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An investment refers to buying an asset or item to generate income or witness its appreciation. The purpose of investment revolves around the pursuit of profits with several types of available investment plans.
The world of investment may appear cold and confusing. When faced with challenges, recall the words, "A dream doesn't become reality through magic; it takes sweat, determination, and hard work."
An investment can be about anything, like dedicating your time or resources to enhance your life or benefit others. But within the financial sphere, investment revolves around terms such as securities, real estate, the stock market, and more.
This blog offers complete information related to what is an investment, its types, its significance, influencing factors, and more.
Investment Meaning & Definition
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.
Top Objectives of Investment
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 money or assets stands as a main objective for many investors. Certain investment plans serve as safeguards, preserving your hard-earned money 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 money 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 money 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*
Investing in tax-saving vehicles enables you to qualify for deductions on your taxable income. Moreover, allocating your funds to certain assets can effectively lower your tax obligations.
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
What are the Types of Investment?
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 (money 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 money 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.
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 returns2.
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.
Some Steps to Consider Before Investing
Map a Personal Financial Plan
The first and foremost step in making successful investments involves knowing your goals and gauging your risk tolerance. You can plan these factors independently or take guidance from a financial expert.
As an investor, you can work towards financial stability over time by implementing a well-informed plan. Eventually, you can enjoy the benefits of effective money management by understanding savings and investments.
Assess Your Risk Comfort Zone
Every investment entails a certain level of risk. While purchasing securities, such as stocks, bonds, or mutual funds, you must acknowledge the potential for partial or complete loss of your invested capital.
If you have a long-term financial goal, you can skillfully venture into asset categories with greater risk, like stocks or bonds. This potentially yields greater financial rewards.
Optimise Tax Savings with Long-Term Investments
Investment plans with a long-term duration also offer the advantage of potential tax savings:
Investments like PPF and ULIPs can reduce your taxable income when you allocate funds to them.
Equity mutual funds, gold ETFs, and debt mutual funds can benefit from indexation benefits on capital gains if held for a sufficient duration."
Final Words
Investment always entails committing resources today - whether it's time, exertion, capital, or an asset - with the hope of reaping a greater reward in the future than the initial input. The availability of investment types allows you to choose a plan per your current financial goals.
Opt for Investment Plans that are curated to help you meet various financial goals, such as bridging income gaps, settling debts, funding education, buying a house, and more.
