A financial investment is a purchase made with the goal of allowing the principal to increase in value. The accumulated wealth can be put to various uses, such as making up for income shortfalls, saving for retirement, or meeting specific obligations like loan repayments, tuition payments, or the acquisition of other assets.
Having a firm grasp on the meaning of the term “investment” is critical if you want to make smart financial decisions. You can make better investment decisions if you understand the investment meaning in the context of your current financial situation.
You can earn money from investments in two different ways. If you invest in something that can be sold, you might be able to make a profit. Second, if you make an investment in a plan that generates a return, you will accrue profits and earn a salary. It can be said that investments are all about putting your savings into assets or objects with a long-term value that will be worth more than their initial value or that will help you generate an income.
An investment, in the financial sense, is an asset acquired with the intention of allowing its value to rise over time.
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When Is the Right Time to Make an Investment
Some people spend a significant amount of time trying to figure out “what is investment,” as well as the investment goals and benefits. Investors are reluctant to look at investments as a means of wealth creation because of the inherent risk. In addition to risk-free investments, there are a number of investments with low to moderate risk. You should learn as much as possible about “what is investment meaning” and how it fits into your overall financial plan while you are still young. You have fewer responsibilities when you’re young, so you’re more likely to try out different investments and use those that work best for you.
Investing early can help your money grow faster thanks to the compounding effects of your investments. It’s possible to maximise your investment returns if you start early and consider various aspects of ‘what is investment’ before investing.
India’s Most Popular Investment Options
There are a plethora of investment options available to you. You must, however, make certain that you only invest in options that are compatible with your risk tolerance and meet your needs.
In India, you can invest in any of the following seven options:
Direct Equity
An investment in stocks, also known as direct equity, is one of the most effective ways to grow your money. When you buy stock in a company, you become a part owner of that business. You’re putting money into the company’s future. To reap the rewards of your investment, you’ll need both time and knowledge of the market. If this is the case, then direct equity investment is nothing more than speculative behaviour. Any investor with a Demat account and who has undergone KYC verification can purchase stocks offered by publicly listed companies on recognised stock exchanges. Long-term investors should look to stocks as a good option. Various economic and business factors influence stocks, so you must actively manage them. You must also be aware that no guarantees can be made regarding the returns, and you must be ready to take on the associated risks.
Mutual Funds
In recent decades, mutual funds have become increasingly popular among millennials. A mutual fund is a collection of individual and institutional investors with a common investment objective who pool their money together to make a larger investment. A financial expert known as a fund manager oversees the pooled funds and makes investments in securities and assets to maximise returns for investors. Equity, debt, and hybrid mutual funds are the three basic types of mutual funds. Funds investing in stocks and equity-related instruments are called equity mutual funds, while funds investing in bonds and papers are called debt mutual funds.. Hybrid funds invest in a variety of securities, including both equity and debt. Investment vehicles like mutual funds let you start and stop investing whenever you want. Investing in mutual funds is something that anyone can do. You don’t have to be an expert or have a lot of time to invest in mutual funds because the manager of the fund handles portfolio construction for you. However, you should only put your money into funds with similar risk and return profiles as yours. As a result, no assurances can be given about the returns, which are completely subject to market fluctuations. Keep in mind that a fund’s past performance does not guarantee future results.
Fixed Deposits
If you want to invest for a set period and earn a set rate of interest, you should look into fixed deposits, which are deposits you make with a bank or financial institution. While mutual funds and stocks offer some capital protection, fixed deposit accounts guarantee both the principal and interest on the investment. You don’t have to give up on the profits, because they’re the same. For investors who prefer to play it safe, fixed deposits are a great option. Fixed deposit interest rates fluctuate with the economy and are set by the banks in response to the Reserve Bank of India’s policy review decisions. In general, fixed deposits are considered to be irrevocable investments, but investors often have the option of borrowing against them if necessary. A five-year fixed deposit with a tax saving option is also available.
Recurring Deposits
One more fixed-term investment, a recurring deposit (RD) gives you the opportunity to invest a fixed amount each month for a predetermined period of time while earning a fixed rate of interest. RDs are available at financial institutions such as banks and post offices. The institution issuing the loan determines the interest rates. In an RD, a small amount of money is invested each month to build up a corpus over a specified period of time. RDs provide complete capital protection while also providing guaranteed returns. RDs, like fixed deposits, are a good option for conservative investors.
Public Provident Fund
With a 15-year lock-in period, Public Provident Fund (PPF) is a tax-saving investment vehicle for long-term saves. Government of India offers it, and the sovereign backs up your investment. The Government of India adjusts the PPF interest rate every three months. After 15 years, the investor can withdraw the entire corpus without paying any taxes. Loans and partial withdrawals are also permitted by the PPF if certain conditions are met. Certain conditions must be met for early withdrawals to be permitted, and you can extend your investment by five years at maturity.
Employee Provident Fund
Section 80C of the Income Tax Act, 1961 gives salaried individuals a tax break when they contribute to an Employee Provident Fund (EPF). Deductions from an employee’s monthly salary for EPF purposes are typically a percentage of that amount, with the employer matching that deduction in full. The EPF corpus that is withdrawn when it reaches maturity is tax-free as well. India’s government sets EPF rates and guarantees your returns on EPF investments every quarter. The Voluntary Provident Fund allows for contributions above the minimum (PPF). Keep in mind that access to your EPF investments is subject to certain conditions, and that your EPF account only matures once you have reached retirement age.
National Pension System
In terms of tax-saving investment options, the National Pension System (NPS) is a newcomer. As an investor, you’ll be locked into the NPS plan until you retire, but you’ll get better returns than you would with PPF or EPF. This is due to the NPS’s inclusion of equity-based plan options. A portion of the NPS maturity corpus must be used to purchase an annuity in order for the investor to receive a regular pension. Only 40% of the total accumulated corpus can be withdrawn as a lump sum, with the rest going into an annuity plan. NPS membership is mandated for some government employees.
