Understanding of Investments
Investments are essential nowadays because just earning money is not enough for a comfortable lifestyle or fulfill your dreams and goals. Most people can achieve their financial goals but are not fulfill their dreams. I have seen lots of people who earn well but fail to invest it properly, and they have been losing their money. What are the benefits behind hard work if you can’t invest it properly to get higher returns and achieve your goals. So, take out some time and think about personal Finance i.e., where are you investing your savings or which plan is best for investing your money, then you decide on investing your money.
If you want to secure your future and manage your budget, you have to add one more task in your life i.e. INVESTMENT.
What is Investment ?
In Simple words, An Investment is a process by which you can put your savings today into something; you can get return more money in future. In general terms, investment means making some sacrifices today in the hope of getting a better return in the future.
According to Warren Buffett (God of Investment), definition of investment is “Investments that are denominated in a given currency include money-market funds, bonds, mortgages, bank deposits, and other instruments. Most of these currency-based investments are thought of as “safe.” In truth, they are among the most dangerous of assets”.
In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In Finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit.
Investment is a step to create your wealth for several purposes in the future. To make sure that you will not struggle for money at a later point in life. For example, a retirement fund is a form of investment so that you can maintain your standard of living when you are too old to work. Investing is an option to grow your savings and achieve your financial goals, whether it’s for your home, your children’s education, or your retirement. When parents sacrifice and reduce their current expenses, to fund their children’s higher education. They are investing their savings in their children’s future, and to some extent, they are trying to secure their old age, but that may not always hold good.
Some people are terrified about investing their money in stocks or mutual funds. While investors have invested their money in any investment, it has carried some risk in the hope of higher returns.
Investing while you are young is one of the best decisions one can ever make.
Benefits of Investment
There are many benefits you can get through investments.
- Helps you to build wealth: This is one of most the reasons for investing your money. In simple terms, if you are investing something today, then you will get an additional income in the future.
- It helps you to meet other financial goals: Nowadays our priorities have been changed day-by-day. Investment is the best option to earn itself for the future. It will give you a regular income for day-to-day expenses after your retirement.
- Investing will get you to retirement: Investors can also use the proceeds of their long term investments to build a nest egg to help make their eventual retirement more comfortable.
- The certainty of Future Funds: This is one of the main benefits of investing in which you get a higher return when an investor invests their money in long term investment plans such as Mutual funds, stocks, bonds etc.
- Helps in Emergency: Anything can happen anytime in this busy schedule of life, and you must be prepared to face it. The investment will help you in emergency times.
- Tax Savings: When an investor invests their money is that it gives you a chance to reduce your taxable income. However, investing today can give you a bit of a break on taxes.
Categories of Investments
The investments are categorized into two types:
- Short Term Investments – Short-term investments are those investments that are expected to yield returns within one year. For example, Treasury Bills, Commercial Paper, Certificate of Deposit etc. These are usually low risk and highly liquid instruments and preferred by those investors who are more interested in capital preservation and yield returns within a short term.
- Long Term Investments – Long-term investments are those investments that are intended to hold for more than one year to yield returns. For example, Stocks, Equity, Mutual Funds, Bonds, Real Estate etc. These instruments are usually associated with high risk and high returns. These are preferred by those investors who need capital appreciation.
Types of Investments:
There are various types of investments that can help you achieve your financial goals.
- Stock: A share of stock represents ownership of the Company in proportion to the total number of shares. An investor invests money in the stock market to buy stocks, and the investor thinks that the value of the stock will go up over time. The holders of the shares are known as shareholders of the Company, and the ownership of the shareholder is based on their proportion of holdings of the Company.
- Bonds: A bond is a financial security where some institution borrows money from an investor, which is paid back at a specific time at a particular rate of interest. A bond, also known as a fixed-income security, is a debt instrument created to raise capital. In simple, A bond is an instrument of indebtedness that represents a loan made by an investor to a borrower.
- Mutual Funds: mutual funds are a trendy way to invest their money. A mutual fund is a type of investment where more than one investor pools their money together to purchase securities. Most Mutual funds are involved with essential investment criteria, such as debt funds, equity funds, or balanced funds.
- Exchange-Traded Funds: An Exchange-traded funds are a collection of investments that tracks a market index. Exchange-traded funds hold assets such as stocks, commodities, bonds, etc.
- Options: An Options is a derivative contract that gives the right to investors to buy or sell securities at a fixed price within a specified period of time. There are two types of options i.e., Call Option and Put Option.
- Retirement Plan: Retirement Plan implies to determine retirement income plan and actions and decisions which are necessary for achieving future goals. A retirement fund is a form of investment so that you can maintain your standard of living after your retirement.
- Insurance: An insurance plan which provides security and benefits to our family after an insured life. There are various types of insurance plans such as Term Life Insurance, ULIP (Unit Linked Insurance Plan), Life Insurance Plan, Traditional Insurance Plan, Medical Insurance Plan etc.
Investment is something or spends something today for your bright future.
If you do have any questions, queries, or need any help related to finance, investments, or plans, feel free to ask us.