What is Investment? Investment Meaning, Types, Objectives

2025-02-20

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The meaning of investment is putting your money into an asset that can grow in value, produce income, or both. For example, you can buy equity stock of a listed company in the hopes of receiving regular dividends and capital appreciation in the form of the share price.

Your savings become investments when they are put into assets that carry investment risk or a degree of illiquidity. Such investments help you create wealth that can be used as an emergency fund, a retirement corpus, for buying a house, funding a child's education, etc. The information provided above answers what is investment in a definition point-of-view. To understand it better, let us move ahead with its objectives, types and the factors affecting it.

Key Takeaways

Investments can be grouped into ownership equity (high risk), lending (moderate risk), and money market participation (low risk).
Investments with higher returns often have lower liquidity and require a longer investment horizon. Balancing these elements is key to meeting financial goals.
Investment options like ULIPs, ELSS, and PPF provide tax-saving benefits under Section 80C. Understanding tax implications can help reduce overall tax liability.
A well-diversified portfolio should include a mix of low, medium, and high-risk investments to manage risks while optimising returns.

Consulting a financial advisor can help you identify your risk appetite, select appropriate investments, and build a strategy that aligns with your goals.

Objectives of Investment

To understand what is investment, we must first understand its objectives. The need for investment will grow as you move ahead in life. Growing responsibilities will demand an increase in investment. The primary objectives of investment are listed below:

Safeguard Your Money: Investing keeps your money safe from immediate and unnecessary expenditures. It also helps you keep your money safe from inflation. Inflation erodes the value of your money. Unless it is invested in an interest-earning asset. It will help you automatically keep up with inflation.
Grow your Savings
Investment is the only way to start growing your invested money. It allows your money to earn interest; if you keep the interest invested, it will also start earning interest.
Build Funds for Emergencies: Life is usually a series of ups and downs. Sometimes, you earn decent money and save money, while other times, you need a large sum for an emergency. Building investment pools helps you on such rainy days.
Secures your Retired Life: Retired life is when you don’t have a source of income to sustain your life. Once you have built a retirement corpus, you can experience the freedom that comes with it.
Save Tax: Investment in tax-saving instruments like life insurance plans, ULIPs, PPF, NPS, etc allows you to claim deductions on your taxable income. Thus, investing in specific assets can help you reduce your tax liability. Many of these investments also help you reduce your future tax with tax-free maturity values.
Fund Bigger Life Goals: Your monthly income may not be enough to purchase your next car or build a house for your family. However, if you invest a small amount in a few years both could be possible.

Different Categories of Investments

Depending on the type of asset you invest in you can expect a certain degree of risk and return ratio. You can divide all investments into the following categories:

Owner's Equity: These are some of the high-risk investments as you are directly holding the ownership stake. Owners only earn after paying all the expenses and liabilities. Ownership stake makes you a party to the profits and losses of the company.
Lending: Lending is considered safer than equity ownership as you secure an obligation from the borrower to pay interest. Thus, you hold the first right to the money over the owners. However, the rate of return will also be lower.
Money Market Participation: Money market investments are short-term debt obligations, which can last up to 365 days or less. Examples include T-bills, Commercial Papers, etc. Even though these investments will earn less, they are safe.

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Types of Investments

You will find many investment options and you should shortlist the best ones as per your needs. At a broader level, investment can be divided into two categories - Equity and Debt. Equity primarily invests in shares of companies in different ways. Debt is where your money is invested in money market instruments. Understanding the types of investment is crucial to understanding what is investment.

The table lists different types of investment options in India:

