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What is Investment: Meaning, Working, Factors Risks & Types

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In simple terms, investment means using your money to get more money. This is done by investing money in something-like a project or an asset-and then expecting its appreciation over time or income. Think of it this way: you plant a small tree today, so that you can enjoy the fruits it bears in days to come! Now that we know what is investment, let’s get into the investment meaning. 

Understanding the investment meaning

Investment, in simple terms, is the process of putting money into something for a potential increase in value or gain over time, such as stock, bonds, real estate, and even business. It allows your money to do more for you and enables you to achieve your financial goals or secure a better future-a calculated risk you deliberately take today for a healthier tomorrow.

How does investment work?

Essentially, two major ways that investments work include capital appreciation and income generation. In the case of capital appreciation, the theory lies in the fact that over time, the value of your purchase increases, and you sell at an appreciated price, say after buying a house. On the other hand, by income generation, it simply means that there is a periodic inflow of money into your pocket due to something such as stock dividends or interest from bonds.

The goal is to choose the right mix of assets that will balance your risk and reward to help you achieve your desired financial goals.



Types of Investments in India

1. Stocks: Owning shares of a company gives you a small portion of the company, which may give huge returns on investment but at the same time, is highly riskier.

2. Bonds: These are safer kinds of investments where one lends money to companies and governments to assure fixed returns in interest. Find out how one can invest in bonds in India to diversify their portfolio.

3. Mutual Funds: Professionally managed pools of money investing in a diversified portfolio of stocks, bonds, and other investments. A very good choice for the majority of investors desiring professional management of their investments.

4. Real Estate: This involves the purchase of property, either for rental purposes or to sell at a much higher price later on in the future. It's long-term.

5. Fixed Deposits (FDs): A very safe option wherein one deposits money in banks for a certain fixed period to receive assured interest in return.

6. Public Provident Fund (PPF): It is long-term Government-backed tax-saving investment with decent returns.

7. Gold: Investment in physical gold, ETFs, or Sovereign Gold Bonds. Hedge against inflation.



Why Should You Invest in Investment Plans?

There are many advantages of investment, let’s look at a few of them. 

1. Wealth Creation: Investment plans grow one's wealth over time through earning interest on interest.

2. Financial Security: They serve as an emergency backup and provide for a secure financial future.

3. Tax Benefits: Most of the investment plans come with tax benefits available under Section 80C and other rules.

4. Achievement of Financial Goals: With the help of investment schemes, you are able to achieve your goals of buying a house, funding your child's education, or saving for retirement.

How to Start Investing?

1. Define Financial Goals: Establish the goal of investments-retirement, house purchase, or any other goals.

2. Determine Your Risk Tolerance: Be aware of the level of risk you can afford to take.

3. Select Investment Avenues: Decide upon a portfolio comprising stocks, bonds, mutual funds, FDs, etc., according to your risk appetite.

4. Investment Account Opening: An investment can be made in stocks, bonds, or mutual funds by opening either a Demat or trading account in your name.

5. Diversify and Start Small: Start with a little investment and diversify between the different types.

6. Periodically go through the investment list and make changes in portfolios where necessary.

Objectives of Investment

1. Capital Growth: This is where one selects assets that over time increase in value.

2. Income Generation: Get regular money in dividends, interest, or rental income.

3. Capital Preservation: Safeguarding the principal amount while earning smaller returns.

4. Tax Efficiency: Invest in instruments that provide tax benefits for reducing one's overall tax liabilities.

Factors to Consider Before Investing

1. Risk Tolerance: Know your ability to take losses.

2. Time Horizon: The length of time you have before the money is needed.

3. Financial Goals: Relate your investment decisions to very short-term, short-run, and long-term goals.

4. Market Conditions: The state of the market should be observed.

Investments and Risks Involved

Being aware of the investment risks is a prerequisite for any investor. 

1. Market Risk: The fluctuation of the stock market can also alter the value of your investments.

2. Credit Risk: Possibility of the bond issuer going into default on its repayment. 

3. Liquidity Risk: This is the risk of not having one's investment sold quickly. 

4. Inflation Risk: The possibility that inflation might eventually curtail the purchasing power of your return. 

Example of Compounding 

Compounding works very much like getting interest on the interest you earn. Suppose you put INR 10,000 in an account that pays 10% per year. You will earn INR 1,000 in interest in the first year. In the second year, you would earn interest on INR 10,000 and on INR 11,000. As time goes on, it does a lot for your money to grow. 

Conclusion 

It is important to invest in growing wealth, achieving financial goals, and securing the future. Though associated with risks, one can always make intelligent choices to minimize those risks and diversify to reduce further risks. Start off small, be consistent, and let your money work for you!

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

Frequently Asked Questions

What do you mean by investment?

Answer Field

Investment is the process of using cash to acquire objects or projects (or a part of them) to earn profit from the appreciation in their value.

What is the difference between active and passive investing?

Answer Field

Active investing involves frequent buying and selling to outperform the market, while passive investing involves holding assets long-term to match market returns.

How can I measure the performance of my investments?

Answer Field

Quantify the performance by calculations such as Return on Investment, Compound Annual Growth rate, and comparison with benchmark indices.

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