The end goal of all earnings is to create wealth and fulfill necessary responsibilities. All the money you make at your 9-to-5 job, everything you earn at that side hustle, and every penny of your income is either spent for today’s gratification or saved for a rainy day later in life. Investments can help you save up for the future, since they offer a safe and secure means to allow your earnings to grow into a significant corpus.
Getting to know all about investments can help you formulate the right financial strategy for saving up to meet your short-term goals. It can also help you come up with the best investment plan for building up a sizable retirement fund for your golden years. So, here’s everything about investments for beginners, starting with investment meaning, and going through the objectives and categories of investments available in India.
What is Investment?
An investment is essentially an asset that is created with the intention of allowing money to grow. The wealth created can be used for a variety of objectives such as meeting shortages in income, saving up for retirement, or fulfilling certain specific obligations such as repayment of loans, payment of tuition fees, or purchase of other assets.
Financially speaking, an investment means an asset that is obtained with the intention of allowing it to appreciate in value over time. Generally, investments fall in any one of three basic categories, as explained below.
Categories of Investments -
1. Ownership Investments
Ownership investments, as the name clearly suggests, are assets that are purchased and owned by the investor. Examples of this kind of investment include stocks, real estate properties, and bullion, among others. Funding a business is also a kind of ownership investment.
2. Lending Investments
When you invest in lending instruments, you’re essentially behaving like the bank. Corporate bonds, government bonds, and even savings accounts are all examples of lending investments. The money you park in a savings account is basically a loan that you give the bank. This money is used by the bank to fund the loans it gives out to its customers.
3. Cash Equivalents
These are investments that are highly liquid and can easily be converted into cash. Money market instruments, for instance, are excellent examples of cash equivalents. Cash equivalents generally offer low returns, but correspondingly, the risk associated with them is also negligible.
What are the Objectives of Investment?
Before you decide to invest your earnings in any one of the many investment plans available in India, it’s essential to understand the reasons behind investing. While the individual objectives of investment may vary from one investor to another, the overall goals of investing money may be any one of the following reasons.
Reasons to Start Investing Today -
1. To Keep Money Safe
Capital preservation is one of the primary reasons people invest their money. Some investments help keep hard-earned money safe from being eroded with time. By parking your funds in these instruments or schemes, you can ensure that you don’t outlive your savings. Fixed deposits, government bonds, and even an ordinary savings account can help keep your money safe. Although the return on investment may be lower here, the objective of capital preservation is easily met.
2. To Help Money Grow
Another common objective of investing money is to ensure that it grows into a sizable corpus over time. Capital appreciation is generally a long-term goal that helps people secure their financial future. To make the money you earn grow into wealth, you need to consider investment options that offer a significant return on the initial amount invested. Some of the best investments to achieve growth include real estate, mutual funds, commodities, and equity. The risk associated with these options may be high, but the return is also generally significant.
3. To Earn a Steady Stream of Income
Investments can also help you earn a steady source of secondary (or primary) income. Examples of such investments include fixed deposits that pay out regular interest or stocks of companies that pay investors dividends consistently. Income-generating investments can help you pay for your everyday expenses after you’ve retired. Alternatively, they can also act as excellent sources of supplementary income during your working years by providing you with additional money to meet outlays like college expenses or EMIs.
4. To Minimize the Burden of Tax
Aside from capital growth or preservation, investors also have another compelling incentive to consider certain investments. This motivation comes in the form of tax benefits offered by the Income Tax Act, 1961. Investing in options such as Unit Linked Insurance Plans (ULIPs), Public Provident Fund (PPF), and Equity Linked Savings Schemes (ELSS) can be deducted from your total income. This has the effect of reducing your taxable income, thereby bringing down your tax liability.
5. To Save up for Retirement
Saving up for retirement is a necessity. It’s essential to have a retirement fund you can fall back on in your golden years, because you may not be able to continue working forever. Additionally, it would be unfair to depend on your children to support you later in life, particularly if they have children of their own to raise. By investing the money you earn during your working years in the right investment options, you can allow your funds to grow enough to sustain you after you’ve retired.
6. To Meet your Financial Goals
Investing can also help you achieve your short-term and long-term financial goals without too much stress or trouble. Some investment options, for instance, come with short lock-in periods and high liquidity. These investments are ideal instruments to park your funds in if you wish to save up for short-term targets like funding home improvements or creating an emergency fund. Other investment options that come with a longer lock-in period are perfect for saving up for long-term goals.
Learning more about investments and the reasons to consider parking your funds in them can help you get started with this very essential part of financial planning. Before you invest, try and understand the reasons behind your investments and identify your financial goals, so you can pick the right instruments to help you meet your long-term and short-term objectives.
Please consult your financial advisor before investing in any financial instruments.
ARN No:- Mar/Bg/1