Investment Type	Description	Risk	Reward
Stocks	Stocks represent your ownership share in the company. Stocks will provide a return on investment through changes in the share price, or dividends. It can be highly volatile and is considered one of the riskiest investments.	High	High
Bonds	Bonds are an instrument of borrowing. Bondholders have the first right to the assets of the company. Thus, these are considered safer than equity stocks. Also, a bondholder’s return on investment will be more stable than a stockholder's as bonds can have fixed coupon rates.	Low	Low
Mutual Funds	Mutual funds are pooled assets that are professionally managed. It can pool money from thousands of small investors and create a portfolio of up to 30 securities to generate a return on the pooled money. Mutual funds allow investors to invest a small amount regularly and choose their asset portfolio as per their risk profile.	Medium	Medium
Unit Linked Insurance Plans	ULIPs are life insurance plans that allow you to invest in diversified funds as per your risk profile. You will get market-linked returns and tax-saving benefits on your investments. Life cover will be available regardless of the performance of the invested sum.	As per your portfolio	High
Gold	Investing in physical gold could be expensive, risky, and fraught with storage issues. Thus, you can use an electronic form of gold investment. Gold ETFs and Gold Bonds are some of the popular ways of investing in gold and keeping up with its price.	Medium	Low
Public Provident Fund (PPF)	It is a scheme that offers a good rate of return and a sovereign guarantee. With PPF you can beat inflation, and build handsome wealth, that too completely tax-free. PPF also allows adequate liquidity. Thus, this investment helps you build a safety fund for your family. The account is extendable after 15 years of maturity. So, you can use it to save for your retirement and draw a tax-free pension after 60.	Low	Low

Did You Know?

Starting April 1, 2026, ULIPs with yearly premiums exceeding ₹2.5 lakh will incur a 12.5% LTCG tax.

Source: Financial Express

Why is your Choice of Investment Asset Important?

Selecting an investment option needs a balance between the following three factors:

Liquidity
Risk or Volatility-Return
Investment Tenure

Usually, risk-return and liquidity are inversely proportional to each other. The higher the risk the lower the liquidity and the higher investment tenure you will need.

For example, if you are only saving money, the liquidity is high, the investment risk is zero, and there is no investment tenure.

All the assets and investment options offer a different trade-off between these factors:

Investment Option	Liquidity	Risk-Return	Ideal Investment Term
Savings Account	Equal to Cash	Almost Nil	Nil
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
Equity Mutual Funds	Medium to High	High	5 to 10 years
ULIPs	Low	Medium to High	5 to 81 years
Public Provident Fund (PPF)	Low	Low (but tax-free)	15 years+
Real Estate	Very Low	Medium	10 years+

While investing you should always optimize the investment horizon. Your chances of receiving better returns will be higher if you stay invested for a long time with high-risk investments. However, you also need less risky and more liquid investments to fulfill your short and medium-term needs.

Before investing in an asset, you must understand the risk-reward equation and liquidity.

Factors to Consider Before Investing: Now that you understand the basics of the investment process, you must also learn to choose the best investment option as per your financial goals. Listed below are a few steps to help you find the best investment option as per your life goals:
Define your Investment Goals: Every financial journey is different. Hence, everyone's investment goals are different. The first thing you can do is define your investment goals. This will help you with the following:
- How much money do you need in the future?
- How much can you invest now?
- How long do you need to invest?
Choose Investment Options as per Goals: Once your goals are defined, select the investment option. Your choice will depend mostly on the time available for a particular milestone or event in life.
- For example: If you want to buy a car after 3 years, you can invest your savings in a debt mutual fund and achieve your goal. Buying a house after 10 years means you can invest in equity funds and stocks.
Ensure Higher Tax Savings: Long-term investment options can also help you save on tax. Investments like PPF and ULIPs help you reduce your taxable income when you invest in them. Equity mutual funds, gold ETFs, and debt mutual funds enjoy indexation benefits on capital gains if, you hold them long enough.
Insure Important Family Goals: Certain family goals like a child’s higher education and marriage cannot be left to chance. So, you should choose investment options that offer good growth and protection for the goal.
- For example: Investment options like ULIPs have a life insurance cover with diversified investment options. Guaranteed Return Plans are safe long-term investments that offer guaranteed returns on the investments.

Investment is essential to grow your money and create wealth. It will help you achieve your life goals. There are many investment options available in India, and you must understand the purpose, the risk, and the reward associated with them.

You should select an option according to your investment goals and needs.

The Difference Between Savings and Investment

Understanding the distinction between savings and investment is crucial when planning your financial future. Both play significant roles, but they serve different purposes. Let's explore the key differences.

