Investment means putting your savings in an asset created to help you grow your money. In other words, an investment is a financial asset that is bought with the idea that it will provide you with higher returns in the future. You will sell it at an amount higher than the cost price and make a profit.
Your savings become investments when they can deliver an additional return on the invested amount. Investment helps you create wealth that can be used as an emergency fund, a retirement corpus, buying a house, a child's education, etc.
If you do not have cash or have limited cash to invest, you can use leverage. It is an investment strategy where you borrow money to invest in financial instruments to increase the potential return of an investment.
The meaning of investment has been changing throughout the human history of financial activity. However, the purpose of investing has always remained the same.
You receive your salary at the end of the month, and you spend it on your needs and wants. You also set aside a per cent of it - you save money from your income. If you set aside Rs 10,000 every month for a year, you would have Rs 1.2 lakh at the end of the year.
You want to invest this money so that someday it grows enough to replace your income or at least the need to work for an income.
There is no value appreciation in savings, meaning there is no addition over and above what you have added at the end of each month. Whereas, the investment allows you to beat inflation and grow your wealth.
Know More about - How to Invest Money?
Types of Investments
You will find many investment options to invest your savings. You must know all the options. It will help you shortlist the best ones as per your needs.
At a high level, investment can be divided into two categories - Equity and Debt. Equity investment primarily invests in shares of companies in different ways. Debt investment is where your money is invested in money market instruments.
The below table lists different types of investment options in India:
Why is your Choice of Investment Asset Important?
Selecting an investment option needs a balance between the following three factors:
b) Risk or Volatility-Return
c) Investment Tenure
Must Read - What is Liquidity?
Usually, risk-return and liquidity are inverse 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 highest, 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 for 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 fulfil your short and medium-term needs.
Also Read - How to Manage Money?
Before investing in an asset, you must understand the risk-reward equation and liquidity.
How to Choose the Best Investment Option?
Now that you understand investment basics, you must also learn to choose the best investment option. You can follow the below steps to choose the best investment option for yourself:
1. Define your Investment Goals:Every financial journey is different, and 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:
a) How much money do you need in future?
b) How much you can invest now?
c) How long do you need to invest?
2. Choose Investment Options as per Goals:Once you have your goals defined, you can select the investment option. Your choice will depend mostly on the time available to you. For example:
a) If your goal is to buy a car after 3 years, you can invest your savings in a debt mutual fund and achieve your goal.
b) Buying a house after 10 years means you can invest in equity funds and stocks.
3. Ensure Higher Tax Savings:Long-term investment options can also help you save on tax:
a) Investments like PPF and ULIPs help you reduce your taxable income when you invest in them
b) Equity mutual funds, gold ETFs and debt mutual funds enjoy indexation benefits on capital gains if you hold them long enough.
4. 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 which offer good growth as well as protection for the goal.
a) Investment options like ULIPs that have a life insurance cover with diversified investment options
b) Guaranteed Savings Plans are safe long-term investments which also protect your maturity value from your untimely demise.
The stock investment comes with a lot of volatility and risk and is not suited for most investors' risk profiles. If you want to invest in equity, a safer way would be to invest through mutual funds. However, to have tax-saving benefits and ensure your family goals, ULIPs are a better investment option.
Investors looking for safer investment options can invest in bonds or invest in gold. Bonds will give fixed guaranteed returns, but the return in gold is variable.
Investment is essential to grow your saved 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 pick the investment option according to your investment goals and needs.
Also read - What is Net Present Value?Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.