The importance of investment is tremendous for people who save money to grow it multifold. By converting ideal resources into financial assets, profit may be generated.
Investment refers to the acquisition of assets by individuals that are not intended for immediate consumption but rather for future use, which is the development of wealth in the process.
With these assets, one hopes to make money or profit from a rise in their capital appreciation value over time. These are examples of investment assets, including anything from stocks and real estate to derivatives, jewelers, and fine art. Safety, income, and growth are the primary goals of every investment.
However, the level of risk and advantages associated with each investing instrument vary, so investors choose the best to suit their needs. The more people understand the importance of investment, they will contribute significantly to the economy’s growth by putting their funds from their savings accounts to use in the creation of new goods and services.
Why Should You Invest?
To earn a better return and be successful in the money market, you must invest and make money. If you do this, your future will be brighter. The importance of investment is directly related to achieving your financial goals. Saving and establishing an emergency reserve for the future is another benefit of investing. As a result, regular investments force you to save a particular amount of money each month, which helps you create a long-term sense of financial discipline.
Increases Wealth
The importance of investment also relates to profitability as it may provide a steady stream of income for individuals. Interest and dividends are one method to make money while investing. It’s what investors are looking for in investing opportunities: a higher rate of return with less risk.
Aiming for a Higher Quality of Life
Knowing the importance of investing early plays a major role in the production of wealth. Capital appreciation through time aids in the creation of wealth. Investors may make a fortune by reselling their assets for much more than they paid for them when they bought them.
Tax Saving
Consequently, customers can save money by taking advantage of various tax benefits. To take advantage of various tax deductions, many people prefer to invest.
Here’s What the Income Tax Act Says:
According to section 80C of the Income Tax Act, taxpayers may save up to Rs. 1,50,000 on their taxable income.
Economic Development
The expansion of the economy as a whole depends heavily on investment. To put it another way, as a consequence of this, people’s ideal resources are more efficiently mobilized and used. The importance of investment emphasizes a method of bringing together those who have money and others who need money. As a result, the country’s economy grows due to fresh capital.
Improve your financial stability
It is possible to attain long-term financial goals via investing strategies. Individuals may easily grow their net worth by understanding the true importance of investment in long-term assets. The fundamental objective of this strategy is to increase the assets of retirees while simultaneously providing a stable income.
Here is a beautiful explanation provided by Zerodha.
Few assumptions for calculation:
- You get a 10% salary hike year on year.
- The cost of living increases 8% year on year.
- You invest your savings @12% ROI.
Image credit: Zerodha
So, you can grow your savings to 4.2 Cr from 1.7 Crs. That’s the importance of investing.
Characteristics of Investments
Risk Factor
Every investment comes with a degree of risk. Everything from losing your money to not getting your money back to volatility in your returns is a risk with this kind of investment. Each investment has a different level of risk connected with it. Investors who choose less hazardous investments, on the other hand, have the opposite problem.
Learn: Position sizing & portfolio management
Income Stability
Income stability refers to the consistency and lack of fluctuation of one’s earnings. Investments in assets that consistently provide a profit are sought after by everyone.
Liquidity
An investment’s liquidity is determined by how quickly it may be sold or withdrawn from the account. An investment’s ability to be sold without suffering a financial loss is referred to as its “liquidity.” Most investors prefer to invest in liquid assets.
Safety
The value of any investment might fluctuate due to changing market conditions. When an investment instrument guarantees the safety of investors’ money, it is deemed adequate. Depending on the situation, it should be redeemable at any moment. The present state of the market and the state of the industry should be thoroughly examined before making any investment choices.
Capital Appreciation
Profitability is the foundation of any investing strategy. When deciding whether or not to invest in a certain project, it is critical to keep in mind the chance that the investment’s value may increase over time. If an asset is predicted to appreciate in value in the future, investors should take advantage of the opportunity and acquire it as soon as possible.
Return on Capital Employed
Investors might anticipate a wide range of returns throughout their investment, depending on the present status of the market. Sum of money that people are expected to invest in one or more asset classes for a certain period. For every one of us that invests, we want to see a constant and predictable return.
Marketability
To describe an investment security’s capacity to be purchased, sold, or transferred on the market is known as “marketability.” This feature of investment instruments affects their value since investors prefer investments with more marketability.
Purchase Power Stability
When investing, it is important to consider an investor’s purchasing power. The value of his investment must advance in lockstep with rising prices; therefore, he takes precautions to prevent any losses.
