What Is Investment: Know Meaning, Types, and How to Investment

Learn the numerous benefits of investments and ways to accumulate long-term wealth.
What Is Investment
4 mins
20 February 2024

Investing is a critical financial strategy that can help you secure your future and achieve your financial goals. Whether you are a seasoned investor or just starting your investment journey, understanding the fundamentals is essential. Let us understand the basics of investing, explaining how it works, the benefits it offers, and provide a detailed overview of the top 10 investment options in India, including traditional options like fixed deposits, as well as newer opportunities.

Here's how an investment works?

Investing involves allocating your money into various financial instruments such as FD’s, stocks, bonds, mutual funds, real estate, and more, with the goal of generating a return on your capital over time. When you invest, you essentially provide capital to a business or financial entity, hoping that it will grow and generate profits. Your returns can come in the form of interest, capital appreciation, dividends, or rental income, depending on the type of investment.

Types of Investments in India

  1. Fixed Deposits (FDs): Fixed deposits are a popular low-risk investment option in India. When you invest in FDs, you deposit a lump sum amount with a financial institution like Bajaj Finance, for a fixed tenure and at a predetermined interest rate. The returns are guaranteed, making it a secure choice, but the interest rates may not always beat inflation. Bajaj Finance provides up to 8.85%.
  2. Stock Market: The stock market is where investors buy and sell shares of companies. By investing in stocks, you become a partial owner of the company. Stocks offer the potential for substantial returns but also come with higher volatility, making them suited for those with a longer investment horizon and a higher risk tolerance.
  3. Mutual Funds: Mutual funds pool money from multiple investors to invest in various assets like stocks, bonds, or a mix of both. They are managed by professionals, providing diversification and making them an accessible choice for those who don't want to pick individual investments.
  4. Real Estate: Investing in real estate involves purchasing properties for rental income and capital appreciation. Real estate investments are often considered a tangible asset, providing potential rental income and value appreciation over time.
  5. Bonds: Bonds are essentially loans made to governments or corporations in exchange for periodic interest payments. They offer regular income but may have a lower risk compared to stocks.
  6. Public Provident Fund (PPF): PPF is a government-backed, long-term savings scheme with tax benefits. It is known for its safety and steady growth, making it suitable for risk-averse investors.
  7. National Pension System (NPS): NPS is a retirement-focused investment platform that allows you to build a retirement corpus. It combines equity and debt investments, offering choices to suit different risk appetites.
  8. Gold: Gold is a precious metal often considered a hedge against inflation and economic instability. It can be invested in various forms, including physical gold, gold ETFs, or sovereign gold bonds.
  9. SIP (Systematic Investment Plan): SIP allows you to invest in mutual funds through regular, smaller contributions, promoting disciplined and consistent investing. It is suitable for investors who prefer gradual wealth accumulation.
  10. Cryptocurrency: Cryptocurrencies like Bitcoin are digital assets that have gained popularity as an alternative investment. They offer the potential for significant returns but come with high volatility and risk. Crypto investments are typically suited for those with a higher risk tolerance.
  11. Unit Linked Insurance Plans (ULIPs): ULIPs are a type of insurance policy that also offer investment opportunities. They allow you to invest in a variety of funds, including equity, debt, and balanced funds. The returns on ULIPs are linked to the performance of the funds you invest in.
  12. Savings/Endowment Plans: These are life insurance policies that offer both insurance coverage and savings opportunities. They are designed to help you save money over a long period of time and provide a lump sum payment at the end of the policy term.

Best Investment Options to Grow Your Wealth

The best investment option depends on your financial goals, risk tolerance, and investment horizon. Diversifying your portfolio across multiple assets, including both low and high-risk investments, can help you maximise returns and manage risks.

How to Start Investing as a Newbie

  • Set clear financial goals.
  • Build an emergency fund.
  • Assess your risk tolerance.
  • Choose your investments wisely based on your goals and risk profile.
  • Open investment accounts.
  • Create a diversified investment portfolio.
  • Continuously educate yourself and stay updated on market trends.

Reasons to start investing early

  1. Power of compounding: The longer you invest, the more time your money has to grow through compounding. This means that your earnings will earn additional earnings, leading to a snowball effect.
  2. More time to recover from losses: Early investors have a longer time horizon to recover from any market downturns or losses. This is because they have more time for their investments to grow back their value.
  3. Develop a habit of saving and investing: Starting early helps you develop a habit of saving and investing regularly, which is essential for long-term financial success.
  4. Achieve financial goals sooner: By investing early, you can take advantage of compounding and potentially reach your financial goals, such as retirement or a down payment on a house, sooner.
  5. Reduced risk of missing out on market opportunities: The longer you wait to invest, the more likely you are to miss out on periods of strong market growth. Starting early ensures you participate in these market upswings.
  6. Build a diverse investment portfolio: Over time, early investors have more opportunities to diversify their portfolios and reduce overall risk.

