What is Investment? Types, Objectives & Why to Invest

What are Investments?

Your hard-earned money should ideally appreciate over time. Achieving this requires setting funds in financial tools, which serve as your investments. So what are investments?
Investing entails placing your money into assets or instruments that have the potential to appreciate in value. This is accomplished by buying assets, investing in money market instruments, real estate, and other avenues, resulting in returns on your initial investment. The overarching purpose of investing is twofold: to facilitate the growth of your capital and to establish long-term wealth, and also generate additional income.
There are various forms of investments, ranging from traditional choices to more contemporary ones. The time-honored investment avenues include fixed deposits, gold, real estate properties, and endowment plans, along with insurance policies. These options have garnered popularity due to their perceived safety and historical potential for substantial returns.
Furthermore, alternative investment options such as debt funds and equity are gaining traction among investors. This diverse investment landscape offers varying risk profiles and potential returns, empowering you to tailor your investment strategy to your financial goals and risk tolerance.

Why should one Invest?

In the pursuit of aspirations and dreams, a critical aspect emerges—financial goals. These goals necessitate financial resources to materialize, supporting not only our ambitions but also our day-to-day lives.
The unprecedented events of 2020 starkly illustrated the speed at which lives and livelihoods can be thrown off track. At such junctures, the symbiotic relationship between savings and investments come into play. Diligent financial planning creates a provision for uncertain times in the form of investments.
These investments serve as a buffer during proverbial rainy days, instilling confidence to confront external challenges. This is called financial immunity. The idea is that you generate enough wealth through investments so that external factors cannot waver you from your path and progress. However, building this financial immunity hinges on possessing the right knowledge. Hence, the dire need for financial literacy becomes evident—regardless of your profession, age, or gender. Financial literacy is a cornerstone for anyone with financial earnings.

Types of Investments

Navigating the world of investments is a crucial step toward securing your financial future. From time-tested classics to contemporary strategies, understanding the diverse investment types empower you to make informed decisions that align with your goals and risk tolerance. So, let's dive in and explore the array of investment options that can pave the way to your financial success.

Bonds

Bonds represent a type of debt investment. When you invest in bonds, you are lending money to an organization. This can be a private or government-controlled company. Bonds have a fixed coupon rate, i.e., the rate at which the organization pays you interest at regular intervals, providing a consistent source of income. Bonds offer stability due to the certainty of returns and duration making them a relatively safe investment option. Hence, they also carry a lower rate of return than other riskier options.
Furthermore, since you know the maturity amount and date, you can plan your bond investments according to future milestones and events in your life. It may be a good idea to invest in bonds for medium- to long-term financial goals.

ULIP

Unit Linked Insurance Plans (ULIPs) are an investment type combining life insurance with investments in money market instruments. A portion of your premium covers life insurance, while the remainder is invested in various funds.
ULIPs offer tax deductions under the Income Tax Act 1961, subject to conditions under Section 80C. The returns may also be tax-exempt subject to Sec 10(10D) and/or as per the prevailing laws.
ULIPs have a lock-in period of 5 years. Hence, they are suitable for long-term goals.

Public Provident Fund (PPF)

If you are looking for an investment type that is considerably safer than market-linked products, you can opt for the government-backed Public Provident Fund (PPF).
The government declares the interest rate applicable to PPF investments every quarter. However, the interest is credited to your PPF account annually. This compounding can work wonders for your corpus.
PPF has a long lock-in period of 15 years. After which, you may extend your investment tenure 5 years at a time, any number of times.
The minimum investment per year is Rs.500, while the maximum allowed is Rs.1.5 lakh. The entire investment and the maturity amount are tax-exempt.
From a financial planning standpoint, it’s an apt choice for long-term investments and retirement planning, offering both tax benefits and financial security.

Savings/Endowment plans

Savings and endowment plans are a traditional form of investment that combine fixed returns with life insurance coverage. These plans cater to risk-averse investors, providing consistent returns with lower market risk.
Premiums paid on savings plans are eligible for tax deductions under Section 80C of the Income Tax Act 1961. Rs.1.5 lakh per annum is the maximum amount that can be claimed. The returns may also be tax-exempt under Sec 10(10D), subject to conditions.
Like term plans, endowment plans are suited to fulfill your investment objectives over a medium to long term. Goals such as buying a house, marriage, children’s education, etc., may be planned with such insurance policies.
You can also choose whether you want to receive your returns or the maturity amount as a lump sum amount or as regular payments over a period of time. Hence, savings/endowment plans can aid in generating income in the future.

Fixed deposits

A traditional form of investment is fixed deposits.
When you invest in bank Fixed Deposits (FDs), you earn a fixed rate of interest for a predetermined fixed tenure. Since you can choose the tenure of your investment in fixed deposits subject to the bank’s conditions, it also provides a degree of flexibility.
Fixed deposits are suited for short-term to medium-term goals, like a down payment for a house or a car, a vacation, school fees, etc.
Other than bank FDs, you can also choose corporate fixed deposits. These instruments usually offer higher interest rates than banks but also tend to carry higher risk.

How does an investment work?

Investments serve as a tool for financial planning.
The fundamental principle of an investment is to set aside a portion of your present income to ensure a financially stress-free life in the future.

Analyze Your Financial Needs

Start by understanding your current expenses. and anticipating future financial requirements are crucial steps in investment planning. This assessment helps determine the investment tools that align with your goals. Moreover, evaluating your risk appetite - the extent to which you can tolerate losses for potential gains – plays a pivotal role in shaping your investment strategy.

