What is Investment?

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An investment involves allocating money to an asset with the goal of achieving financial gains through value appreciation or income generation. Options for investing include the stock market, real estate, gold, etc.

While saving money is essential, investing can significantly enhance your financial growth. By earning returns on your investments, you can achieve your dreams and financial goals faster than saving alone. Investing wisely helps you maximise the potential of your hard-earned money.

Let’s read this blog to understand more about investments, its working, types of investments, factors to consider when investing and more.

An investment implies allocating money to assets such as real estate, gold, or the stock market to generate returns. This differs from merely saving money. While a savings account may offer a small percentage of interest, it does not yield significant future returns.

However, investing is done with the intent of generating substantial returns on investments over time. The investment definition involves putting your money to work.

How Does an Investment Work?

The real meaning of investment lies in understanding how it works so that you make the most of your investments. Investments help you get returns on your money to meet your financial goals over time. When you invest anywhere except the stock market, it may give you fixed returns. However, when you invest money in the equity market, returns ultimately depend on the market condition, as it can be dynamic and change the direction of your returns.

Types of Investments

Here are the various types of investments based on every individual needs:

1. Savings Accounts

Savings accounts are one of the most common types of investment. They are low-risk ways to put money in a bank account while earning interest on it. Banks generally offer 3% to 4% per annum interest based on the amount in your account. This option is more suitable for beginners who have just started their investment journey and are looking to save money every month or a lump sum of money at once. However, they do not guarantee high returns over time.

2. Public Provident Fund (PPF)

PPF is another popular type of investment, and you can invest through your bank or post office. For 2024, PPF offers a 7.1% interest on investment, which the Finance Ministry of India determines yearly. One important aspect of Public Provident Funds (PPF) is their lock-in period. You can invest a minimum of Rs. 500 and up to a maximum of Rs. 1.5 lakh annually. Additionally, investments in PPF are eligible for tax deductions under Section 80C of the Income Tax Act.

3. Fixed Deposit (FD)

Fixed Deposits (FDs) are among the most favoured traditional investments in India. You can deposit a fixed amount in your bank and receive guaranteed returns. FDs have a lock-in period ranging from 7 days to 10 years, offering a steady growth of your money over time with interest rates typically between 2.75% and 8.14% depending on various factors like maturity periods, FD amount and investor age.

4. Mutual Funds

Mutual funds have been one of the best investments in India over the years.. They are linked to the market conditions, and offer an average of 9% to 12% annual return on investments. There are several types of mutual funds to invest like equity, debt, or hybrid funds. There is also an option of a professional fund manager to help you manage your investments.

5. Unit Linked Insurance Plan (ULIP) -

ULIP combines the benefits of investment and insurance in one plan. They have a lock-in period of 5 years, during which you can invest money regularly for long-term investment. These are also eligible for tax deductions under section 80C of the Income Tax Act.

6. National Pension System (NPS)

The National Pension System (NPS) is a government-backed retirement savings scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). It offers an attractive long-term savings avenue for retirement planning. NPS contributions are invested in a mix of financial instruments, including government bonds, corporate bonds, and equities.

Upon retirement, 60% of the accumulated corpus can be withdrawn as a tax-free lump sum, while the remaining 40% is used to purchase an annuity, ensuring a steady income during retirement. Additionally, NPS provides tax benefits under Sections 80C and 80CCD of the Income Tax Act, making it a comprehensive and beneficial retirement planning option.

Reasons to Invest

Wealth Creation: Investment plans help grow your money over time, providing significant returns compared to traditional savings accounts.
Financial Security: They offer a safety net for future financial needs in phases such as retirement, education, or emergencies.
Tax Benefits: As mentioned above, many investment plans offer tax benefits under Indian tax laws (e.g., Section 80C).
Diversification: Investment plans allow you to spread risk across various assets, reducing the impact of market volatility.

Objectives of Investment

Investing aims to achieve several objectives, such as:

It helps grow your savings over time, providing a financial buffer for future needs like retirement or unexpected expenses.
Some investments offer tax advantages, reducing your overall tax burden.
Moreover, investing helps hedge against inflation, ensuring your money retains its purchasing power.

Diversifying your investments across various assets helps minimise the risk of significant losses. By understanding and pursuing these objectives, investors can build a solid financial foundation and work towards achieving their long-term financial goals.

Factors to Consider Before Investing

Financial Goals

Set clear goals for why you are investing. Decide if your goals are short-term (like buying a car), medium-term (like saving for education), or long-term (like retirement). Knowing your goals helps you pick suitable investments.

Risk Tolerance

Understand how much risk you can handle. If you can accept high risk for higher returns, consider stocks. If you prefer safety, look at bonds or fixed deposits. Knowing your risk level helps you avoid stress.

If you are looking for a low-risk investment option, NPS can be the best fit. The scheme offers a pension account (Tier I) and an additional investment account (Tier II) for greater flexibility. The Tier II account invests your contributions in Equity, Corporate Bonds, Government Securities, or Alternative Investment Funds (AIF).

Investment Horizon

Determine how long you can stay invested. For long-term goals, you can take more risks with stocks. For short-term needs, choose a bit safer and liquid options. It ensures you have funds when you need them.

Costs and Fees

Be mindful of the fees associated with investing, including brokerage fees and fund charges. Lower fees ensure that a greater portion of your investment remains invested and continues to grow over time.

Conclusion

Investment involves allocating money to assets like stocks, bonds, or real estate to generate long-term returns. A prime option is investment in National Pension System (NPS). It offers tax benefits under Section 80C and Section 80CCD of the Income Tax Act, reducing taxable income while growing your retirement corpus. Its diversified investment approach, including government bonds, corporate bonds, and equities, ensures balanced and potentially higher returns.

By investing in NPS, individuals can achieve long-term financial stability, secure a steady income post-retirement through annuities, and benefit from professional fund management, making it a reliable option for a robust financial future.

What is Investment, and What are its Objectives?