Investment is a process of acquiring an asset with an aim to generate money from it. Generating income from an asset can be through regular income or appreciation of the asset. Appreciation is the increase in the value of the asset over time.Investing is a way to get money to work for you.
When one invests in stocks and bonds or a piece of land, they aim to generate money from it in the form of dividend, interest or capital appreciation. Hence investing is spending money today on something that will help generate income in the future.
Investing is important to achieving your goals. By making investments, you’re also saving, making regular investments forces you to line aside a sum regularly, thereby helping you instill a way of monetary discipline.
Investing is an act of committing your savings to an endeavour, with the objective increasing your wealth and earning additional income or profit.
Why you should invest ?
Impact of Inflation
One of the benefits of investing over leaving your money in a savings account is the opportunity to protect your purchasing power against inflation. A country’s inflation rate is an indication of the health of its economy and how much prices have increased. Since 2016, the year-on-year US
inflation rate has varied as follows:
- 2.1% in both 2016 and 2017
- 1.9% in 2018
- 2.3% in 2019
- 1.4% in 2020
- a predicted rate of 1.4 to 1.8% in 2021
Inflation, in simple terms, is a surge in the price of materials and services. It decreases the worth of your money and reduces your purchasing power.
When there is a rise in the inflation rate, you buy fewer things with the same amount of money. You have no control over the inflation rate. If you are to stay ahead of inflation, you need to have more money to purchase the extent of the goods you intend to in the future with the money you have today. But, money doesn’t grow on its own. If your money has to grow, then it has to earn returns. To earn returns, you need to invest. Therefore, making investments is necessary to tackle inflation. For instance, Inflation at the rate of 8% means that you need 8% more money than what you have to purchase the same item next year.
Here’s how inflation at 8% reduces the worth of Rs 1 lakh over eight years: Amount in hand now Rs 1,00,000
|After 1st year||92,000|
|After 2nd year||84,640|
|After third year||77,869|
|After 4th year||71,639|
|After 5th year||65,908|
|After sixth year||60,636|
|After seventh||Rs 55,785|
|After 8th year||51,322|
It is vital to earn inflation-beating returns, if not, you’ll not be ready to afford materials and services within the future from the savings you’re making now. So, lets see what are some of the investments from which giving us a fair return of returns, which can also beat the rate of inflation.
Grow Your Capital
At its most basic definition, your capital is the amount of wealth you possess. Generally, capital will include the funds you have access to, such as the money in your bank account, and liquid assets – assets that can be easily sold and turned into cash.
Achieve Your Financial Goals
Your financial goals might include buying your forever home, moving to an electric car instead of a petrol or diesel vehicle, setting up a college fund for your children, or arranging a reliable income for your retirement separate from your pension
Earn More Than From a Savings Account
Putting money away in a savings account may seem like the obvious way to safeguard your financial future. However, the performance of your savings is always reliant on how well the account’s interest rate compares with inflation. Investing that money instead offers you the opportunity to not only beat inflation but also provide a greater percentage return than you would receive from a savings account.
Investment and saving
Investing is different from saving. In saving, one is setting aside money for future use. Whereas, in investing, one is purchasing an asset with an intent to generate growth from it in the future.
Saving will not give returns that will help beat inflation. In contrast, returns from investing , if done right, are higher than the rate of inflation. Saving comes with no risk while investing has certain risk involved. Saving suits for short term or immediate goals.
Whereas, investing is best for medium-term and long-term goals such as child’s education, marriage, and retirement planning.
Investing is not just about purchasing an asset; it also means taking an action that will help generate revenue in the future. For example, when one individual chooses to study an additional course or does a Masters in a particular field to develop skills, they might help generate future income.
Different Types of Investments
There are differing types of investment within the market, and that we have bifurcated them into three main categories. They are
Fixed income investments: These investments give guaranteed returns within the variety of interest. These are low-risk investments. Below could be a list of some of the most effective fixed-income investments.
Market-linked investments: Market-linked investments are those investments that don’t guarantee returns and their returns are keen about market movements. These are considered high-risk investments. However, the returns from these investments also are high when the market rallies.
Other investments: Investments that don’t come under fixed income or market-linked investments are other investments. These also are called alternative investments.
Below is that the list of the foremost popular alternative investment products.
Bonds are fixed-income instruments that provide a hard and fast rate of interest to the investors against the cash invested. The investors lend money to the govt. and
corporations and acquire regular income within the kind of interest. Bond issuers are the borrowers who raise money publicly or privately for funding various projects. A bond is an instrument that has information on the interest, due date, day of the month, and bond terms. Investors of bonds are paid the whole amount after the bond expires (upon maturity). Investors may also sell the bond before maturity within the secondary market at higher prices and obtain profits.