Investment Diversification

Diversification is key to a balanced investment portfolio. Rather than concentrating all your funds in a single investment type, diversify across assets with varying returns and durations. Prioritize, secure your financial future and cater to your family's needs.

Duration

Investments help fulfill future needs. That is why it is crucial to estimate ‘when’ those needs will arise and what will be their financial demands.
You will need to choose short-term, medium-term, or long-term investment opportunities accordingly. You may get suboptimal returns or even face a loss if you have to dip into your long-term investments to fulfill your medium or short-term needs.
Hence, diversify your investments based on when and how much money you will need to meet certain obligations.

Periodical Reassessment

Investments demand regular reassessment due to ever-changing market conditions. Your portfolio's performance may vary over time, with certain investments gaining prominence while others lag. Consistent assessment every 6 months or annually ensures that your investment strategy remains on track, increasing the likelihood of meeting your financial goals. For example, when your goals are nearby, it is necessary to move your corpus to investment avenues with lesser risk. This will ensure that you do not fall short of the needed amount when the moment arises.

What are the Objectives of Investment?

At its core, the purpose of financial investment is to grow wealth and achieve financial goals. However, informed decision-making is paramount, and that's where financial literacy comes into play.
Financial literacy is the starting point of any fruitful financial decision. It arms you with the skills and confidence to make informed financial decisions. Investment decisions taken after considering all the available information can lead to meaningful wealth-building.
This can help to start you on the path toward financial immunity so that you can withstand unexpected financial shocks and navigate difficult times with ease. Let us delve deeper into the reasons behind choosing to invest:

Safeguard your cash flow

Investments shield accessible money from impulsive spending and provide protection against inflation. Generating returns exceeding inflation rates ensures your wealth remains intact and potentially grows over time.

Build your savings

An investment objective to keep in mind while financial planning is to build your savings. This is the corpus you would be building to have a comfortable future.
It should help your initial capital appreciate by compounding in value over time. If you want true financial freedom, your money should grow into wealth. This wealth will offer you and your family financial immunity against any unforeseen happenings.

Build Funds in Emergencies

Emergencies crop up all the time and bring huge expenditures with them.
It is prudent to keep funds aside for such emergencies. One of the ideal things to do is to invest emergency funds in a safe financial tool, like fixed deposits, even if they generate only modest returns. The idea is that the money is accessible when you need it the most.
It is recommended to have an emergency fund equivalent to 6 to 12 months’ expenses.

Save Tax

Besides capital growth or preservation, tax saving is another investment objective. It is a worthy advantage as it provides double benefits – your capital appreciates while your tax liability decreases.
The Income Tax Act 1961 allows deductions of taxable income when investments are made in instruments like NPS, PPF, ULIPS, ELSS, etc.

Secures your Retirement

It is a fact that there comes a time when you will have to retire, and your active income will come to a halt or become negligible. This may hamper the comfort of your existing lifestyle.
Having a retirement plan for such a scenario helps. Since investments help your money grow, they can generate a steady cash flow during retirement. Diligent financial planning can ensure financial independence, and a dignified retirement.

Achieve your financial goals

Everyone has different goals for different stages of their lives. Some may be short-term, some medium, while others may be long-term goals.
Investments should be made in instruments that will help you achieve your goals when the right time arrives. For this, ascertain the lock-in periods of various instruments, and invest in them accordingly.

Different Categories of Investments

Investing involves making strategic choices that balance the potential for reward with the level of risk you're willing to undertake. Different investment categories offer varying degrees of risk and corresponding potential returns. Understanding these categories is essential for crafting a diversified investment portfolio that aligns with your financial goals.

Ownership Investments

These are investments that make you the owner of the assets that you purchase. Stocks and real estate are two examples of such investments. As owners, you earn if the investment appreciates in value and lose capital if it depreciates.

Investing in Lending

As the name suggests, investing in these instruments makes you a lender to the person or institution you are investing in.
Bonds issued by a company is a prominent example. When you buy bonds issued by a company or the government, you lend money to them. The company or government pays you interest for the duration of the bond.
Though not entirely risk-free, bonds are considered lower risk than stocks. Bonds issued by the government tend to be safe. Hence, they also tend to generate lower returns during a specific period.

Cash Equivalents

Cash equivalents refer to highly liquid investments that can be quickly converted into cash, without significant loss of value. Examples include Treasury bills (T-bills) and commercial papers.
These instruments are particularly attractive for their ease of conversion and lower associated risk. While they may offer lower returns compared to other investment categories, their stability makes them an essential component of short-term financial planning.
By understanding the distinct characteristics and risk profiles of these investment categories, you can strategically allocate your funds to create a balanced portfolio that aligns with your risk tolerance and financial aspirations.

Frequently Asked Questions (FAQs)

What do you mean by Investment?

Investment refers to the act of purchasing various assets or financial instruments with the potential to generate income and/or appreciate in value over a period of time.

What are the different types of investments?

Various types of investments include equity (stocks) and Debt, PPF, and NPS. ELSS, bullion, real estate, term plans, savings/endowment plans of insurance policies, art, antiques, etc.

When should you start investing?

The best time to embark on your investment journey is right now. However, even if you've already begun earning, it's important to recognize that wealth growth requires time. Starting early allows your money more time to accumulate and grow into substantial long-term wealth. Therefore, the sooner you start investing, the more time your money gets to reward you with financial immunity.