1. Savings

Savings refer to the money you set aside regularly for short-term or emergency needs. Typically, this money is kept in secure and easily accessible accounts, such as savings accounts or fixed deposits. The primary goal of savings is to ensure safety and liquidity rather than generating significant returns. The key features of savings include:

Low Risk: Savings are generally risk-free since they are kept in secure financial instruments.
High Liquidity: You can access your savings easily whenever required.
Limited Growth: While your savings are safe, they may earn minimal interest, meaning your wealth may not grow significantly over time.

For instance, saving using a term insurance plan with a regular income payout can help you save while having coverage.

2. Investment

Investment refers to allocating your money to assets that can grow over time. These assets may include stocks, bonds, mutual funds, or real estate. Unlike savings, investments carry a certain level of risk but offer the potential for higher returns. The following are the essential characteristics of investments:

Potential for Higher Returns: Investments are designed to grow your wealth, often outpacing inflation.
Risk Factor: Unlike savings, investments may fluctuate in value based on market conditions.
Long-Term Focus: Most investments are ideal for meeting future financial goals, such as retirement, education, or wealth creation.

For example, investing in a ULIP (Unit Linked Insurance Plan) where your funds are allocated in market-linked instruments while providing life insurance coverage.

3. Key Differences at a Glance

Aspect	Savings	Investment
Purpose	Emergency or short-term needs	Wealth creation and long-term goals
Risk Level	Low or minimal risk	Varies; can be high or low based on asset type
Liquidity	High; easily accessible	Medium to low; may require time to withdraw funds
Returns	Minimal; earns basic interest	Potentially high, subject to market performance

How to Start Investing?

Now that you’re confident about beginning investing, it’s time to clear some air around how to begin your journey. While this may seem intimidating, following the proper steps can help you build a corpus for the future and make your financial game even stronger.

Follow these essential steps to begin investing wisely:

1. Do Your Research

Once you get a hold of what is investment, understanding the available options is crucial. Each investment type carries different levels of risk, potential returns, and liquidity. Take time to explore your options that might include:

Stocks for growth potential
Mutual funds for diversification
ULIPs for market-linked growth with life cover benefits
Gold or real estate for stability over time
Term Insurance for life coverage
Retirement plans for an independent future

By researching each option, you can build a portfolio that suits your goals and comfort level.

2. Create a Budget

A well-defined budget ensures you allocate funds strategically. Identify your income, expenses, and savings capacity to determine how much you can invest regularly. Creating a budget helps you:

Avoid overspending
Ensure emergency funds remain untouched
Prioritise long-term financial goals

3. Know Your Risk Appetite

Understanding your risk tolerance is key to making sound investment choices. Ask yourself:

Are you comfortable with short-term market fluctuations?
For greater rewards, can you tolerate a higher risk level?
Do you prefer stable returns over aggressive growth?

Your risk profile will guide your investment choices, ensuring your portfolio aligns with your comfort zone.

4. Research Tax Implications

The objectives of investments not only focus on putting your money in the right place but also on knowing how they impact your tax obligations. Certain investments, including ULIPs, ELSS, and PPF, offer tax-saving benefits under Section 80C of the Income Tax Act. However, any gains you earn from stocks or mutual funds could be subject to capital gains tax. By being informed about these tax implications, you can maximise your investment returns and minimise your tax liabilities.

5. Consult a Financial Advisor

Consulting a financial advisor can be invaluable for personalised advice. A professional can assess your position, recommend suitable investment options, and help create a strategy that aligns with your goals. Whether you're a beginner or an experienced investor, expert guidance can provide clarity and confidence in your decisions.

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Types of Investments Based on Risk

As an investor, you may encounter several situations requiring risk assessment. While the objectives of investment may be clear to you, understanding these risks is crucial when investing to align your financial decisions with your life goals. They offer stable returns with minimal risk exposure and are suitable for short-term financial goals. Now, inflation may reduce actual returns over time, but combining low-risk investments with growth-focused options can be helpful.

Based on your financial position, the following are three investment options that you can choose from:

1. Low-risk Investments

Low-risk investments are ideal for conservative investors, retirees, or individuals prioritising capital protection. These options offer stable returns and minimal exposure to market volatility. Some of the popular low-risk investments include:

Fixed Deposits (FDs): Secure deposits with fixed interest rates, ideal for short-term savings.
Public Provident Fund (PPF): A government-backed scheme with guaranteed returns, perfect for long-term wealth creation.
National Savings Certificate (NSC): A secure savings option offering steady returns that are suitable for conservative investors.
Government Bonds: Backed by the government, these provide low but stable returns with minimal risk.

