over decades can turn into a considerable retirement fund, ensuring you enjoy financial independence in your later years.

Achieve your financial objectives

No matter whether it's financing your child's higher education, purchasing your dream home or travelling the world, every goal can be attached to a suitable investment option. Short-term goals might suit safer instruments like FDs. 

However, long-term aspirations could be met with equities or balanced funds. Matching up the apt investment to your timeline ensures you get there on timeand with confidence.

Why Should You Invest in Investment Plans?

The earlier you start investing, the more time your money has to grow. That’s the magic of compounding. Imagine you invest ₹5,000 a month at age 25. By the time you’re 55, your investment could grow into a much larger corpus compared to someone who starts at 35, even if they invest the same amount. The extra years give your returns more time to generate their own returns, creating a snowball effect.

Starting young even means you have more time to absorb risks. Market movements are less daunting when you have decades ahead to recover from short-term volatility. This permits you to browse through higher-growth options like equities early in life and then gradually move to safer investments as your goals get closer. To put it simply, time is your biggest ally in creating lasting wealth.

Why You Must Begin Investing Early

Starting with your investment journey early is one of the prudent financial decisions you can make. The earlier you start, the more time your money gets to grow and the easier it becomes for you to reach your goals. Even meagre amounts invested periodically from a young age can outpace larger sums invested later in life. Here is why:

Power of compounding

Compounding is the same as planting a tree. The sooner you plant, the more time it has to grow and bear fruit. When you invest, your returns start generating their own returns, creating a snowball effect. 

For instance, if you invest ₹5,000 a month from age 25 at an average return rate of 10% per year, by 55, you could have nearly ₹1.14 crore. Begin the same plan at 35, and you would have just about ₹39 lakh, less than half, even though you invested just 10 years less. Time is the secret ingredient in this case.

Stay ahead of inflation

Inflation eats your purchasing power over time. Something that costs ₹10 lakh today might cost ₹20–25 lakh in just a span of 10 years. By investing in assets that grow faster than inflation, i.e., equity funds or ULIPs, you ensure the value of your money does not shrink and that you are well prepared for rising expenditures.

Take more risks comfortably

When you begin at a very young age, you can afford to take up calculated risks. This is because you have time to recover from any market downturns. This gives you the freedom to invest in higher-return options like equities, which, over the long term, tend to outperform safer investments.

Reach financial goals sooner

Looking to retire at the age of 50? Buy a flat at 40 years of age? Travel the world at 35 years? Starting early makes these goals possible. Your money gets more years to grow, so you do not need to invest massive amounts later to catch up. Early investing even gives you the flexibility to adjust your plans with zero financial stress.

More time to manage market ups and downs

Markets will always have highs and lows. But long-term investors who begin early have the benefit of riding out volatility. Even if the market dips over the short term, remaining invested for decades permits you to benefit from thorough upward trends.

Key Benefits of Investment

While saving is vital, it often can’t keep pace with inflation or generate the kind of wealth required for long-term financial security. By zeroing in on the correct investment plans and lining them with your investment objectives, you can enjoy both financial and emotional peace.

Protect your money by investing

When you park money in interest-bearing assets like fixed deposits, mutual funds or bonds, you’re not just keeping it safe from impulsive spending, you’re also shielding it from inflation. Over time, the rising cost of living can reduce your purchasing power. 

Strategic investing ensures your money grows enough to preserve its real value. This is one of the core lessons in savings and investment conversation, i.e., saving stores money, but investing protects and grows it.

Build your wealth

Long-term wealth creation occurs when you allow your returns to generate their own returns, a process known as compounding. 

No matter whether it's through equity investments, ULIPs or other ownership investments, reinvesting earnings accelerates growth. Think of it as planting seeds that grow into trees, which then bear more seeds. Over the years and decades, the outcome is a large financial forest.

Create funds for emergencies

Life is full of surprises, which you face in the form of medical expenses, job lossor sudden repairs. Having investments in liquid form and low-risk options such as liquid mutual funds or short-term FDs ensures you have quick fund access when you need it the most. These are part of your short-term investment types that act as a safety net without disturbing your long-term plans.

