Investment: Importance & Types

Investing is the process of putting money into assets in the hopes of improving your financial situation in the future. Investments are made to produce a profit, which increases the amount invested.

Why Should You Invest?

To reach your objectives, you must invest. It’s the only way to improve your prospects. You are also saving and amassing a corpus for a rainy day by making investments. Aside from that, making regular investments pushes you to set aside money regularly, which helps you develop financial discipline over time.

Impact of Inflation and the Importance of Investing

Inflation is defined as an increase in the cost of goods and services. It lowers the value of your money and lowers your purchasing power. When the rate of inflation rises, you may buy fewer items for the same amount of money. The rate of inflation is beyond your control. If you want to remain ahead of inflation, you’ll need more money than you have now to buy the number of things you want in the future with the money you have now. Money, on the other hand, does not develop on its own. If you want your money to expand, it must earn returns. You must invest to gain rewards. As a result, making investments is required to combat inflation. Inflation of 8% means you’ll need 8% more money to buy the same thing next year than you do now. Earning inflation-beating returns is critical; otherwise, you may not be able to acquire materials and services in the future with the funds you are currently making.

Types of Investments

There are several investment alternatives available to you. Before selecting to invest in any particular investment opportunity, you must examine your needs and risk profile. Active and passive investments are two types of investments. Active investing necessitates changing assets in your portfolio regularly, based on market and economic conditions. To engage in active investments, you must have sufficient time and investment understanding. Active investments are best exemplified by equity investments. Passive investments, on the other hand, do not require you to be actively involved in your investments. You put your money in and leave it there for a set period. It is also known as the buy-and-hold investment approach. This investment approach is recommended for those who do not have the time to handle their finances. After determining your requirements and risk tolerance level, you must pick between an active and passive strategy.

There are several investment alternatives available to you. However, you must be certain that you are only investing in options that are within your risk tolerance and meet your needs.

The top three investing possibilities in India are shown below:

Direct Equity

Direct equity, sometimes known as stock investing, is by far the most powerful financial vehicle. When you acquire stock in a firm, you are purchasing a portion of the company’s ownership. You make a direct investment in the company’s expansion and development. To get the most out of your investment, you’ll need plenty of time and market knowledge. If not, direct equity investing is no better than speculating. Stocks are sold by publicly traded firms through recognized stock exchanges, and any investor with a Demat account and KYC authentication can purchase them. Long-term investments are best made with stocks. Because different economic and commercial factors influence equities, you must actively manage your assets. You must also be aware that the profits are not guaranteed, and you must be willing to accept the related risks.

Mutual Funds

Mutual funds have been around for decades and are becoming increasingly popular among millennials. A mutual fund is a type of investment vehicle that collects money from a variety of individual and institutional participants who share a common investment goal. The pooled funds are managed by a financial professional known as a fund manager, who invests in securities and assets to provide investors with the best possible returns. Mutual funds are categorized into three categories: equity, debt, and hybrid funds. Debt mutual funds invest in bonds and papers, while equity mutual funds invest in stocks and equity-related instruments. Hybrid funds invest in both debt and equity securities. Mutual funds are flexible investment vehicles that allow you to start and stop investing whenever you want. Investing in mutual funds is something that anyone can do. You don’t need time or knowledge to invest in mutual funds because the fund manager manages the portfolio and all you have to do is put money in. However, it is best to invest in funds that have risk levels and objectives that are similar to yours. The returns are not guaranteed because they are entirely contingent on market fluctuations. It’s important to remember that a fund’s previous success does not guarantee future results.

Fixed Deposits

Fixed deposits are a type of investment offered by banks and financial institutions in which you deposit a flat sum for a specific period and earn a set rate of interest. Fixed deposits, unlike mutual funds and stocks, provide comprehensive capital protection and guaranteed returns. However, you make no concessions in terms of the returns, which stay unchanged. For the cautious investor, fixed deposits are appropriate. Fixed deposit interest rates fluctuate with economic conditions and are set by banks in response to the RBI‘s policy review decisions. Fixed deposits are normally locked-in investments, but they are frequently used as collateral for loans or overdrafts. There is also a tax-saving fixed deposit option with a 5-year lock-in period.