Tax Benefits
Investors pay close attention to the tax implications when it comes to earning money through investment programs. What’s leftover after taxes is how much a person’s genuine net income is. Investors consider the tax consequences of different investment alternatives before a final decision is made. For example, a person may lower his tax burden with low-tax securities while simultaneously boosting his return.
Legality
It’s important to think about the legal ramifications of financial investment before choosing. Unsuspecting investors are doomed to lose their money if they buy unregulated securities. Legal and tax-advantaged securities, such as those issued by the LIC, UTI, and Post Office National Savings Certificates (POSC), are the best investments for you to make.
Types of Investments
There is a diverse range of investment opportunities accessible to you. Before agreeing on a certain investment plan, it is important to consider your financial requirements and your risk tolerance. Investing may be classified as either active or passive, depending on the strategy used.
Active Investments
A person must adopt the role of the portfolio manager to invest in an active portfolio. This approach aims to beat the market over the long run while also taking advantage of price fluctuations in the near term. However, when it comes to investing in stocks, bonds, and other assets, there are many more aspects to take into account.
Portfolio managers use their crystal balls to predict when and where a stock’s price will rise or fall based on qualitative and quantitative data. It is their job to lead a group of analysts.
Active investments require faith in the portfolio manager, who must be trusted to know exactly when to buy and sell. Therefore, being right more often than wrong is necessary for active investing.
Passive Investments
The purpose of a passive investor is to accumulate wealth over the long term. This has resulted in passive investors saving a significant amount of money by minimizing the number of transactions that they make in their portfolios. Therefore, a long-term view is required for the strategy. To put it another way, resist the temptation to react to or foresee the stock market’s upcoming fluctuations.
In general, when you invest in the stock market as a whole, you can gain from the overall increase in corporate earnings, even if your holdings are small. This is because the most successful passive investors ignore short-term setbacks, even severe ones, and concentrate on the long-term objective instead.
Popular Investment Options
You have a wide range of alternatives to select from when it comes to investing. However, it is important to keep in mind your risk tolerance and needs before making investments.
Mutual Fund Investments
Millennials are increasingly turning to equity mutual funds, which have been around for a few decades. To achieve a certain investing goal, equity mutual funds collect money from various sources, including individuals and businesses. A fund manager, a kind of financial specialist, makes investments in stocks and other assets in order to maximise profits for clients and fulfill their financial goals.
How Do Mutual Funds Operate?
A mutual fund portfolio might comprise equities, debt, and hybrid funds. An equity mutual fund and a debt mutual fund are two different types of investments. Hybrid funds are the best option for people who wish to invest in both equity and debt.
You may start and stop investing in mutual funds anytime you like. It is possible for everyone to invest in mutual funds. Investing in mutual funds does not need significant resources, such as time or knowledge, since the fund manager is responsible for the overall composition of the portfolio.
Investing should only be considered for funds whose risk and objectives align with your own. Market changes mean that it is hard to know precisely how much money you will earn in the future. There is no guarantee that a specific fund’s past performance will predict its future returns.
- Nature of Investment: Both active and passive
- Return Potential: Moderately High
- Anti-Inflation Potential: Very high
- Risk Factor: High
Direct Equity
Direct equity is a concept that refers to investing in the stock market without going via an intermediary. Creating a Demat and trading account and investing in the stock market via a stock brokerage business are often required. Following the completion of this process, you will be allowed to acquire shares in companies directly from the market.
- Nature of Investment: Active
- Return Potential: Very High
- Anti-Inflation Potential: Very High
- Risk Factor: High
Fixed Deposit
Banks and financial institutions provide a fixed deposit as an investment option. You deposit a certain amount of money and get a predetermined return on that money over time. Regarding financial security, fixed deposits are superior to mutual funds and stocks as these safeguard your long-term financial goals. But you’ll have to make a trade-off since the benefits are still the same.
Fixed deposit accounts are an excellent choice for individuals who want to proceed with caution. Reserve Bank of India policy review decisions influences fixed deposit interest rates set by banks in response. In the case of a financial emergency, fixed deposit investors may borrow against their savings. The tax-advantaged variant of the fixed deposit has a five-year lock-in term.
- Nature of Investment: Passive
- Return Potential: Moderately low
- Anti-Inflation Potential: High
- Risk Factor: No Risk
Recurring Deposit
Investing in a recurring deposit (RD) enables investors to set aside a specific amount each month for a certain period while also earning a set interest rate. You may get an RD at any bank or post office location. It is up to the lender to set the interest rate.
To establish a large nest egg, RD encourages investors to put a small amount of money into it each month for a certain time. Investments in RDs are backed by a guarantee of a certain return on the principal invested. Risk-averse investors might choose RDs since they are similar to fixed deposits.