Ensure stress-free retirement

One of the most important long-term goals is financial independence in retirement. Investing early in guaranteed return plans, PPF, pension plans or balanced mutual funds can provide a steady post-retirement income or a lump sum corpus. This eliminates the stress of relying solely on savings or family support.

Maximise savings

Some investments help you grow your wealth while also reducing your tax burden. Tax-saving options, i.e., PPF, ULIPs, NPS, and ELSS, qualify for deductions as per Section 80C of the Income Tax Act, 1961. Many even endow tax-free maturity benefits, which allow you to maximise savings while generating competitive investment returns.

Invest in life’s bigger dreams

Whether it's purchasing your dream flat, owning a four-wheeler or taking a world trip, big-ticket purchases become possible with disciplined investing. By matching your investment strategy to your goal timelines, using safer options for short-term goals and growth-focused ones for long-term goals, you can achieve these dreams without financial strain.

How Does an Investment Work?

Investments make your idle funds productive. In place of sitting in a savings account and yielding minimal interest, your surplus funds are allocated to instruments that can generate income or grow in value over a long time. 

This growth is called investment returns, which may be available in the form of a regular interest component, dividends or an increase in the value of the asset itself.

There are two kinds of investment options:

• Fixed-return investments like FDs and the PPF offer predictable returns and capital safety. They are well-suited for conservative investors or for meeting short-term requirements.

• Market-linked investments such as mutual funds and stocks do not assure returns, as they depend on market performance. But they have the potential to yield higher growth over the long-term period, which makes them better suited for investors with a higher risk appetite level.

Note that the key to investment success depends on aligning your choices with your investment objectives and risk and return profile. For instance, if your goal is wealth creation over a span of 20 years, equity options may be a better fit. But if you're looking for stability as well as an assured income, then fixed-return products might work best.

Before you begin investing, it is essential to examine your current financial position. This implies being aware of your income, expenditures and existing savings. Setting up a contingency fund is crucial, so you're not forced to sell investments during urgent situations. 

Once that's in place, define your short-term goals (like buying a four-wheeler in three years) and long-term goals (like retirement in 25 years). Then, zero in on an investment strategy that matches well with these timelines and your comfort with risk.

When planned in a careful manner, investments do not just grow your money, they help you attain financial security, flexibility and great mental peace.

Types of Investments

Investments are available in many forms and understanding them helps you choose what aligns with your financial goals, risk tolerance and time horizon. Here’s a simple breakdown:

Stocks

Buying stocks means owning a part of a company. If the company grows, so does the value of your shares, offering capital appreciation and sometimes dividend income. They carry a higher risk but can deliver higher returns over the long term, ideal for wealth growth.

Bonds

Bonds are debt instruments where you lend money to a company or the government in exchange for regular interest and your capital back at maturity. Government bonds are safer, while corporate bonds may offer higher returns but with slightly more risk.

Mutual funds

These pools of money are raised from many investors and managed by professionals.

• Equity funds aim for long-term growth.

• Debt funds focus on stability and income.

• Hybrid funds balance growth and safety.

• ELSS funds offertax savings as per Section 80C of the Income Tax Act, 1961. Systematic Investment Plans (SIPs) make it easy to invest in such funds on a periodic basis and diversify.

ULIP

ULIP plans endows both life insurance coverage and market-linked investments. You can zero in on equity, debt or balanced funds, enjoy tax benefits as per Section 80C* of the Income Tax Act, 1961  and build wealth over the long term.

PPF

A government-backed and low-risk product with tax-free returns. It is just perfect for safe and long-term savings as well as retirement planning.

Real estate

Property investments can generate rental income as well as appreciate over time. They’re suitable for long-term goals but require high initial investment and may have low liquidity.

Savings/endowment policy

These insurance-backed savings plans provide guaranteed returns, making them ideal for long-term and goal-based saving. They also offer tax benefits and financial security.

Categories of Investments

Investments can also be grouped depending on how they function in the financial system, whether you're lending money to an institution or keeping funds in highly liquid instruments for short-term requirements. 