2. Medium-risk Investments

Medium-risk investments strike a balance between stability and growth, making them ideal for those seeking moderate returns without facing extreme market volatility. These investments are well-suited for medium-term goals such as home renovations, funding education expenses, or purchasing a vehicle.

By combining medium-risk options with low-risk assets, you can create a balanced portfolio that offers both security and growth. While these investments are not entirely immune to market fluctuations, they tend to be more stable than equity investments. They provide a safer path to achieving your financial objectives. Here are a few medium-risk investment options:

Balanced Mutual Funds: These funds invest in both equity and debt instruments, reducing risk while offering steady returns.
Debt Mutual Funds: Investing primarily in fixed-income securities, they provide stability while offering better returns than low-risk options.
ULIPs (Unit Linked Insurance Plans): ULIPs allow you to invest in diversified funds based on your risk appetite while offering life cover.

3. High-risk Investments

High-risk investments are designed for aggressive investors aiming for substantial returns. While these options hold significant growth potential, they come with increased exposure to market volatility and often require active management. These investments are best suited for long-term financial goals such as retirement planning or wealth accumulation, where investors have the time to recover from potential short-term losses.

The following are a couple of top high-risk investment options that you may want to consider opting for:

Equity Stocks: Shares in publicly listed companies offer high return potential but carry market-driven risks.
Equity Mutual Funds: Managed by professional fund managers, these funds invest heavily in stocks, aiming for long-term capital appreciation.
Cryptocurrency: While increasingly popular, cryptocurrencies are highly volatile and should be approached cautiously.

Summing Up

Investment is a crucial tool for growing wealth over time. Its primary objectives include generating returns, preserving capital, and hedging against inflation. Various types of investments cater to different risk appetites and financial goals, ranging from traditional assets like stocks and bonds to alternative options such as real estate and commodities.

Factors such as risk tolerance, time horizon, economic conditions, and market volatility significantly influence investment decisions.

By understanding the fundamentals of the investment process, you can make informed choices to build a secure financial future tailored to your needs and aspirations. Ultimately, investing is a journey towards financial empowerment and long-term prosperity.

Glossary:

Liquidity: In a secondary market, liquidity is the ease or speed at which a security can be purchased or sold.
Risk-reward Equation: Traders use the risk/reward ratio to assess investment risk and potential returns. A higher risk means a higher expected reward.
Taxable Income: The income subject to income taxation.
Tax Liability: Known as tax obligation, it is the total amount of taxes owed to taxing authorities.
Market-linked Returns: Market-linked returns depend on how well your investments perform.

Frequently Asked Questions Related to What is Investment?

The three main categories of investment styles are growth versus value investing, small versus large cap enterprises, and active versus passive management.

ETFs, mutual funds, stocks, and bonds are the most popular asset classes. These are some of the asset classes that you would probably select from while making investments in a college savings plan or retirement savings plan.

Some of the fundamental objectives of investment are securing and safeguarding your money, growing it exponentially, and generating a steady and supplementary source of income.

Investing involves the following 5 steps:

Establish a target or goal for your investments.
Find out what your risk tolerance is.
Assess the Allocation of Assets.
Assembling Your Portfolio.
Observe, document, and keep current

The growth of your money depends on the investment risk you can take. Saving suffers from the following two risks -

It doesn’t provide growth
The value of your money will decline due to inflation and taxes. Also, habitually, we end up spending the available money.

Thus, investing keeps the savings safe from inflation, and expenditure.

Disclaimer - This article is issued in the general public interest and meant for general information purposes only. The views expressed in this blog are solely those of the writer and do not necessarily reflect the official policy or position of Canara HSBC Life Insurance Company Limited or any affiliated entity. We make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability, or availability with respect to the blog or the information, products, services, or related graphics contained in the blog for any purpose. Any reliance you place on such information is therefore strictly at your own risk. You should consult with a qualified professional regarding your specific circumstances before taking any action based on the content provided herein.