What is Investment?

When a person acquires an item as an investment, the intent isn't to consume it immediately but rather to harness it in the future to accumulate wealth. An investment refers to buying an asset or item to generate income or witness its appreciation. 

In other words, investment means acquiring assets that rise in worth over time, thereby yielding returns in the form of income payments or capital gains. 

For example, as an investor, you may opt for investment plans today with the expectation that your chosen plans will generate income down the line.

After understanding the investment definition, the article further explains how it works.

An investment works as an asset or financial instrument that is purchased with the goal of increasing in value or producing income in the near or long future. The return can be interest, dividends, rent from real estate, or the capital gain, or rise in the market value of the asset. 

If the share price of a company is increasing because of its performance, for instance, the investment in the shares might increase. Likewise, bond investments can yield a steady income and rental property investments can yield rental income as well as capital appreciation. 

But in reality, the growth of an investment will be determined by the performance of the market, the length of time you invest, the risk level, and the economic conditions. Regular investing and regular reinvestment can help to accumulate wealth over time and can also contribute to a long-term financial objective.

The purpose of investment revolves around the pursuit of profits. Listed below are some of the top objectives of investment:
 

To improve your financial security

Securing capital or assets stands as a main objective for many investors. Certain investment plans serve as safeguards, preserving your hard-earned capital against the erosive effects of time. By investing your funds into these plans, you can ensure the longevity of your savings. 

To build an income source

Investing to create a reliable income source for oneself takes various forms, such as dividends, interest, or yields. These investment objectives entail a higher degree of risk, but they also offer the prospect of greater returns.

To achieve financial goals

You can achieve financial goals after skillfully investing your capital in the right investment plans. Some of these goals may include buying a new house or car, education, saving up for retirement, etc. Aligning your investments with specific goals empowers you to navigate the path toward achieving them.

To grow your wealth

After setting aside a portion of your finances, the last thing you want is to face the risk of losing it all due to unforeseen events or sudden catastrophes. Investment presents a means to put your capital to work and accumulate wealth over time. 

As an investor, you can chase capital gains with the help of some strategies, such as conservative growth, aggressive growth, and speculative approaches.

Conservative growth means creating an investment portfolio to incrementally build wealth over a larger period of time.

Aggressive growth entails bold investments in stocks to achieve short-term and long-term gains.

The speculation involves efforts to maximise market-linked returns2 by actively trading shares based on speculative predictions of price changes.

To gain tax benefits*

Additionally, several of these investments offer the advantage of tax-free maturity values. This helps in the reduction of future tax burdens. Below are some of the tax-saving instruments:

• Fixed Deposit

• PPF (Public Provident Scheme)

• ULIP (Unit linked insurance plan)

• Life Insurance

• Tax-saving mutual funds

• National Pension Scheme

Stocks/equities

A stock share represents a fractional ownership stake in either a public or private company. Owning stock provides investors with the potential to receive dividend payments derived from the company's net profits. 

As a business firm attains greater success, it attracts more investors interested in purchasing its shares. This way, the value of these shares can be appreciated which allows potential capital gains upon sale.

Bonds/fixed income securities

A bond constitutes an investment requiring an initial capital outlay (capital that's spent to buy capital assets). These bonds yield periodic payments over the bond's lifespan. Upon maturity, the investor receives their originally invested capital back. 

Real estate

Real estate investments come with a range of investments in tangible, physical spaces with practical utility. Land can be developed, office buildings can be leased, warehouses can store inventory, and residential properties can provide housing for families. 

Mutual funds

Mutual funds involve pooling capital from multiple investors to collectively invest in stocks, bonds, and other securities. The potential for profitability exists when selecting the right fund, mainly when keeping up with a long-term investment duration.

ULIP (Unit Linked Insurance Plan)

ULIP is an insurance plan offering a dual benefit of investment for long-term financial goals and life insurance coverage to protect one's family in the event of an unfortunate incident. Depending on the proportion of the investment, investors are allocated units. 