These categories assist you in matching products to your goals, risk appetite level, return preferences and time frames.

An investment in lending

Here, in this case, you act as a lender. You provide funds to a government, corporation or financial institution in return for a regular interest component over a fixed period. Examples are government bonds, corporate bonds, debentures and treasury bills. 

These lending investments are lower risk in nature than equities. This makes them a good choice for conservative investors who seek capital preservation as well as want predictable investment returns.

Cash equivalents

These are highly liquid, short-term investment options that can be quickly converted into cash, often within 90 days. Examples basically are certificates of deposit (CDs), commercial papers, treasury bills and money market funds. 

Owing to their low risk and quick accessibility, cash equivalents are utilised for contingency funds or for parking surplus capital when you require safety as well as flexibility.

Types of Investments Based on the Risk Profile

Every investment come with some level of risk attached. And the correct choice depends on your goals and comfort with market fluctuations.

Low-risk investments:

These concentrate on safety as well as capital protection features, offering steady but modest investment returns. Best for conservative investors or those with short-term goals. Examples of low-risk investments are FDs, PPF, government bonds and endowment plans.

Mid-risk investments:

A balance between growth and safety, these match well with mid-term goals. They may fluctuate in value but are less volatile as compared to pure equity. Examples of mid-risk investments that you must be aware of are balanced mutual funds, ULIPs and debt funds.

High-risk investments:

Tailored for aggressive investors and those looking out for high growth. These can deliver strong returns but tend to hold a higher chance of loss. Best for the purpose of long-term creation of wealth. Examples of high-risk investments that you must be aware of are equity mutual funds, individual stocks and crypto assets.

Why are Long-Term Investments Important?

Think of long-term investing. It is same as planting a tree. You won’t enjoy the fruit right away. But with time, patience and extensive care, it grows strong and yields more every season. Remaining invested for years permits your money to grow steadily, ride out market ups and downs and benefit from the power of compounding effect, where your earnings begin earning their own returns.

As per a report published in Business Today, as of January 2024, India has around 87 million investors compared to just 17.9 million in the year 2015. Maharashtra leads the country, with 17.4% of all stock market investors coming from the state. This sharp rise in participation shows increasing awareness regarding the significance of wealth creation. 

Wondering how you can make it work for yourself too? If you invest a sum of ₹5,000 a month at an average return of 10% p.a. In just a span of 10 years, you could accumulate about ₹10 lakh. And in 20 years, that amount could grow to nearly ₹38 lakh. That’s compounding at work!

Long-term investments are best for big goals such as retirement, your child’s education or buying a home. Popular financial options are PPF, ULIPs, equity mutual funds and certain endowment policies.Before you begin, examine your risk appetite level and line up your investments with your goals. The correct long-term plan today can secure your tomorrow.

The Difference Between Savings and Investment

Think of savings and investment as two sides of the same coin. Both are very important.But they serve distinct purposes in your financial journey.

Savings

Savings are like keeping water in a bottle, i.e., safe, accessible and ready whenever you’re thirsty. It’s the portion of your income you set aside for short-term requirements or exigencies, usually parked in a bank account or FD. Savings have high liquidity and minimal risk. But they don’t grow your wealth much.

Savings are done for attaining short-term goals such as a weekend trip, buying a new phone or covering unexpected medical expenses.

Investment

Investments are the same as planting seeds in a garden, you do not see results overnight. But over time, they grow into something bigger. Here, you allocate funds in financial instruments (i.e., mutual funds, stocks, bonds or ULIPs) with the motive of building wealth over the long term. 

While investments hold some risk, they endow the potential for generating higher returns and are essential for attaining long-term goals, i.e., buying a home, funding your child’s education or retiring comfortably.

Factors to Consider Before Investing

Investing is not just about chasing the highest returns; it’s about making choices that match well with your goals, comfort level and future plans. Think of it as mapping out a road trip: you require being aware of where you are going, how long the journey will take and what you will need along the way.

