What is Investment and What is Its Purpose?
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Updated date : 29 July 2020
What is Investment
Different people possess different notions and understanding of “investment”. To start with, first of all, let’s try to get a clear understanding of what is investment and how it can be useful for the folks.
Investment is an act of buying assets or items that help you generate income in the long run. Economically, it can be defined as the act of purchasing assets or goods that won’t be consumed today but will be used to create wealth in future. While in financial aspects, one can define investment as an act of buying monetary assets in order to receive income from it in future or selling it later at a higher price for profit.
To elaborate the concept of ‘what is investment’ from financial point of view, it means that the investor invests or commits his money or cash in either security, financial assets or in bond issued by the government or the financial institutions with a hope to accumulate more cash in their account.
Investing money in a bond or equity not only brings a lump sum amount to the pocket of the investors but it also assists the government to expand its on-going projects. This is one of the primary reasons the government encourage and people choose this investment option.
There are different types of investment plans that a consumer can go for. However, before getting into details of different products of investment, it is essential to understand that there are basically two types of investment products: i) non-finanacial and ii) financial assets.
Non-financial assets are the most preferred among most of the people. Real estate and gold investments are few examples of non-financial assets. On the other hand, financial assets are further divided into a) fixed income products and b) market-linked products. here, bank fixed deposit and Public Provident Fund are fixed income products; whereas, mutual funds and stocks are market-linked products.
Here are the best investment avenues Indian people can look into in order to meet their financial goals:
Direct equity is a volatile asset class and is a risk willing product. Not only it is tough to find the right stock in direct equity to invest but it’s also difficult to fix the timing of exit and entry. The risk of losing a substantial portion of amount is higher unless the consumer choose for stop-loss method to diminish losses. In the present time, 5,3,1 year of market returns is around 12.5, 8 and 13 percent, respectively. The consumer needs to have a demat account to invest in direct equities.
Equity Mutual Funds
According to the regulations of Securities and exchange board of India (SEBI), the scheme of equity mutual fund should invest at least 65 % of its assets in equity related instruments and equity. The fund of the equity should passively or actively be managed.
How a fund manager handles the actively traded funds, majorly defines the returns of these funds. The scheme of equity is graded as per the capitalisation of the market or the market in which they invest their money. In the present scenario, 5, 3 and 1 year of market return is around 20 %, 15% and 15%, respectively.
Debt Mutual Funds
The debt funds are one of the best modes for the investor to invest their hard earned money. They are less risky compared to the equity. This debt mutual funds in general invest in the securities which generate fixed interest such as government securities, corporate bonds, treasury bills, commercial paper and many more. In the present scenario, 5,3,1 year of market return stand around 7.5%, 8% and 6.5%, respectively.
RBI Taxable Bonds
The government has come up with 7.75% savings taxable bonds. This bond replaced the previous 8% savings taxable bonds 2003. As per the rule of RBI, the tenure of these bonds is 7 years. In general, the bond is issued by RBI in the format of demat and accredited to the BLA (Bond Ledger Account) of the consumer or the investor. Furthermore, a Certificate of Holding is provided to the consumer/investor as proof of the investment.
Senior Citizen Savings Scheme (SCSS)
Those who are looking forward to create a substantial financial corpus for their retirement, often choose to take up this option. As the name indicates, only senior citizen can open and invest in this scheme. Those who are above 60 can avail the benefit of this scheme.
They can either avail this saving scheme from post office or public banks. The tenure of this scheme is 5 years. Once it matures it can further be extended to 3 more years. In the present scenario, the interest rate of this scheme is 8.3% per year. This is fully taxable and quarterly payable. One person can open only one account and the maximum investment limit is 1.5 lakhs.
Public Provident fund (PPF)
PPF is still one of the most popular investment options across the country. there is a huge lot of people who still prefer to invest the money in this fund. The tenure of the scheme is 15 years. This is a tax saving investments avenue and the interest rate offered is also reasonable.
Bank Fixed Deposit
In India, fixed deposit is still considered as the safest investment choice among people. According to the rules of the Credit Guarantee Corporation and Deposit Insurance, each depositor has insured up to Rs 1 lakh for both principal and interest. One can easily choose for either yearly, half yearly, quarterly or monthly interest option.
Going through the aforementioned facts, it would be easier for you to relate to what is investment and how it brings hopes of gaining higher amount to the investors. These investment options are inferred as the best investment options among the common folks of the country. However, it’s always advisable to consult with financial advisors before going ahead with any investment plan as proper guidance and advice can lead one investor to right path of investment.
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