Investing can be described as allocating money, with the expectation to grow it or generate profit. We can invest money in different places like starting a business or investing in a business, assets such as real estate or stocks which is a more popular choice nowadays.
These invested assets have the potential to help us in the future in terms of financial freedom.
What is an Investment?
An investment can be anything ranging from real estate that generates you rental income or stocks that can give you potentially high returns in the future or bonds that can provide you with a fixed income. In simple words investment is anything in which we put our money now and it appreciates its value after a period of time.
Categories of investment
Now that we know what investments are, we should also know the types of investments. There are three categories of investment.
Investing in corporate bonds or the government bonds or savings accounts are called lending investments, as you are lending your money to either banks, government or these institutions.
These are the assets purchased by you, usually as an investor. These investments can include stocks, gold, real estate. If you have invested in any company, business or a startup then it is also an ownership investment
Investments which can be easily converted into cash as they are highly liquid. Money market instruments may fall into this category
Reason for Investment
People have different goals and aspirations with their investment and so let’s discuss some reasons for which people start their investment journey
Appreciation of money
Capital gain is the main reason why we invest. All of us want to grow our initial money to some big amount for all our goals. For this it is important to invest in some kind of asset according to our risk appetite.
Earn a steady source of income
When you invest in FD or the fixed deposit then you can earn interest every month that can supplement your current income. You can also invest in bonds and real estate for a steady passive income
Lower tax liability
This is usually unknown to normal people that through investments they can actually lower their taxes by bringing down their tax liability. For example investment in equity linked savings scheme, public provident funds do qualify for tax exemptions, the ceiling of which can be rs 1.5 lakhs
Objectives of investing
Why should you start investing in assets? Well there are multiple reasons for that which include
We all have some financial goals, they can be short term or long term. To achieve them it’s important to have parallel sources of income. By investing in some assets you can actually achieve these goals
Safe from inflation
Inflation is a financial monster that can eat all your money by lowering their value, so to keep your money safe and upto their value it is important to invest and remember if your money isn’t growing then it will become prey to inflation.
Investment as a secondary income
It is a fact that an average millionaire has at least 7 parallel sources of income generation. How can you make some for yourself?
Well many investments offer you dividends payout or interest, over the period of time when your value grows high it can act as a second source of income.
As a matter of fact many retired people depend on the interests and dividend payouts of their prior investments to bear their regular expenses.
Importance of Investing
To constantly earn returns and add a parallel income source along with your existing source, it is important for you to invest your money in assets. Investing is also the only way through which you can save your money and beat inflation.
What is Inflation?
We have been talking about inflation and how it lowers the value of your money. But what actually is inflation?
Inflation refers to a general rise in price, it is the reason why everything gets more expensive and it leaves you with less or low purchasing power compared to what you had before. In simple words if you could buy something at a rate of rs 10. Now you will have to pay rs 11 or maybe rs 12 to buy the same thing.
This is how inflation eats your money and it doesn’t mean that you can’t beat it. By investing you are in a way beating inflation through inflation so you can beat it easily, which could not be possible with just saving you money.
Why Saving Is Not Enough?
Keeping your salary money safe in a bank account instead of just spending it away might seem like a genius idea, however the fact is inflation rate is higher than what you earn through your savings account.
To avoid losing your purchasing power what you must do is make your money work hard for you and earn returns.
Savings is necessary, but just saving your money and keeping it idle thinking that it might help in long future is just stupid.
To survive in the financial world you must know and understand the basics of investments, along with how investing and savings are different from each other.
You must remember that without savings you can not invest and without investing you can not save any money over a period of time. So investing and savings are both correlated.
Investment includes reallocation of funds and resources wisely for greater profits. When you start to invest start learning about it as much as possible, even the great investor warren buffett states that “never invest in a business that you don’t understand”
Do investors make money?
An investment makes money in one of two ways: By paying out income, or by increasing in value to other investors. Income comes in the form of interest payments, in the case of a bond, or dividends, in the case of stock. … Bonds, too, change their prices every day on the market.
What are the 4 types of investments?
There are four main investment types, or asset classes, that you can choose from, each with distinct characteristics, risks and benefits.
– Growth investments
– Defensive investments