Establishing your investment objectives

Your goals are unique, and your investments, too, must be planned out in a unique way. Start by defining whether your targets are short-term in nature (like buying a four-wheeler over a span of 3 years) or long-term in nature (like building a retirement fund over a span of 20 years). This clarity acts as the basis for choosing the correct financial products.

Zeroing in on the best investment option

 Align the financial product to your goal’s time horizon:

• Short-term goal – For instance, four-wheeler purchase in three years - debt mutual fund

• Long-term goal – For instance,purchasing a flat in 10 years - equity funds or stocks

The correct fit ensures you are not taking unnecessary risks or missing out on growth opportunities.

Save on taxes with long-term investment products

Some investments grow your wealth as well as lower your tax bill. Instruments (i.e., ELSS, PPF, ULIPs and NPS) qualify for tax deductions (as per Section 80C), making them prudent and efficient productsfor investors.

Ensure your family’s important goals

Big milestones (child’s education, marriage or healthcare) need more than hope; they need structured planning. Go for products that endow growth as well as protection, such as ULIPs or dedicated child plans.

By lining up investments with your life stage, risk tolerance and tax planning, you are not just putting money to work, you are even building a future you can count on.

How to Start Investing?

Beginning your investment journey can appear like stepping into a maze, lots of options, plenty of advice and a fair share of myths. Know what's good news? You don’t need to be a finance expert or have a huge sum of money to begin. Here is a roadmap you must follow:

Do research before investing

Before you put in a single rupee, understand where it is going. Go through distinct financial products, i.e., mutual funds, FDs, PPF, stocks, and learn about their risk, return and suitability. Do not just depend on what a close companion or relative suggests. 

Cross-check facts from trusted sources, namely,Reserve Bank of India (RBI), Securities Exchange Board of India(SEBI) or reputed financial institutions. For example, if someone says, “this fund gives assured high returns”, check its previous performance, risk rating and official documentation.

Create a budget

Healthy investing begins with healthy money habits. Evaluate very carefully your month-on-month income and expenses, and make sure you have an emergency fund (enough for six months of living expenditures) before you begin locking money away. 

If your month-on-month surplus is ₹5,000, then consider beginning with a ₹2,000 SIP and gradually increasing it.

Understand how easy it is to access your money

Every investment has a “liquidity factor.” Liquid assets like certain mutual funds let you withdraw in a few days. Locked-in assets such as PPF (i.e.,15 years) or tax-saving FDs (i.e., 5 years) restrict access. For example, if you are saving for a holiday next year, avoid products with long lock-ins.

Know the tax impact of your investments

Returns aren’t just about percentages, taxes matter too.

• Short-term capital gains (STCG): For equity funds, selling before one year might attract 20% tax.

• Long-term capital gains (LTCG): Holding for more than one year can lower the tax to 12.5% (beyond ₹1.25 lakh gains).

Being aware of this assists you in planning out withdrawals prudently, so you keep more of what you earn.

Understand your risk level

Make sure to ask yourself: “If my investment value falls by 10% tomorrow, will I panic or remain invested?” Use online risk profiling tools to examine your comfort level if you are risk-averse, lean towards bonds, debt funds or fixed deposits. 

If you can manage market swings, then consider equity options. And remember always, diversification disseminates risk.

Seek professional advice

It’s okay to ask for help. A certified financial advisor can explain jargon, clear out various myths (like “you need lakhs to invest”), and match financial products to your life goals and risk appetite level. 

Why is Your Choice of Investment Asset Important?

Your investment is the same as a cricket team. Each player (asset) has a distinct role. You would not send your best batsman to bowl the final over, correct? Likewise, selecting the incorrect asset for your goal can result in missed returns, locked-up money or taking on more risk than you can manage.

Distinct assets differ in risk, returns, liquidity and investment tenure. Your choice must depend on:

• Your goal (short-term or long-term)

• Your risk appetite (low, moderate or high)

• Your need for liquidity (swift access to money)

Here is a comparison:

Example:

If your goal is to buy a flat inthe span oftwo years, equity might be too risky. A short-term FD or debt mutual fund may be a safer option here. 

But for retirement,i.e., 25 years away, equity could be your star performer. Always note that the correct asset is the one that works for your goal, not against it.

