Investing is the act of allocating resources, usually money, with the expectation of generating an income or profit. You can invest in endeavors, such as using money to start a business, or in assets, such as purchasing real estate in hopes of reselling it later at a higher price.
- In investing, risk and return are two sides of the same coin; low risk generally means low expected returns, while higher returns are usually accompanied by higher risk.
- Risk and return expectations can vary widely within the same asset class; a blue-chip that trades on the NYSE and a micro-cap that trades over-the-counter will have very different risk-return profiles.
- The type of returns generated depends on the asset; many stocks pay quarterly dividends, while bonds pay interest every quarter.
- Investors can take the do-it-yourself approach or employ the services of a professional money manager.
- Whether buying a security qualifies as investing or speculation depends on three factors – the amount of risk taken, the holding period, and the source of returns.
- ‘Investing’ is more than building rainy day savings
On a practical level, saving involves putting aside money today for use in the future. It’s what economists describe as ‘forgone consumption’. In other words, rather than spending all your money, you tip some into a savings account for another time.
Savings is a sensible starting point in investing because it provides the funds you need to purchase a range of different assets. However investing goes one step further, helping you achieve personal goals with three significant benefits.
- The potential for healthy long term returns
While saving means setting aside part of today’s money for tomorrow, investing means putting your money to work to potentially earn a better return over the longer term. Different classes of investment assets – cash, fixed interest, property and shares – typically generate different levels of return (which is relative to the risk of the investment).
‘Growth’ assets, such as shares and property, have historically had the best overall returns of all asset classes but have also had bigger peaks and troughs. As an investor, there is the potential to earn capital growth over the longer term as well as an ongoing income return (like dividends from shares or rent from a property).
‘Defensive’ assets, like fixed income and cash, may not have generated the same level of returns over time as growth assets but these returns have been less variable, with smaller peaks and troughs.
- Beat inflation
Inflation is the ongoing rise in the cost of living over time, and it can impact on our financial wellbeing.
One way to help outpace inflation – and generate positive ‘real’ returns over the longer term – is by investing in assets that are not just capable of delivering higher income returns but also offer the potential for capital growth
- Earn additional income
It is possible to earn extra income by investing in quality investments.
The return on your investments might be used as a source of regular extra income for day-to-day living. Or you might choose to reinvest the money to further grow (or compound) your wealth.
The bottom line is that savings are important. Depending on your appetite for risk the benefits of investing can mean having more than some ‘rainy day’ cash
Investments in equity markets or stocks provide avenue for wealth creation over a long period of time. It takes a great deal of research and prudence to identify the right stocks to invest in. You also need to time your entry and exit prudently, and it involves continuous monitoring of investments. Capital appreciation happens over long period of time and is dependent upon market volatility. The good news is that in the long run, some of the stocks has been shown to deliver greater inflation-adjusted returns when compared with many other classes of assets.
Bond is one of the types of debt investments available in India. Investors lend money to the issuer company in exchange of a bond and in return of the bond, the issuer is obliged to pay interest on the principal amount. The issuer is required to repay money borrowed along with a fixed rate of interest on the amount borrowed. Nowadays, variable rate of interest is also quite common.
- Real Estate
Investing in real estate involves purchasing residential or commercial properties to allow your capital to appreciate or to generate regular rental income. This way, you get to enjoy a steady stream of income in the form of rent. Another strategy is to purchase real estate units, hold them, and then sell them at a later point in time for a higher price, thus earning a significant return on your initial investment
- Mutual Funds
Mutual funds (MFs) invest in market-linked instruments such as stocks, bonds, or a mix of both equity and debt instruments. You can choose between equity funds, debt funds, and balanced funds depending on your financial goals and requirements. Furthermore, you can also invest small amounts periodically in MFs using a Systematic Investment Plan (SIP).
- Unit Linked Insurance Plans (ULIP)
Unit Linked Insurance Plans (ULIPs) are among types of investments that come with tax benefits as well. It’s an instrument that offers you the advantage of investment combined with insurance. The premium you pay to remain invested is divided into two portions. One part goes towards providing you a protective life cover, while the other is invested in market-linked instruments or funds. ULIPs also provide deductions under Income Tax Act 1961 as per prevailing tax laws, since the premium paid is deductible, and the maturity benefits and long-term capital gains are tax-free
A mutual fund is a kind of financial vehicle created from a pool of money collected from several investors to
Shares represent ownership of a company. When an individual buys shares in your company, they become one of its owners.
A systematic investment plan (SIP) is a plan in which investors make regular, equal payments into a mutual fund, trading