These units possess a net asset value (NAV) calculated daily. Since these units are linked to the market, their NAV fluctuates by market conditions.

PPF (Public Provident Fund)

PPF can be described as a long-term investment plan, favoured by people on the lookout for stable yet high returns. PPF accounts come with a 15-year lock-in period during which funds cannot be entirely withdrawn. 

Investors have the option to extend this tenure by an additional 5 years after the initial PPF lock-in period expires, if necessary.

Other commodities 

Other commodities mainly include raw goods like agricultural products, energy resources, or metals.

You have the option to invest directly in tangible commodities, such as owning physical gold bars, or to choose alternative investment plans with digital ownership, such as investing in a gold exchange-traded fund.

Now that we understand investment meaning, let’s understand why selecting the right investment asset matters. 

Although several investment plans can help you build a corpus, not all of them may be suitable for you. You need to know which investment format is good for you, and which ones best fit your financial needs. 

Below is a list of the three essential factors that you must consider while making an investment decision. 

Risk assessment

Virtually every investment opportunity carries a degree of inherent risk. Therefore, understanding the associated risks before diving in is essential. Your risk tolerance must inform your investment decisions that enable you to optimise your investment plans. 

You can opt for lower or medium-risk investments if saving your main investment is paramount, even though the potential returns may be low. Also, if you want greater returns and are open to assuming some risk, your investment portfolio will take a different shape.

Investment duration

Your personal financial goals must have a certain timeframe as your investments will come with a specific period. Moreover, a long-term investment plan increases the chances of gaining higher profits and returns. 

Overall, your investment duration must align with your financial goals and the purpose behind your investments.

Liquidity consideration

Whilst making investment decisions, you must anticipate the possibility of needing to liquidate your investment to address unforeseen financial requirements. Moreover, evaluating the long-term growth potential and liquidity of your chosen investment is vital. 

If your selected investment plan maintains high liquidity, you can capitalise on market price fluctuations and easily divest the investment if necessary.

The following are the key factors to consider before making an investment.

Financial goals

It's essential to understand for what purpose you are investing before you invest. People often begin investing without making it a part of a specific financial objective, which typically results in inconsistent investments in the long run. Your aims may be short term such as purchasing a new car or planning a holiday, medium term, such as funding a further education course or long term, such as planning for retirement. Once you have established a goal and timeline, finding appropriate investment solutions becomes much simpler and more feasible.

Risk tolerance

All investments carry some degree of risk, and it is important to have an understanding of what level of volatility you are comfortable with. There are investors who can handle short-term volatility and fluctuations because they are expecting the investment to appreciate over time, and there are investors who will like stability and predictable growth. In a sense, there is no “right” "risk" level here. This is influenced by your finances, age, regularity of income, and risk tolerance. 

For instance, equity investments might be appropriate for a very aggressive investor, while a bond, fixed deposit, or other investment with a more pension-like focus may be more suited to a conservative investor. In case you are searching for a comparatively lower risk option, the National Pension System (NPS) is thought of as an option, which offers flexibility because of Tier I and Tier II accounts, and investing for retirement.

Investment horizon

Your investment horizon simply means how long you can keep your capital invested before you may need it. This factor matters more than many first-time investors realise. For long-term goals, investors generally have more flexibility to consider growth-oriented options like equities because there is enough time to recover from short-term market volatility. On the other hand, if the funds may be required in the near future, safer and more liquid investments are usually preferred. Worth noting, matching your investments with the right time horizon can help avoid unnecessary pressure during market ups and downs.

Costs and fees

While the amount of investment may not sound large at first, it can have a significant impact on overall returns over time. If you don't consider and account for the charges like brokerage fees, fund management expenses, transaction charges or exit load, then your gains on investment can get eaten up little by little. A smart investor will pay careful attention to fee structures, as even a slight difference over the course of a long investing period can make a big difference. Selecting investments with clear and fair expenses means you will keep more of your money invested and compounded over the years.