How to Start Investing

  1. Do Your Research
    Before diving into the world of investments, it's essential to conduct thorough research and understand the different asset classes available, such as stocks, bonds, mutual funds, and real estate. Each asset class has its own unique characteristics, potential risks, and returns. Familiarize yourself with these aspects to make informed decisions about your investment portfolio.

  2. Establish a Personal Spending Plan
    Effective investing starts with a solid understanding of your personal finances. Create a detailed budget to track your income and expenses, identifying areas where you can cut back and allocate more funds towards savings and investments. Set realistic savings goals aligned with your financial goals, such as retirement, education, or a down payment on a house.

  3. Understand Liquidity Restrictions
    As you explore different investment options, it's crucial to consider their liquidity restrictions, which refer to the ease with which you can access your invested funds. Assess your short-term financial obligations, such as living expenses, emergency funds, and short-term goals, to ensure your investments align with your liquidity needs. Choose investments with appropriate liquidity levels, considering that some investments, like real estate, may have longer lock-up periods. Striking a balance between liquidity and growth potential is essential to ensure you can meet your financial obligations while still achieving your investment goals.

  4. Research Tax Implications
    Investment decisions can have significant tax implications. Consult a qualified tax advisor to understand the tax consequences of different investment choices and strategies. Familiarize yourself with capital gains taxes, which are levied on profits from the sale of investments, to plan your investment strategies effectively and minimize tax impacts.

  5. Gauge Your Risk Preference
    Every investor has a unique risk tolerance, Before making any investment decisions, it's crucial to assess your risk tolerance. If you're a beginner, start with low-risk options and gradually increase risk exposure as your comfort level grows. Diversifying your portfolio across different asset classes and sectors is another effective strategy to reduce overall risk and mitigate the impact of market downturns in specific areas.

  6. Consult an Adviser
    While you can navigate the investment landscape independently, seeking professional guidance from a financial advisor can provide invaluable support. Advisors can help you tailor an investment plan that aligns with your specific financial situation, goals, and risk tolerance. They can also provide personalized advice on investment strategies, asset allocation, and risk management. Before engaging an advisor, clearly understand their fees, compensation structure, and potential conflicts of interest.

Conclusion

Investing can be a powerful tool to build wealth and secure your financial future. Whether you choose the stability of fixed deposits or the growth potential of mutual funds, your investment strategy should align with your financial goals and risk tolerance. Starting your investment journey might seem daunting, but with knowledge, patience, and prudent choices, you can pave your way towards a financially secure future.

Calculate your expected investment returns with the help of our investment calculators

Investment Calculator

SIP Calculator

FD calculator

SDP calculator

Gratuity Calculator

Frequently Asked Questions

What is the Digital FD offered by Bajaj Finance?

Bajaj Finance has launched a new FD type called "Bajaj Finance Digital FD" for a period of 42 months. Bajaj Finance is providing one of the highest interest rates of up to 8.85% p.a. for senior citizens and for the customers below the age of 60 they are providing up to 8.60% p.a. The Digital FD can be booked and managed only through the Bajaj Finserv website or app.

How do investment plans in India work?

Investment plans in India are designed to help individuals grow their wealth over time by investing in a variety of assets, such as stocks, bonds, and real estate. Investors can choose from a wide range of plans offered by various financial institutions, each with its own set of features and benefits.

Why are long-term investments important?

Long-term investments are crucial for achieving financial stability and security in the future. The power of compounding, where your earnings generate additional earnings, works best over extended periods, allowing your wealth to grow exponentially. Long-term investments also provide the opportunity to ride out market fluctuations and benefit from overall market growth trends.

How is an investment different from a bet or gamble?

Investment is based on careful analysis and risk assessment, while betting and gambling rely heavily on chance and luck. Investments are typically backed by assets or underlying business fundamentals, while bets and gambles often involve predicting unpredictable outcomes.

Is investment the same as speculation?

Speculation involves buying assets with the hope of selling them quickly for a profit, often based on short-term market fluctuations or hype. Investment, on the other hand, involves a more long-term approach, focusing on the underlying value and growth potential of the asset.

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Disclaimer

As regards deposit taking activity of Bajaj Finance Ltd (BFL), the viewers may refer to the advertisement in the Indian Express (Mumbai Edition) and Loksatta (Pune Edition) furnished in the application form for soliciting public deposits or refer https://www.bajajfinserv.in/fixed-deposit-archives
The company is having a valid Certificate of Registration dated March 5, 1998 issued by the Reserve Bank of India under section 45 IA of the Reserve Bank of India Act, 1934. However, the RBI does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.

For the FD calculator the actual returns may vary slightly if the Fixed Deposit tenure includes a leap year.