What is the Importance of Investment?

Saving alone is the same as storing water in a bucket with tiny holes. Over time, inflation quietly drains its value. Investing not just safeguards your money from inflation but also permits it to grow, creating wealth as well as giving way to financial freedom.

It’s the key to affording milestones, right from purchasing a flat to enjoying a stress-free retirement. By investing, you prepare for financial exigencies, secure your future and endow your dreams with the financial wings to take flight.

Investments as Per Life Stages

Your investment journey is not static in nature; it evolves with your life. The appropriate plan at the age of 25 may not be suitable for you at 50. Here is how your requirements and choices can adapt at each life stage:

First job

You have just started earning. This is the right time to plant the seeds of wealth. Begin with small investible amount. Opt for investment options such as ELSS or any suitable equity mutual funds for long-term growth. Add basic term insurance to safeguard the financial future of your family. Even ₹2,000 invested a month can grow significantly over long time. Remember, consistency matters more than size.

Marriage

Two incomes often come with dual responsibilities. Secure your partner’s well-being with a health insurance and begin joint financial planning. Line up your goals,whetherit is purchasing a home or beginning a family and start budgeting together for attaining them.

Birth of a child, buying a houseand a kid’s higher education

Life now calls for long-term planning. Opt for ULIPs, child plans or savings-linked insurance plans that safeguard and grow your funds for predictable future needs like your kid’s higher education or home purchase.Such plans club protection with disciplined savings.

Retirement

Here is when your focus shifts from wealth creation to wealth preservation and income generation. Zero in on money-back policies, ULIP-related retirement plans or pension schemes that endow a regular payout while keeping you insured. Wondering, what's the aim here? It is basically to maintain your lifestyle with zero need for depending on others.

Conclusion

As Warren Buffett once said, “Rule No. 1: Never lose out on money. Rule No. 2: Never forget rule No. 1.” This principle puts straight the first step in successful investing, which is capital safety, ensuring that your hard-earned money continues to work for you without unnecessary risk.

The correct investments assist you in beating inflation, creating wealth and securing your future against uncertainties. As your life evolves, so must your financial strategy, ensuring your goals are within reach. 

No matter whether you're beginning your work career, raising a family or planning out retirement, each life stage offers unique opportunities to build security and freedom. The earlier you begin and the more consistently you invest, the greater is your rewards. 

So, begin today and allow your money to work for the life you dream of.

Frequently Asked Questions (FAQs) on What Is Investment

What do you mean by investment?

Investment is putting your funds into assets, i.e., stocks, mutual funds or real estate, with the aim of growing them over long time. It involves balancing out potential returns with the level of risk you're willing to take up.

 What are the 3 types of investments?

The categories are ownership investments (i.e., stocks, real estate), lending investments (i.e., bonds, FDs) and cash equivalents (i.e., treasury bills).

 Why is choosing an investment asset important?

Distinct assets offer distinct levels of risk, returns and liquidity. Selecting the correct one ensures your investment matches your goals and time frame.

What is the purpose of an investment?

The purpose of an investment is to grow your money over a long time period by putting it into assets that can yield returns, which helps you attain goals like wealth creation, retirement planning or funding essential expenses.

 How do I start investing?

Set up clear goals, examine your risk appetite level and choose suitable investment options like mutual funds, PPF, or stocks.

 Is gold a good investment?

Yes, it is. Gold comes across as a safe haven, particularly in times of economic volatility. And, so it must be part of a diversified portfolio.

 Why invest when you can save money with zero risk?

Savings keep your money totally safe, but don't grow it; investments help beat inflation and build wealth over a long time.

 Can I start investing with a small amount?

Absolutely. Opting for SIP route in mutual funds permit you to begin with as meagre an amount as ₹500 per month.

 What is the best investment for beginners?

Equity mutual funds via SIPs, PPF or index funds are beginner-friendly options owing to low entry barriers and professional management.

 Why is investment important for securing your future?

It assists you in growing wealth, staying ahead of inflation and being financially prepared for life’s major goals and exigencies

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