What is investment – understanding its importance and benefits

If you keep a bag of mangos in your fridge for a month, they will go bad and lose their value. However, if you plant a mango tree, you will receive an uninterrupted supply of mangos for years at length. The mango tree will also provide for your future generations. But it will take some time to grow and bear fruits. This is how an investment works. When you invest your money, you open the possibility of earning money in the future to fulfil your goals and provide for your loved ones.

Find out what is investment and why it is good for you. 

What is investment or investing – Decoding the jargon

Investing refers to purchasing an asset that has the potential to grow in value in the future. When you invest your money, you intend to earn profits, that is, get more money than what you originally invested. 

Investing works in two ways. The first can be through a saleable asset, such as real estate, stocks, or gold. So, you can buy an asset at a low price and sell it at a higher price in the future to earn a profit. The second way can be through investment returns. For example, you make returns over time when you invest in mutual funds. The fund generates returns by investing in the market, which are then forwarded to you. 

Types of investment – Which one would you be comfortable with?

There are several types of investments in India. Here are some popular ones:

• Stocks: Stocks or direct equity represent ownership in a company. Publicly-listed companies list their stocks on stock exchanges where you can buy and sell them to earn a profit.  
• Bonds: Bonds are a type of debt where you lend money and earn interest in return. Governments, municipalities, or corporates may require funds for developmental projects. So, they issue bonds. In return, you earn interest at a pre-fixed coupon rate till maturity. 
• Fixed deposits (FD): Offered by banks and Non-Banking Financial Companies (NBFCs), FDs allow you to invest a sum of money for a pre-decided tenure and interest. 
• Public Provident Fund (PPF): PPF is a government-backed savings scheme that allows you to save for your future needs, such as retirement. The fund has a lock-in period of 15 years and is, therefore, ideal for long-term needs only. 
• Real estate: Real estate refers to buying land or a piece of property with the aim of capital appreciation or creating passive income. Commercial and residential properties can offer high returns when you sell them. They also provide a source of regular income through rent or lease.  
• Mutual funds: Mutual funds pool money from multiple investors and invest it in other securities, such as stocks, bonds, etc. They are managed by fund managers and therefore offer professional management for better gains. There are different types of mutual funds, like equity, debt, hybrid, and more. You can invest in any of these based on your risk appetite and goals. Mutual funds offer multiple ways of investment, such as through a Systematic Investment Plan (SIP) or in a lump sum. The former lets you invest smaller quantities over time and the latter can be used when you have surplus funds. So, you have a lot of flexibility in investing.

Benefits of investing – Why should you invest?

• Capital appreciation: With proper investment planning, you can create a considerable amount of wealth for your future goals. A single income may not be sufficient to meet all your needs. However, investing can be a simple way to create a second source of income, build wealth and secure your future. 
• Tax savings: Some investments qualify for tax benefits. For instance, an Equity Linked Saving Scheme (ELSS) is an equity mutual fund that allows you to explore equity investing as well as save tax under Section 80C of the Income Tax Act, 1961. You can claim a tax deduction of up to Rs. 1.5 lakh per annum and save up to Rs. 46,800 in taxes annually by investing in this equity fund.
• Hedge against inflation: Investing your money offers you financial protection against inflation. If you invest in inflation-beating instruments such as equity mutual funds, you can earn higher returns than the rate of inflation and grow your money’s value.  
• Less financial burden: There are convenient ways to invest your money, such as through SIPs that lower your financial burden. You can also invest in a lump sum. The choice is entirely yours and can be made as per your budget.

Conclusion

The right investments can be your ticket to financial freedom. So, make sure you research and pick options that align with your goals and needs.

An investor education initiative by Edelweiss Mutual Fund

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