- Nature of Investment: Passive
- Return Potential: Moderately low
- Anti-Inflation Potential: Low
- Risk Factor: No Risk
NPS (National Pension System)
You may want to consider investing in the National Pension System (NPS) to save money on taxes. An advantage of putting money into the NPS plan over the PPF or EPF is that investors don’t have to commit until retirement age, but they may anticipate higher returns. Because NPS plans may incorporate stock options, this is correct.
To get a monthly pension, an annuity must be bought using a portion of the NPS maturity corpus, which is not tax-free. Only 40% of the entire corpus may be withdrawn as a lump sum, with the balance invested in an annuity plan. Certain federal employees must join the National Pension Scheme (NPS).
- Nature of Investment: Both active and passive
- Return Potential: Moderately High
- Anti-Inflation Potential: Moderately High
- Risk Factor: Moderate
Employee Provident Fund (EPF)
Section 80C of the Income Tax Act, 1961 provides tax relief for salaried persons who contribute to an Employee Provident Fund (EPF). A percentage of an employee’s monthly pay is normally deducted for EPF purposes, and the employer deducts the same amount. The EPF funds withdrawn when they reach maturity are likewise free of all federal, state, and local taxes.
The government of India sets EPF rates every quarter, and the sovereign guarantees your investments in EPF. The Voluntary Provident Fund allows you to make additional contributions beyond the legally required minimum (PPF). While you may be able to access your EPF assets if you satisfy certain requirements, your EPF account only matures when you retire.
- Nature of Investment: Passive
- Return Potential: High
- Anti-Inflation Potential: Moderately High
- Risk Factor: No Risk
Public Provident Fund (PPF)
Public Provident Fund (PPF) is a long-term tax-saving investment instrument with a fifteen-year lock-in period. In India, we have Government-issued insurances and policies to protect your assets. The PPF is based on the fact that the Government of India reviews the interest rate every quarter.
Investors may withdraw their money from the fund after 15 years without paying a dime in taxes. Depending on the circumstances, the PPF allows for loans and partial withdrawals. If you meet the conditions for early withdrawal, you may extend your investment for another five years.
- Nature of Investment: Passive
- Return Potential: High
- Anti-Inflation Potential: Low
- Risk Factor: No Risk
What’s the Best Way to Make an Investment?
Investors sometimes find themselves perplexed while deciding on one of the many available investment options. If you’ve never invested before, you may not know where to start—making the wrong investment option might harm your financial situation.
Investor’s Profile
Decisions on a financial plan should be made based on your specific profile. The amount of money you make and the number of people who rely on your income are other important considerations. Taking equity-related risks while caring for one’s family may not be achievable for someone young and has lots of time on his hands.
If you’re in your fifties or older and don’t have children or other dependents, you may be able to profit from higher returns by investing in equity. However, there is no such thing as a universal approach to investing. To get the most out of your investments, you need to be deliberate in your choices and organized in the way you layout your approach.
Age of the Investor
A young investor’s time horizon and financial commitments are often less constrained than an experienced investor. It is possible to invest in vehicles with a long-term view and to keep increasing your investment as your income increases over time if you have a long career ahead of you.
As a result, young investors are better off with equity-oriented assets like mutual funds rather than fixed deposits. On the other hand, traditional investments like FDs may appeal to older investors. But, of course, as you become older, your financial priorities change.
Purpose for Investment
An investment may have short-term or long-term goals. Go with a less hazardous investment for short-term aims while keeping in mind the great potential of stocks for long-term investments. Some of your needs may be addressed in a non-negotiable or a negotiable manner.
For non-negotiable goals like saving for a child’s education or a down payment on a house, guaranteed-return investments are an excellent choice. If your goal can be postponed for a few months, stocks and mutual funds may be suitable. Recall that if your assets perform as planned, your goals might be achieved much more quickly than expected.
The Key Strategy for Investing
Setting objectives and assessing your current financial situation are the first steps in creating an investment plan. Here are some other items to consider when you are planning to invest –
- Don’t be fooled by schemes promising big profits in a short amount of time, and conduct your research before making investments.
- Regularly review your stock and mutual fund investments.
- Consider the tax consequences of investment returns.
- Don’t get tangled up in sophisticated investments you don’t comprehend.
Get started on your investments as soon as possible to maximize your chances of success. When it comes to making financial investments, time is of the essence. The earlier you begin investing and the longer you remain committed, the greater the returns on your assets will be.
