Induced Investment

Induced investment is the type of investment that goes up or down depending on how much money people are earning in the economy. When income levels change, this investment also changes.
EXPLORE FUNDS
Induced Investment
EXPLORE FUNDS
3 min
26-June-2024

Induced investment refers to those investments that you make for financial gains. To explain it more clearly, let us consider an example. An induced investment involves investing money in stocks to make a profit in the future. You may also invest in a financial vehicle to earn higher interest rates. It also helps you make more money.

In this article, we will look into the definition of induced investment, provide real-world examples, and explore the various factors that determine these investments. We will also examine induced investment from both a business perspective and a retail investment standpoint, offering a comprehensive understanding of how changes in income influence investment behavior across different sectors.

What is induced investment?

An induced investment involves the utilisation of profits to make investments for growth or increase profitability. Besides the profit motive, induced investments do not have any other motives. This is significantly different from autonomous investments, which are influenced by factors other than profit motive such as the welfare of society and others.

Example of induced investment

Suppose, a company produces 1000 units of clothes from 100 machines. This example will help you understand what induced investment is.

Now, the company has decided to install AI-enabled machines that can increase productivity by 10 times. This means the company has to install just one new AI-enabled advanced machine to produce 1000 units of clothes. This means the productivity of the company increased. But the capacity did not. The company is still creating the same 1000 units of clothes but at increased productivity. The money the company spent on buying the new AI-enabled advanced machine will be considered an autonomous investment because the capacity did not increase.

Now, consider the case where the company anticipates a jump in the demand for clothes, thanks to a large consignment from a foreign country. Suppose, the company anticipates a demand for 2000 units of clothes. So, the company installed 2 AI-enabled advanced machines, which could produce 2000 units of clothes. Here, productivity and capacity both increased. In this case, the money spent on buying two new AI-enabled advanced machines led to an increase in capacity, which would lead to increased profit and income for the company in the future. That is why it is called an induced investment.

Also read about: SIP investment

Determinants of induced investments

The determinants of induced investment are primarily influenced by changes in income and economic conditions. These determinants include:

  • Changes in consumer spending: Induced investment is influenced by changes in consumer spending and demand. As consumer spending increases, businesses are more likely to invest in new projects or expand existing ones to meet the growing demand.
  • Business confidence: Changes in business confidence also impact induced investment. When businesses are more confident in the economy, they are more likely to invest in new projects or expand existing ones.
  • Interest rates: Interest rates also play a significant role in determining induced investment. Lower interest rates make borrowing cheaper, which can stimulate investment by making it more attractive for businesses to invest in new projects or expand existing ones.
  • Economic growth: Induced investment is also influenced by overall economic growth. As the economy grows, businesses are more likely to invest in new projects or expand existing ones to capitalise on the growing demand and opportunities.

Induced investment from a business perspective

If you invest in a business to make a profit or increase the future value of your investment, it is called an induced investment.

But how can you understand whether your investment in the business has gained profit for you? You can understand it as the profit of the company starts increasing. Let us understand it in more detail.

Suppose, a business starts to grow and make profits. Its manager starts investing the proceeds to increase the profit further, especially in multiples. A company’s ability to generate profit is directly related to the induced investment level. This means when a company makes more money as profit, it can invest more money for future growth. However, during recessionary times, a company reduces its investment activities so that it can recover its assets.

One of the most common examples we see in the real world is increased capital investment. Sometimes, companies need to invest in advanced machinery to replace the workforce. This helps them cut costs and consequently increase profit. It helps the company expand both vertically and horizontally. By adopting increased mechanisation, a company can diversify and also produce new products or expand to new markets.

Also read about: What is a one-time investment plan

Induced investment from retail investment perspective

Induced investment from a retail investment perspective refers to investments made by individual investors with the primary goal of earning financial gains. These investments are driven by the desire to maximise returns, build a secure future, combat inflation, and provide a financial safety net for retirement. Retail investors focus on assets that can generate high returns, such as stocks, bonds, or real estate, to achieve their financial objectives. This approach prioritises financial gains over other factors, leading to a focus on profit maximisation and growth.

Summary

When a business makes induced investment, it leads to financial prosperity because it is done to make profits. It helps you create a strong financial foundation.

