What is Investment?

What is Investment?

An asset created with the objective of wealth creation is referred to as an investment. The profits made on an investment can be utilized to meet several requirements, such as meeting income shortage, retirement planning, clearing debts, or purchasing more assets.

It’s essential to understand the meaning of investment in order to choose the best investment plans and meet your financial goals. This is why it’s crucial to analyse the different options available to you and make sure to choose the right ones according to your objectives.

Typically, investments have the capacity to generate wealth for you in two ways. One, if you purchase a saleable asset such as precious metals or property, you can generate wealth in the form of profits earned on the sale. Second, if you opt for a return generating investment plan, such as ULIPs, your income will be rendered in the form of accumulated gains. In other words, investment can be understood as the process of putting money in instruments that generate income or become worth more than their initial worth over time.

What are the Different Types of Investments?

Now that you understand the meaning of investment, it’s important to discuss the different types of investments. Let’s take a look at the different types of investments available in India

1. Stocks

When you buy stocks, you essentially get a share in the ownership of a company and earn dividends over time.

2. Bonds

When you invest in bonds, you put your money in a government or private institution. You receive a fixed interest on your investment along with the principle upon maturity.

3. Mutual Funds

In mutual funds, money is pooled from different investors and invested in various company’s bonds or shares. These investments are managed by fund managers. Based on your financial objectives and risk appetite, you can choose between equity or debt funds, or invest in a mix of both.

4. ULIP Plans

Unit Linked Insurance Policies, or ULIPs, are essentially similar to mutual funds, but they come with an added advantage of life insurance. When you invest in a ULIP, a part of the premium paid by you is invested in equity/debt funds, and the remaining is used to secure life insurance coverage for your loved ones. In addition, premiums paid towards ULIPs are also tax-exempt under section 80C upto Rs. 1.5 lakhs per annum. However, tax laws are subject to change from time to time.

5. Public Provident Fund

Public Provident Fund or PPF is a government-offered savings scheme that lets you invest your money for a fixed period and helps you earn interest on the investment.

Why Should I Choose to Invest?

Before you start your investment journey, it’s important to understand the reasons behind investing money and doing so smartly. Let’s take a look at a few of these reasons –

1. To Preserve Your Money

Preservation of capital is one of the most crucial benefits of investment. Some investment plans help keep your money from getting eroded over time and ensure that you don’t run out of your savings. Investment instruments such as fixed deposits, government-issued bonds, or recurring deposits are excellent options for capital preservation.

2. To Generate Wealth

The biggest benefit of investments is that they help you generate wealth. They act as an additional source of income and can come in handy on rainy days. However, it’s important to remember that capital or wealth generation is a long-term objective. It takes a considerable amount of time to generate a sizeable corpus, and it’s recommended to invest in a plan that offers potentially large returns. Some of the best investment options to meet this goal are mutual funds, real estate, and ULIP plans.

3. To Generate a Source of Secondary Income

Investments are an excellent way of ensuring steady income. Investing in investment tools that payout returns on a regular basis are perfect for making sure you have a consistent inflow of money. These investments can help you cater to your day-to-day expenses once you have retired, provide supplementary income in your working years, and offer aid in paying for outlays such as EMIs or college fees.

4. Minimize Tax

Another way in which investments can help you save, if not generate wealth, is by helping you minimize taxes. The Income Tax Act of 1961 ensures that investment tools like ULIPs, PPFs, and ELSS are exempted from taxes. The amount invested in these instruments is reduced from your income, thereby reducing your taxable income and bringing down your tax liabilities.

5. Retirement Savings

It’s important to save up for your retirement as it lets you continue leading a respectable lifestyle even when you’re no longer working. By investing your money in the right investment plans, you can allow it to grow and create a financial safety net that you can fall back on in your golden years.

6. Attain Financial Goals

Investing your money in smart financial tools makes it easier to achieve your short-term as well as long-term investment goals. Some investment plans come with high liquidity that lets you withdraw your funds to cater to short-term goals or keep them invested until you meet your long-term objectives.

7. Ensure Security of Your Loved Ones

Some investment tools such as ULIPs come with the added advantage of life cover. This means that these investments come in handy in the event of an unfortunate incident and help provide the required financial security to your loved ones in case you’re no longer around to ensure that yourself.

How to Make Smart Investments?

Now that you understand the meaning and benefits of making smart investments, it’s time to understand how to make a wise choice while choosing the right investment plans for yourself. Here are a few things that you need to keep in mind while investing your hard-earned money -

1. Consider Your Financial Needs

The first thing you need to keep in mind while choosing the right investment plan is your financial needs. Think about your family size, the number of earning and non-earning members in your household, and your and your family’s life goals.

2. Build a Diverse Portfolio

It’s important to strike a balance between risk and return when you choose your investment plans. This is why you must build a diverse portfolio that includes various kinds of plans.

3. Duration

Another thing to keep in mind while choosing the best investment plan is the ideal duration of your investments. You should choose a tenure that you’re comfortable with and wouldn’t take a toll on your day-to-day expenses.

Disclaimer:

The article is meant to be general and informative in nature and should not be construed as solicitation material. Please read the related product brochures for exclusions, terms and conditions, warranties, etc. carefully before concluding a sale

Consult with your financial advisor before making any decisions on insurance purchase.

Tax benefits are as per the Income Tax Act, 1961, and are subject to any amendments made thereto from time to time.

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Frequently Asked Questions (FAQs)

What is meant by investments?

Investment can be understood as the process of putting money in instruments that generate income or become worth more than their initial worth over time.

What are some of the most common forms of investments?

Some of the most common types of investments are -

  • Stocks
  • Bonds
  • Mutual Funds
  • ULIPs
  • Public Provident Fund

Do some investment plans also come with an insurance element?

Yes, ULIP is one of the most lucrative investment options that comes with a life insurance component.