What is investment: Types and importance of investment

Posted On: 25 August 2024

Investing is more than just putting your money aside. It's a strategic approach to outpace inflation, secure your financial aspirations, and create freedom in your life.

Instead of letting your hard-earned funds stagnate in bank accounts, a good investment portfolio will help you utilize the power of various investment avenues such as stocks, equities, mutual funds, and fixed deposits.

This article will give you an overview of various investment options available for you.

Table of contents

What is an investment?
How do investments work?
Investment types based on the profile
Types of Investments in India
Why investing is important
What makes investment plans popular
Reasons to start investing early

What is an investment?

An investment is a calculated decision to put your funds to work, rather than letting them remain idle. It's allocating your money to an asset with the anticipation of earning a profit.

A wide range of investment options are available in India, including mutual funds, unit-linked investment plans (ULIPs), endowment plans, stocks, bonds, and more. While these options vary in their structure and risk profiles, they share a common objective: to enhance the value of your invested capital over time.

Successful investing, however, involves more than just choosing an asset and hoping for the best. It requires a combination of careful analysis, a long-term perspective, effective risk management, and a well-diversified portfolio.

How do investments work?

When you invest, your money is actively working for you, with the potential to generate returns. The nature of these returns can vary depending on your chosen investment avenue.

Some investments offer guaranteed returns, where the amount you'll receive is predetermined at the outset. This provides a sense of security and predictability, making it a suitable option for risk-averse investors.

On the other hand, market-linked returns are associated with investments in equity and debt markets. Equity markets, encompassing stocks and shares, hold the potential of higher returns but also entail greater risk due to market fluctuations. Debt markets, comprising bonds and fixed-income securities, offer relative stability and returns, albeit at a comparatively lower rate.

Investment types based on the profile

Different investment options carry varying levels of risk. Choosing the right type of investment depends on your individual risk tolerance and financial goals.

Low-risk investments

While offering lower returns, they provide relative stability and are often backed by government guarantees, making them a suitable option to mitigate impact on capital invested.

Suitable for: Risk-averse investors seeking relative stability and modest returns

Examples: Fixed Deposits (FDs), Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY)

Medium-risk investments

These strike a balance between risk and reward, making them suitable for investors seeking moderate growth with some level of risk mitigation.

Suitable for: Investors seeking a balance between risk and reward potential

Examples: Debt Funds, Corporate Bonds, Government Bonds

High-risk investments

These offer the potential for significant wealth creation over the long term but require a greater risk tolerance due to market fluctuations.

Suitable for: Investors with a higher risk appetite and long-term investment horizon

Examples: Stocks, Equity Mutual Funds, Unit Linked Insurance Plans (ULIPs)

Types of Investments in India

India's financial markets offer a wide range of investment opportunities, each with its own set of characteristics, risk levels, and potential returns.

List of some of the key investment options available in India:

Unit Linked Insurance Plans (ULIPs)
Features: Combine life insurance coverage with investment opportunities in equity, debt, or a mix of both.

Benefits: Offer flexibility, potential for market-linked returns, and tax benefits on premiums and returns.

Suitable for: Investors seeking long-term wealth creation potential with life insurance protection.
Savings/Endowment Plans
Features: Traditional life insurance plans that provide fixed returns along with a life cover.

Benefits: Stability, guaranteed returns, suitable for conservative investors.

Suitable for: Investors seeking a secure way to save for specific goals like education or retirement.
Public Provident Fund (PPF)
Features: Government-backed savings scheme with a 15-year lock-in period.

Benefits: Offers tax deductions on contributions and tax-free returns, making it a popular choice for long-term savings.

Suitable for: Risk-averse investors looking for a safe and tax-efficient investment option.
Fixed Deposits (FDs)
Features: Bank deposits with a fixed tenure and interest rate.

Benefits: Low-risk, guaranteed returns, ideal for capital preservation.

Suitable for: Conservative investors seeking stable and fixed returns with minimal risk.
Stocks
Features: Ownership shares in publicly listed companies.

Benefits: Potential for high returns through capital appreciation and dividends.

Suitable for: Investors with a high-risk tolerance and knowledge of the stock market.
Mutual Funds
Features: Professionally managed funds that pool money from investors to invest in diversified portfolios.

Benefits: Offer diversification, professional management, and a wide range of investment options.

Suitable for: Investors seeking diversified exposure to different asset classes with varying risk levels.
Real Estate
Features: Investment in land or property.