● Mutual funds
Mutual funds are financial instruments that pool the cash from various investors to take a position in securities like stocks (equities), bonds, securities industry instruments, etc. Returns on fund investments are supported the market performance of the fund’s underlying assets. Investors can invest in mutual funds either via SIP (Systematic Investment Plan) or the lumpsum mode.
According to the chance profile, investment horizon, and financial goals, an investor can select from differing kinds of mutual funds available to them. Largely there are six sorts of mutual funds, namely growth or equity funds, liquid or securities industry funds, fixed-income or debt funds, hybrid or balanced funds, index funds, and tax-saving funds. Mutual funds help investors in achieving their financial goals, be it short-term or long-term.
The Indian markets’ watchdog SEBI (Securities and Exchange Board of India) has clearly defined each of those investment trust categories to enable investors to form informed decisions.
Investment in stocks is known as an equity investment. Buying stocks or shares would give investors a part of the ownership of that company. Investors invest in stocks with a motive to earn regular income in the form of dividends and also gain from capital appreciation. When the stock prices rise, investors can benefit from selling the shares.
Returns from stocks are market-linked and hence is considered the riskiest investment type. Share prices fluctuate based on market demand and supply and market sentiments. A bullish sentiment will lead to an unexpected rally of the market, while a bearish sentiment will lead to a drop in share prices.
According to the chance profile, investment horizon, and financial goals, an investor can Also called shares or equities, stocks are among the foremost popular growth-oriented investments. after you purchase a share, you become part-owner of a publicly-traded company and stand to realize an element of the profits. The risk-reward ratio with equity investments is commonly beyond most other kinds of investment.
● Exchange Traded Funds (ETFs)
Exchange-traded funds, or ETFs, are a set of investments like shares, bonds, money-market instruments, etc., that track an underlying index. they’re a mash-up of
various investment avenues that supply the simplest attributes of the 2 assets – mutual funds and stocks. ETFs are traded on the stock exchanges and are quite like mutual funds in terms of their regulation, structure, and management. However, one in every one of the biggest differences between ETFs and mutual funds is that the previous may be actively traded on the bourses at any given time during the day, which allows
investors to require advantage of real-time price differentials. On the contrary, mutual funds, whether active or passive, can only be bought/sold at the close of the trading day.
● Fixed deposits
Bank fixed deposits (FDs) are among the safest investment options available to
investors. they’re offered by banks and other NBFCs and permit investors to park their idle cash for a selected duration and for a hard and fast rate of interest. The charge per unit is predecided and unaffected by market fluctuations, which ensures greater safety
of the investments. From the benefit of flexibility to varied options offered to an investor, fixed deposits are a boon to risk-averse investors.
● Real estate Investment
The real estate sector holds huge prospects for several industries like hospitality, retail, commercial housing, manufacturing, and far more. Investors have the choice to speculate in commercial or residential properties or perhaps land mutual funds to earn significant returns on their investments. Timing could be a crucial aspect when one considers investing in property. One should be mindful that property investments will be highly illiquid, i.e. it’d get challenging to sell the property quickly just in case of an urgent monetary requirement.
Insurance products are often a component of finances. They are available in various forms like insurance, insurance, endowment plans, child plans, etc. Insurance products are developed to satisfy particular objectives, for example, life assurance is meant to satisfy your expenses as you age whereas insurance is intended to assist your beneficiaries within the unfortunate event of your death.
Each form of investment offers a varying level of risk-reward ratio. However, risk and returns shouldn’t be the sole considerations that determine what kinds of investment products you
decide on. An investor should also consider factors like asset allocation, fees, past performance, liquidity, etc. Your investment planning should make sure that your portfolio aligns along with your risk tolerance, investment goals, and time horizon.
Make your money work for you
Investing is essential to achieve your goals. Investments are essential in today’s world, just earning money from your primary source of income is not enough. People work hard towards earning money, but that may not be adequate to lead a comfortable life and fulfil future goals. To fulfil your dreams, you need to make your money work hard for you as well.This is the primary motive why you should invest. Money being idle in your bank account or locker is an opportunity lost. You should invest your money smartly to earn returns out of it.
By starting early investing you will have time by your side which will help in accumulating enough wealth for the future. The magic of compounding can only be seen when you have time by your side. Warren buffet became billionaire at the age of 56,while currently at the age of 86 he has the net worth of 76.1 million and there are various examples which proves us that investing early can help you to see the magic of compounding.
Here is an example of the power of compounding.