What is Investment: Types And How To Start Investing

What is investment? To answer this question, we need to go back in time. Since the dawn of civilisation, the process of give and take has been a constant requirement for personal development and of society. One has to give a substance of value to the other to receive another substance of equal value. This process has continued to subside in the modern world, too. However, when the purpose of receiving, or more accurately buying, is to later receive a higher value or sell it at a higher price, the buying transforms into an investment.

What is Investment?

Investment is simply putting in value in the form of money to buy assets whose value can grow with time. The buyer later obtains this value growth by selling the asset or generating interest and dividends on it. An investment can be slow, moderate, or fast-growing, depending on its type. Fixed deposits, gold, and real estate are common among the general population. Other forms of investments like mutual funds, stocks, and cryptocurrency are on the rise exponentially.

How Does Investment Work?

Investment is a way of creating wealth that generates value using value. Investment meaning and working system depend on its type, however, the fundamental working principle is the same in all. Traditional ones, like fixed deposits, provide a fixed interest rate, ensuring minimal risk but offering lower returns over time. Others work to actively increase one’s money by generating passive income, potentially yielding higher returns.

But investing surely isn’t child’s play. The risks involved in investing are often not highlighted much. Stocks can be an excellent choice if chosen wisely by studying the company’s growth and its future ventures. Ultimately, invested money lies in the hands of the company or organisation in which one invests, so it is necessary to make sure the company will grow in the future and won’t go bankrupt or go on a decline. Also, setting up a goal and investing according to it is highly advisable.

Types of Investments in India

There are different ways in which one allocates money to assets. Some may have higher risks, some may require patience, and some may be even based on luck. India is one of the largest and fastest-growing investing nations in the world. Thus, it is important to shed light on the various types one can add to their portfolio in India. Below are the various types of investments in India-

• Fixed Deposits (FD): This type of investment occurs between the investor and a bank. One deposits a sum of money at once or at regular intervals over some time and, at the end of tenure, gets all in return along with a fixed interest. The invested money cannot be withdrawn without proper permission during the tenure. Most Indian households have at least one fixed deposit in the name of life savings. One prime reason is that the risk associated with a fixed deposit is almost zero. However, the return isn’t dynamic but fixed.

• Public Provident Fund (PPF) or Employee Provident Fund (EPF): The Public Provident Fund (PPF) or Employee Provident Fund (EPF) initiated by the National Savings Institute and is a type of post office savings scheme. Any residing citizen can avail of it as a long-term option. The tenure of this fund is a fixed 15 years, and it provides an interest rate of 7.1%. The interest is, however, paid every year on 31st March. It is too a zero-risk interest-based investment.

• Stocks: The companies that are listed in the stock market offer their shares to be traded. One must pay a price to buy one share of that particular company. Stock is a collection of shares from one company. Buying a stock makes you the owner of the respective portion of the company, but it is just money you need to invest and not the work to grow it. Stocks are highly dependent on the market and thus are considered a high-risk option. One owning a company’s stock can earn by selling the stock at a higher price and through dividends.

• Mutual Funds: Mutual Funds have a working principle similar to that of stock. But the difference in this case is that though the one putting in the money is you, the one choosing where to invest your money is some other individual, known as a mutual fund manager. Though it is still subjected to market risk, the risk is less compared to stocks, mostly because mutual funds use safer strategies to invest, like a diverse portfolio or investing Govt. run funds.

Why Should You Invest in Investment Plans?

If you are reading this, there is a high chance that you are above 20 years of age, meaning you have 40 years to retire if you do a job. A job is a very secure way to earn money but still, it is going to run off with time. Thus, saving and investing money become very important factors in the long run. Some of the reasons you should start investing are:

• Investing can let you earn money for you. This is why it is a chosen option worldwide, regardless of its risk factors. It makes one money passively without putting in much work.

• Long-term investing with patience and the right roadmap can fulfil any future goals that wouldn’t be affordable with a simple job.

• With enough market knowledge and well use of opportunities, one can generate an ample amount of wealth in a short span of time.