What’s the Best Investment Option for You?
Because there are so many investment vehicles to choose from, it’s normal for investors to be perplexed. If you’re a novice investor, you’re probably unsure of where to put your money. If you make the wrong investment decision, you could suffer financial losses.
The following are the parameters on which we recommend you base your investment decisions:
Age
Young investors tend to be more carefree and have a wider time horizon for their investments. It is possible to invest in vehicles for the long term and to increase your investment as your income grows over time when you have a long professional career ahead of you. For this reason, equity-oriented investments such as mutual funds are preferable to fixed deposits for new investors. Older investors, on the other hand, may want to stick with tried-and-true options like FDs. As you get older, you’ll need to make adjustments to your investment strategy.
Goal
Investing objectives can be short-term or long-term in nature. Consider a safer investment for a short-term goal and equities for long-term goals because of their high return-generating potential. It’s possible that some of your demands are negotiable and some are not. Guaranteed-return investments are a good choice for non-negotiable goals like a child’s education or a down payment on a house. Investing in equity mutual funds or stocks can be beneficial if the goal is negotiable, meaning it can be delayed by a few months. Keep in mind that if your investments perform well, you may achieve your goals even sooner than you had originally anticipated.
Profile
When making an investment decision, keep your profile in mind as well. Factors like your annual income and the number of financially dependent family members play a significant role. Taking equity-related risks may be out of the question for a young investor with a lot of time on his hands who is also responsible for his family. An older person without dependents and a reliable source of income can also choose to invest in stocks in order to increase their returns. This is why investing is not a one-size-fits-all proposition. Investing must be done with care and strategy in order to get the most out of it.
What kind of investment strategy should I use?
Finding the right investment that matches your profile and meets your needs is the first step in developing a long-term investment strategy. When it comes to investing, here are some things to keep in mind:
- Stock and mutual fund investments should be reviewed on a regular basis to assess the tax implications of the returns you earn on them.
- Keep things simple and avoid complicated investments that you don’t understand.
- Get started as soon as possible.
- Choose investments carefully after conducting adequate research.
- Avoid quick-buck schemes that promise high returns in a short time.
Investing should begin as soon as possible for you. Time is money when it comes to investments. Your investment returns increase in direct proportion to how early you start and how long you stay invested.
Benefits of investing
Saving and investing have never been more critical to the well-being of the average person, especially when it comes to securing a comfortable retirement income. We’re all living longer, which means we’ll need more money in the bank to last us until retirement. With the shift from defined benefit to defined contribution pension schemes and the removal of the requirement to purchase an annuity after retirement, each of us has a greater responsibility to manage our financial retirement.
However, retirement is by no means our only financial goal in life. Aside from saving for a house or car, our other financial goals could include anything from a dream vacation to paying for college tuition for our children.
Even if you’re fortunate enough to receive a windfall or an inheritance, you’ll likely want to invest your money in stocks and bonds, mutual funds, or real estate to increase your savings, whether for a specific goal or to generate a regular income, such as for retirement.
What’s the best way to get around in the investment world? To begin, we urge you to welcome it rather than run from it. Investing, after all, gives you the chance to achieve your financial goals while also improving your quality of life.
When you first look at the investment industry and financial markets, it’s easy to get overwhelmed by the lingo and jargon. Investing basics, investment benefits, and a glossary of investment and financial terms are all covered in this section to make investing easier for you.
To Preserve Your Money
One of the primary goals of investing is to preserve one’s capital. Some investments help guard against the deterioration of hard-earned capital over time. It’s possible to avoid outliving your savings by putting them in these instruments or schemes. Savings accounts, government bonds, and even fixed deposits can help protect your money. It’s easy to achieve capital preservation even if returns are lower because of the lower rate of return.
To Help Money Grow
In addition to maximising returns, one common goal of investing is to build a sizable portfolio over time. The goal of capital appreciation is to help people secure their financial future over the long term. If you want your money to grow into wealth, you must think about investment goals and options that provide a high return on your initial investment. In order to achieve long-term capital growth, real estate, mutual funds, commodities, and stock are some of the best investments. These options may come with a high level of risk, but the potential reward can be substantial as well.
To Earn a Steady Stream of Income
An additional (or primary) source of income can be generated through investments. Fixed deposits that pay interest on a regular basis, as well as stocks in companies that distribute regular dividends, are examples of these types of investments. After you retire, income-producing investments can help you pay for your living expenses. These loans can also supplement your income during your working years, allowing you to pay for things like college or EMIs with the money you save.
To reduce the tax burden
There are other compelling reasons for investors to invest aside from growth or preservation of capital, of course. The Income Tax Act of 1961 provides this incentive in the form of tax savings. There are options for investing that can be deducted from your total income such as Unit Linked Insurance Plans (ULIPs), PPF, and Equity Linked Savings Plans (ELSS). As a result, your taxable income drops, which lowers your overall tax burden.
Save for the future
Putting money aside for your golden years is a must. Because you may not be able to work indefinitely in your golden years, having a retirement fund is critical. The money you earn while working can be put to good use by investing it in high-yielding investments that will provide you with a comfortable retirement.
To achieve your financial objectives
Investing can also assist you in achieving your financial goals, both short- and long-term, without causing you undue stress or difficulty. Some investment options, like short-term lock-ins and high liquidity, are available. These investments are excellent vehicles for stashing money away for short-term goals like home improvements or a savings account for unforeseen expenses. Other investment options, such as those with a longer lock-in period, are ideal for long-term saving.