Benefits: Potential for appreciation in value and rental income.

Suitable for: Investors with a long-term investment horizon and willingness to manage property.
Gold Bonds
Features: Government-issued bonds denominated in grams of gold.

Benefits: Provides exposure to gold prices without the need to physically hold the metal.

Suitable for: Investors seeking a hedge against inflation and portfolio diversification.
REITs (Real Estate Investment Trusts)
Features: Companies that own and operate income-generating real estate properties.

Benefits: Provide regular income through dividends and potential for capital appreciation.

Suitable for: Investors seeking exposure to the real estate market without directly owning properties.
Government Bonds
Features: Debt securities issued by the government to raise funds.

Benefits: Considered low-risk investments with fixed interest payments.

Suitable for: Risk-averse investors seeking relatively stable income and capital preservation.
Direct Equity
Features: Investing directly in stocks of companies listed on the stock exchange.

Benefits: Potential for high returns through capital appreciation and dividends.

Suitable for: Investors with a high-risk tolerance, market knowledge, and research capabilities.
National Pension System (NPS)
Features: Government-sponsored pension scheme with tax benefits.

Benefits: Helps build a retirement corpus with a mix of equity and debt investments.

Suitable for: Individuals seeking long-term retirement planning with tax benefits.
Senior Citizen Savings Scheme (SCSS)
Features: Savings scheme for senior citizens aged 60 and above.

Benefits: Offers regular income and tax benefits.

Suitable for: Senior citizens seeking a safe and reliable investment option with regular income.
National Savings Certificates (NSC)
Features: Fixed deposit scheme offered by post offices.

Benefits: Guaranteed returns and tax benefits.

Suitable for: Risk-averse investors seeking a safe investment with tax benefits.
Sukanya Samriddhi Yojana (SSY)
Features: Savings scheme for the girl child.

Benefits: Offers attractive interest rates and tax benefits.

Suitable for: Parents or guardians looking to save for their daughters' future education and marriage expenses.

Why investing is important

Disciplined saving ensures you have a safety net for emergencies. But investing ensures that your money doesn't lose value due to inflation.

Investment plans can also potentially deliver high returns over time, significantly contributing to wealth accumulation and helping you realize your long-term financial dreams.

What makes investment plans popular

Goal-based planning: Investment plans enable you to define clear financial goals and create a roadmap to reach them.
Wealth creation: Your money works tirelessly, growing exponentially as you stay invested.
Inflation protection: Investment plans have the potential to outpace inflation rates, preserving the purchasing power of your money.
Tax benefits: Under sections 80C and 10 (10D) of the Income Tax Act, you can enjoy deductions on your taxable income, effectively reducing your tax liability and maximizing your returns.
Regular income: Certain investment plans can generate a steady stream of income.
Expert management: Many investment plans are managed by seasoned professionals with a deep understanding of financial markets.

Reasons to start investing early

Here's why starting early is a game-changer:

The power of compounding: Time is an ingredient that supercharges your investments through the power of compounding. When you reinvest your earnings, they generate additional returns, creating a snowball effect that leads to exponential growth over time.
Weathering market storms: By starting early, you give your investments ample time to ride out short-term market fluctuations.
Achieving goals sooner: Whether it's buying a home, funding a business venture, or retiring early, your financial goals become more attainable when you start investing early.
Embracing higher risk: Younger investors often have a greater capacity for risk-taking due to fewer financial obligations and a longer time horizon.

Conclusion

Investing is not merely a passive activity; it's an active, strategic decision. While no investment is entirely without risk, the potential rewards far outweigh the uncertainties.

By carefully selecting investment options that align with your financial goals and risk tolerance, you can create a diversified portfolio that can withstand market fluctuations and deliver long-term growth.

Remember, investing is a marathon, not a sprint. With patience, discipline, and a well-informed approach, you can leverage the power of investing to secure your financial future and turn your dreams into reality.

FAQs

What are the key points one should consider before investing in India?

Your financial goals, risk tolerance, investment horizon, investment options, diversification, and tax implications.

What types of investment options in India are suitable for an average person?

Mutual funds, fixed deposits, Public Provident Fund (PPF), National Pension System (NPS) are among the suitable options.

Is it good to choose a long-term investment option?

Yes, choosing a long-term investment option is generally a good idea for several reasons: power of compounding, market volatility mitigation, and higher potential returns.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals, and horizon. This information is subject to change without any prior notice.