What are INVESTMENTS: Meaning, Types, and Why You Should INVEST?

You’ve heard the term Investments a lot. Especially, during the pandemic, everyone who had extra money in their bank accounts thought of investing that in different financial instruments.

The most common type of investment that you might have heard of is FD, they are our parents' favorite!

But, do FDs really grow your money?

In this article, we’ll explore other types of Investments and try to understand that why FDs are not an ideal option to invest in.

What are Investments?

An Investment involves putting capital to use today in order to increase its value over time.

(Source: Investopedia.com)

For example, Alex invests Rs.10,000 every month for 15 years in Mutual Funds hoping that the money he has invested will generate more money.

The total amount invested by him will be Rs.18,00,000 (Rs.10,000x12x15) whose estimated value after 15 years will be Rs.50,45,760 (based on an expected return of 12% p.a.).

Types of Investments:

Stocks: When establishing an organization, owners issue equity shares to investors in return for capital, which is used to operate and expand the firm.

Shares of a company are traded via the BSE and NSE provided that you have a Demat account.???

Mutual Funds: It is a type of Investment consisting of a portfolio of Stocks, Debt, or Both.

The money is not directly invested by us but a professional of the Mutual Fund Company (Asset Management Company) does the work for us. These professionals take all the decisions regarding the stocks to invest in, what proportion of amount should be invested, etc. In return, they charge a nominal fee (expense ratio) from the amount that we invest.

No Demat account is required to invest in Mutual Funds and you can start from as low as Rs.100 per month.

Public Provident Fund (PPF): It is a type of Investment wherein, you invest your money for a period of 15 years. The period can be further extended in blocks of 5 years, at your discretion. The minimum amount that you have to invest in a year is Rs.500 and the maximum you can invest is Rs.150,000. The rate of return is around 7% p.a.?

Investing in PPF gives you a tax benefit under section 80C up to a limit of Rs.150,000.?

Corporate Bonds: Bonds are issued by the companies to take a loan from the investors and give a fixed rate of return (interest) on the amount borrowed.

Gold: Another most common type of Investment for us; Gold has given satisfactory returns and is considered to be the safest investment.?

Physical Gold comes with the problems of storage and theft. To eliminate these problems, invest in Sovereign Gold Bonds issued by the RBI. Not only it is safe, but it also provides an annual interest of 2.5%.

To know more about SGBs, check out my article on it.

Real Estate: One of the major ways to earn money from Real Estate is to become the landlord of a rental property. The corpus of money required for this type of investment is huge.

What Eats your Investments?

The answer is Inflation.?

Inflation means a rise in the price of a commodity. For example, 2 years ago you bought chocolate for Rs.100. Today, you have to pay Rs.106 to buy that same chocolate.

Do FDs really Grow your Money?

The rate of Inflation in India is 6-7%. Whereas, the rate of return Fixed Deposits provide is 5% p.a.

This means that if have you invested Rs.100 in FD, this amount will not become Rs.105 (Rs.100+5%), but it will decrease to Rs.99 (Rs.100-1%)*

*Assuming the inflation rate to be 6%, (5%-6%, net -1% return on Investment).

The other types of Investments such as Stocks and Mutual Funds give you a return of at least 12% p.a., beating the inflation.

What type of Investment is Good for Beginners?

This decision should be taken after considering the factors such as your age, your risk-bearing capacity, the amount of money you have, etc.

For example, equity investments are risky. So, if a person is 20 years old, he should invest in stocks. Even if he loses money, he will be able to earn more.

Whereas, it is not advisable for a 60-year-old human to invest money in the stock market. It is better for this person to PARK his money where there is little or no risk.

By seeing the Pyramid below, you’ll easily understand the risk and the amount required for each type of investment.

For example, it is least risky to invest in Real Estate but the amount of capital required is colossal. Whereas the amount required to invest in Cryptos is less but it is the riskiest of all the Investments.

(Source: Ankur Warikoo) Click on the image to check out his video.

What is the 50:30:20 Rule?

This rule states that your income in hand should be divided in the ratio of 50:30:20. Where 50% of your income will go towards your needs, 30% will go towards your wants, and 20% you will invest.

For example, if you earn Rs. 50,000, 50% of 50,000 will be kept aside for your needs such as bills, food, etc. Rs.15,000 (30% of Rs.50,000) you will spend on your wants such as clothes, smartphones, vacations, etc. And the remaining Rs.10,000 (20% of Rs.50,000) will be invested.

Why is Investing better than Saving? And why you should Invest?

The meaning of saving your money is to keep it in a safe place, like a savings account. On the other hand, Investing means putting your money in different financial instruments (risky or safe).

When you save your money, you won’t be able to surpass inflation as the interest rate of a savings account is 2-3% p.a. While Investing you’ll be able to accomplish this goal.

Savings are meant for short-term goals like buying clothes or a gadget whereas Investing will help you to fulfill your long-term goals like building capital for retirement.

Investing will multiply your savings by giving you a substantial amount of profit.

To Conclude, start Investing as soon as possible. Your personal capital will give you the financial freedom that you’ve always wanted. And this can happen only by Investing consistently and with sheer determination!?