Investing in the assets of various ventures has resulted in great success for investors. This trendy domain of investment has brought auspicious results to the investors, and having a detailed understanding of the same will reward you with the best. In the blog, we will introduce you to the world of investment, its workings, and the monetary benefits you can expect. Also, we will discuss the types and merits of the investment.
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Introduction to Investment
Investment is the process of putting money or value into an asset with the expectation of generating funds. In layman’s terms, it is the process of putting savings into assets to create more worth than the initial investment.
- Investors can utilize these funds in various ways.
- Usually, the objective of the investment is to overcome the financial shortage, increase savings for later use, or fulfill certain obligations.
- Investment generates funds or values in two ways –
- Investment in saleable assets that will generate profit.
- Investment in return generates plans, which will return in terms of gains.
- For a better understanding, consider this example. For instance, investors might buy financial assets right away with the hope that they will generate income later on or they can be sold for a profit at a higher price. By this, the investors will be able to fulfil their future commitments.
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Working of Investment
Investment works as a medium or mechanism with the objective of generating more funds and value. It includes various types of assets in which you can invest. In the coming points, the process of investment is explained thoroughly. By following these steps, you can extract the best from investment.
- The working of investment is based on majorly three factors –
- Evaluation of potential investment.
- Selection of suitable investment assets.
- Performance of the portfolio.
- The first step towards a good investment includes the expectations of the investors, the investor’s risk tolerance, and the time horizon.
- The second step includes asset allocations. After the evaluation of the above-stated parameters, asset allocation is done, which means the division of theinvestment portfolio.
- Once the assets are allocated, step three comes into play. The third step includes the selection of investment vehicles. To carry out this step, thorough research and analysis of various investment options must be conducted.
- In the third step, parameters like the previous performance of an asset are considered an investment done in the selected asset.
Types of Investment
The field of investment offers you various opportunities to enhance your fund generation. To understand investment better, you should have a glimpse of the sectors in which you can invest. Below mentioned are the different types of investments in which you can put your money and expect a good capital appreciation.
- Stock/Equities – Stocks and equities are referred to as a type of investment done in a private or public firm by buying a stake in the firm. The investor is entitled to the dividend in the net profit generated. There are two ways by which stock investment works. The first one is common stock, and the other one is preferred stock.
- Fixed-Income/Bonds Securities – The working principle is similar to that of debt. Bonds are investments that frequently require an initial payment and then pay a recurring sum throughout the bond price agreement. The investor then receives their original investment back when the bond matures.
- Index and Mutual Funds – Index and Mutual funds are collections of assets under expert management. To earn a return on the pooled funds, it can combine the funds from thousands of small investors and build a portfolio of up to 30 assets. Mutual funds let investors pick their asset portfolio based on their risk profile and invest a small amount regularly.
- Real Estate – Real estate investment refers to investments in physical and tangible assets that can be utilized in the real life. In simple words, these include buying properties, building properties for specific purposes, or buying operational properties that are already built out to yield funds or values. For instance, land to build infrastructure, warehouses for storage inventory, houses to live in, and many more.
- Cryptocurrencies – These are blockchain-based currencies designed to hold or transact digital values. The transaction can be carried out in two forms: coins or tokens. These assets could increase in value and can be issued by cryptocurrency businesses to investors. These tokens can be used for specialized network transactions or to pay transaction fees to gain funds or values.
- Commodities – Raw materials like metals, energy, or agriculture are examples of commodities. Investors can invest in two ways. First, they can pick alternative investment products that symbolize digital ownership,or they can invest in genuine tangible commodities (such as owning a bar of gold) (i.e. a gold ETF).
- Collectibles – It is considered to be the transitional way of investing. In this, you purchase or collect the collectible items. Collectible items include rare, antique, and older things that can be valuable in the modern world. The working principle is similar to that of stocks/equities. Parameters like the popularity and condition of the items are considered at the time of resale. This resale of these antique assets results in fund generation.
- Public Provident Funds – PPFs come with a fair rate of return and a governmental guarantee. You can beat inflation and accumulate significant wealth with PPF, which is entirely tax-free. PPF also permits sufficient liquidity. This investment helps you develop a safety fund for your family. You may take a tax-free pension and utilize the money to save for your retirement.
Need for Investment
You require funds to do your daily activities, including your few specific life goals. If you are only saving a fraction of your income, it will only create a reserve fund. This reserve fund won’t help you out in your unforeseen financial hardship. The reasons for the need for investment in this rapidly evolving era are mentioned below.
- Financial security – To protect yourself from an unforeseen catastrophic event, you should have extra funds with you. These auxiliary funds are generally generated from investments. For example, if you are hit with a significant health crisis, then you are likely prone to financial hardship.
- To get financial independence – In the event of economic difficulty, your investment helps you to stay financially independent and not rely on the money of others. It ensures that you’ll possess enough money to cover all of your expenses for the rest of your life without needing to depend on others or work at your advanced age.