• Investment Plans are key to early retirement and living life on your own terms.

How to Start Investing?

The process of obtaining success from investing is generally like climbing a ladder, one should always focus on the next step. Before investing in safe places like Govt. funds or in risky but growth-prone areas like stocks, one should always check his/her current condition. Initially, investing in small sums relative to one’s earnings is ideal, especially in market-based plans.

One should also highlight his/her goals, long-term or short-term. And then invest accordingly towards both. For example, if one is planning for his/her children’s future education fees, he/she should not invest majorly in high-risk places but rather in plans that are low-risk and require time to grow the money. On the contrary, for short-term goals like buying a car, one can opt to invest in stocks or funds that are a bit risky in nature but give higher returns in a short time.

Though, as mentioned earlier, generating money from investing requires less work than jobs and businesses, that doesn’t mean investing in a plan and forgetting about it. It is crucial to watch the movement of your stocks or funds and also to sell them at the right time to ensure profit.

Objectives of Investment

In order to extract the maximum, some basic objectives must be set. These objectives aim to provide fulfilment to an individual in most aspects. These objectives of investment apply to every type of investor.

• To counter inflation: Inflation can be viewed as the rusting of iron. With time, due to various factors, inflation reduces the value of money. That also means the prices of commodities rise, and thus, if one saves Rs. 50,000 over the last 10 years to purchase a bike, one can no longer purchase it, as due to inflation, the bike’s price now is more than its price 10 years back. However, investing in stocks, mutual funds, gold, or real estate isn’t affected by inflation as these are not cash assets. Thus, one can expect higher values in return.

• To stay secure: Investments can be beneficial in several ways. In the long run, one can use it to fulfil one’s dreams and secure oneself. Any emergency in the form of medical issues, education, or debt can be sorted out with the help of investments.

• To grow money: The definition of an investment involves that money must grow. Money without growth is left for inflation to decrease its value. Stocks, bonds, or mutual funds counter inflation and increase an investor’s money at a preferable rate.

Factors to Consider Before Investing

Before investing, there are several factors one should check, some of them are as mentioned below-

• Make your objectives clear: As mentioned above, some questions must be asked to know where you stand in the investment world. Things like short-term or long-term financial goals and current financial status must be analysed carefully before investing.

• Medium of investing: The medium of investing should be safe and not end up being a scam. There are numerous “get rich quick” schemes going on in the market that should not be easily trusted. One should always cautiously invest their money through a reliable and trusted medium.

• Learn and have patience: Investing requires patience, not just buying and selling stocks. But also gathering knowledge about the market or schemes. Without any knowledge, market-based investing becomes the same as gambling.

Investments and Risk

Higher returns generally come with higher risks, and vice versa for smaller returns. Risks in a long-term investment are lower as compared to short-term ones. Investments with no risks are generally opted for by the higher-age population closer to retirement as they prefer investing the majority of their money in fixed-return plans.

In the stock market, having a diverse portfolio reduces risk. The growing stocks of companies are considered the most risky, but they can provide very high returns if they do well. On the other hand, some companies act like anchors in the stock market by maintaining a steady and optimal growth rate.

Difference Between Savings and Investment

Though the terms “savings” and “investment” may look similar, their concepts are very different.

• Savings: Savings is the money one accumulates over time by keeping aside some portion of his/her income. The purpose of savings can be anything, such as buying a gadget, a vehicle, or funding a vacation. Savings are wealth generated from work and not wealth itself.

• Investment: It is the allocation of wealth in a place where it can grow over time, convenient to the investor’s needs. Its purpose can be greater than savings, such as future plans like building a house, buying property, medical emergencies, and so on.

Conclusion

From childhood, most of us learn about various subjects but not the financial aspects of this world. Investing is one such aspect that should be an income option for every adult. The power of investing lies within its principles, the right choices, and utilising opportunities. Now that you know about it, why not try it out? It is always better to invest at an early age as there will be time to fix your mistakes and get success.

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