Do you want to increase your financial prosperity in the future? If yes, you can start by investing in mutual funds to increase your income or profit. You can explore the Bajaj Finserv Mutual Fund Platform and check more than 1000 mutual fund schemes that are listed on the platform. You can calculate the expected returns with the SIP calculator or lumpsum calculator. Make the right decision and start investing now to fetch huge returns in the future.

Essential tools for mutual fund investors

Mutual Fund Calculator Lumpsum Calculator SIP Calculator Step Up SIP Calculator
SBI SIP Calculator HDFC SIP Calculator Nippon India SIP Calculator ABSL SIP Calculator
Tata SIP Calculator BOI SIP Calculator Motilal Oswal Mutual Fund SIP Calculator Kotak Bank SIP Calculator

Frequently asked questions

What is the meaning of inducement to invest?

The inducement to invest is undertaken by a company when the consumer demand for the goods produced by the company increases.

What are the determinants of induced investment?

There are multiple factors determining induced investment including an increase in demand for its goods, a change in interest rates or wages, and an increase in income.

Why is induced investment important?

Induced investment is important because it is triggered by the motive of profit, which inadvertently leads to an acceleration in economic growth and creates a strong financial foundation.

What is the difference between autonomous and induced consumption?

If a business or a person has high disposable income or increased profit, it will be utilised to invest in avenues that further increase profit or income, even after paying regular bills. This is called induced consumption. If the income or profit is less or limited, it will be utilised to run regular operations such as paying bills. It is called autonomous consumption.

Is government spending autonomous or induced?

Government spending is mostly done with the motive of social welfare and the motive of profit is not the priority. That is why government spending is considered autonomous investment.

Show More Show Less

Related videos

Bajaj Finserv App for All Your Financial Needs and Goals

Trusted by 50 million+ customers in India, Bajaj Finserv App is a one-stop solution for all your financial needs and goals.

You can use the Bajaj Finserv App to:

  • Apply for loans online, such as Instant Personal Loan, Home Loan, Business Loan, Gold Loan, and more.
  • Explore and apply for co-branded credit cards online.
  • Invest in fixed deposits and mutual funds on the app.
  • Choose from multiple insurance for your health, motor and even pocket insurance, from various insurance providers.
  • Pay and manage your bills and recharges using the BBPS platform. Use Bajaj Pay and Bajaj Wallet for quick and simple money transfers and transactions.
  • Apply for Insta EMI Card and get a pre-approved limit on the app. Explore over 1 million products on the app that can be purchased from a partner store on No Cost EMIs.
  • Shop from over 100+ brand partners that offer a diverse range of products and services.
  • Use specialised tools like EMI calculators, SIP Calculators
  • Check your credit score, download loan statements and even get quick customer support—all on the app.

Download the Bajaj Finserv App today and experience the convenience of managing your finances on one app.

Do more with the Bajaj Finserv App!

UPI, Wallet, Loans, Investments, Cards, Shopping and more

GET THE APP

Disclaimer

1. Bajaj Finance Limited (“BFL”) is a Non-Banking Finance Company (NBFC) and Prepaid Payment Instrument Issuer offering financial services viz., loans, deposits, Bajaj Pay Wallet, Bajaj Pay UPI, bill payments and third-party wealth management products. The details mentioned in the respective product/ service document shall prevail in case of any inconsistency with respect to the information referring to BFL products and services on this page.

2. All other information, such as, the images, facts, statistics etc. (“information”) that are in addition to the details mentioned in the BFL’s product/ service document and which are being displayed on this page only depicts the summary of the information sourced from the public domain. The said information is neither owned by BFL nor it is to the exclusive knowledge of BFL. There may be inadvertent inaccuracies or typographical errors or delays in updating the said information. Hence, users are advised to independently exercise diligence by verifying complete information, including by consulting experts, if any. Users shall be the sole owner of the decision taken, if any, about suitability of the same.

Disclaimer:

Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319

BFL does NOT:

(i) provide investment advisory services in any manner or form:

(ii) carry customized/personalized suitability assessment:

(iii) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.

In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.

Disclaimer on Risk-O-Meter:

Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc, and shall also consult their Professional advisors, if they are unsure about the suitability of the scheme before investing.