- Build a strong financial foundation – Individuals make investments to increase their wealth. This implies that people gradually invest their savings after they save them. The investment proceeds, whether they be dividends or interest, can be reinvested in the same financial instrument or even something else during this process. By doing so, you will begin investing and increase your money as well.
- Attain your goals – Some people make investments to help them accomplish specific life objectives. The objective you set would be your reason to invest, for instance, if you have always wanted to own a home, get a new automobile, or travel the world. You have to swiftly expand your money and attain your goals by investing it in accordance with your aims.
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Objectives of Investment
Before diving into investments, clarify your reasons for investing. Each person has unique goals, but common objectives include building wealth, saving for retirement, or creating a financial safety net.
Here are several compelling reasons to invest:
- Maintain Financial Security: Protecting your money from losing value over time is vital. Choose safe options like fixed deposits, government bonds, and savings accounts. They may not offer the highest returns, but they keep your capital secure.
- Accumulate Wealth: Many invest to build a significant sum of money over time. Capital appreciation plays a crucial role in planning for your financial future. To grow your money, think about your investment goals and explore options like real estate, mutual funds, commodities, and stocks, keeping in mind the associated risks.
- Receive Regular Returns: Investments can provide a steady income stream. For example, fixed deposits and stocks of companies that pay dividends can help cover daily expenses during retirement and offer extra income while working.
- Minimise Tax Liability: Apart from growing or preserving capital, tax benefits also motivate investors. The Income Tax Act, 1961 allows tax exemptions for investments in options like Unit Linked Insurance Plans (ULIPs), Public Provident Fund (PPF), and Equity Linked Savings Schemes (ELSS). These investments can reduce your taxable income, leading to lower tax bills.
- Prepare for Retirement: Planning for retirement is crucial. Building a solid retirement fund ensures you enjoy financial security in your later years when you may no longer be able to work. Wise investments can significantly grow your funds, supporting a comfortable retirement.
- Achieve Financial Objectives: Investments can also help you reach both short-term and long-term financial goals with ease. If you seek to save for near-term objectives like home renovations or an emergency fund, consider investments with short lock-in periods and high liquidity. For long-term goals, look for options with longer lock-in periods.
Why Your Investment Asset Choice Matters
When selecting a business investment, you must find a balance among three crucial factors:
- Liquidity: Ensure you can easily convert your investment into cash without losing value.
- Risk and Volatility: Understand that risk, or volatility-return, refers to the likelihood that your investment’s value will fluctuate.
- Investment Tenure: Determine how long you plan to hold the investment.
Comparison of Investment Options: Liquidity, Risk-Return, and Ideal Terms
| Investment Option | Liquidity | Risk-Return | Ideal Investment Term |
| Fixed Deposit | Lower than Savings | Higher than Savings | 7 days to 10 years |
| Gold | High | Medium | 5 to 15 years |
| Equity Stocks | High | Very High | 3 to 30 years |
| Public Provident Fund (PPF) | Low | Low (but tax-free) | 15 years+ |
| Real Estate | Very Low | Medium | 10 years+ |
Guide to Your First Investment
The field of investment is a field of opportunities and possibilities. It is essential to check the guide to investments because sometimes there are issues likea stock market crash ormarket corrections that impact your invested wealth. There are numerous avenues you can follow while making your first investment. Below mentioned are a few of the most promising pointers that you should consider while making your first investment.
- Carry out your own research and analysis – This is considered to be the first step toward your career in investment. The purpose of this self-assessment is to understand the various vehicles in which you can put your money. Relying on someone’s advice, like any investment advisor, will not be considered a healthy practice.
- Layout your spending plan – Before entering this highly unpredictable domain of funds generation, you should set your own limits. Parameters like your investment, time horizon, aspirations from the funds, and loss-bearing capacity should be considered. You should be mindful of your investments as you also have to meet your daily life obligations.
- In-depth understanding of liquidity restrictions – Some investors can have less liquidity than others, which might make it harder to sell. An investment can occasionally be locked for a set amount of time and unable to be sold. Though not obligatory fine print, it’s essential to know if some assets may be bought or sold at any period.
- Tax implications – In some cases, funds generated from investment can be tax-adverse. Due to unfavourable short-term profit, you might invite unintended tax gains. The investment vehicle should be considered cautiously.
- Consultation from experts – If these things are too much for you, consider having expert advice. It is regarded as a healthy practice for novices.
Conclusion
In the blog “What is Investment?” we introduced you to the domain of investment. It is an essential aspect of personal and economic growth. It refers to the process or mechanism of putting money and resources into various assets, with the expectation of reaping benefits in the future. It can be done in multiple avenues, ranging from buying stocks, and real estate, to commodities and collectibles. Investing requires discipline, research, and a willingness to take calculated risks. It also involves understanding the potential returns and risks associated with each investment vehicle. With the right approach and mindset, investment can provide a means of achieving financial security, freedom, and even realizing one’s dreams. Enroll in our certification course in Investment Banking to equip yourself with the knowledge and skills necessary for a successful career in the financial sector.