Importance of Investment in India: Why and Where to Invest?
The process of putting money into an asset with the hope of seeing it increase over a predetermined period is called investing. Investments can be made using a range of strategies, including mutual funds, ULIPs, pension plans, life insurance coverage, and others. Buying financial assets to earn income from them later on or resell them at a higher price to make a profit is a basic example of an investment. Read further to find out more about "what is an investment," encompassing its types, goals, advantages, and how to pick the best option.
Table of Contents
Why Should You Invest?
Investing means putting your funds in an approach that has the possibility of producing income or an increase in value. The amount of investment required will increase as responsibilities increase. Some of the primary objectives of investing are as follows:
Invest to safeguard your funds: Holding your money in an interest-bearing asset can protect it from inflation and wasteful expenditure. Investments ensure that your money will remain worth the same over the years and help you keep up with price increases.
Increase your wealth: The only way to make the funds you have work for you is to invest. Investing permits interest to be earned on your money, which may then be reinvested to produce even more interest.
Establish emergency funds: Setting aside money for unforeseen costs will help you get through life's bumps. It is crucial to save money for tough times when you are financially secure. Having these tools at your disposal might help you deal with any difficulties that may arise.
Assure a stress-free retirement: You will not have an ongoing source of revenue that you can rely on after your working years have ended. Making a retirement plan will provide you with the financial stability you need to live a stress-free retirement.
Optimize savings: You may minimize your taxable earnings by investing in tax-saving programs such as PPF, NPS, ULIPs, life insurance policies, etc. You can also receive a tax-free return on these assets when they mature. Consequently, you may significantly reduce your total tax liability by making the correct asset investments.
Invest in your aspirations: You probably won't be able to purchase a home or a car for your family with your pay alone. Nevertheless, you can accomplish all these objectives within a few years by making a minimal financial investment.
Inflation and the Importance of Investment
The simplest definition of inflation is an increase in the cost of goods and services. It reduces your ability to buy and decreases the worth of your money. You may purchase fewer goods with the same amount of money as the rate of inflation rises. The inflation rate is beyond your control. The more money you have now, the more you can buy the more of the products you plan to buy later if you want to keep ahead of inflation. Money, however, does not expand by itself. Your money has to generate profits if it is going to expand. You must invest if you want to make money. Consequently, investments are necessary to tackle inflation. If inflation is at 8%, you will require 8% more money to buy the identical item the following year. This is how Rs 1 lakh lost value over eight years because of 8% inflation:
Amount in today | Rs 1,00,000 |
After 1 year | Rs 92,000 |
After 2 years | Rs 84,640 |
After 3 years | Rs 77,869 |
After 4 years | Rs 71,639 |
After 5 years | Rs 65,908 |
After 6 years | Rs 60,636 |
After 7 years | Rs 55,785 |
After 8 years | Rs 51,322 |
Earning returns that beat inflation is crucial because, without it, the money you save now would not be enough to pay for goods and services later.
How does Investment Work?
An asset purchased to let its value rise over time is called an investment. The wealth can be earned through investing for a variety of reasons, like to cover income gaps, get ready for retirement, or fulfill responsibilities like loan repayment, tuition, or the buying of more assets. Understanding the significance of investments, comparing savings and investment programs, and knowing which tools to employ are all necessary to reach your financial objectives. There are two ways that investments might generate revenue.
First, you could potentially earn money if you invest in an accessible asset.
Second, you are going to earn income by accumulating profits if you invest in a return-generating plan.
Thus, investing is the process of allocating your funds to assets or items that will appreciate or produce income over time.
Investment Alternatives in India
There are many distinct investment alternatives available to you. It is imperative that you make sure you are only investing in options that meet your needs and are within your risk tolerance. The top seven opportunities for investment in India are as follows:
Direct Equity
The most powerful investment vehicle is most likely direct equity, sometimes known as stock investing. Buying a share in an organization entitles you to a percentage of its ownership. You contribute directly to the expansion and advancement of the business. To get maximum value out of your investment, you need to have sufficient time and market knowledge. Otherwise, direct equity investments are essentially just speculation. Any investor who has a Demat account and has completed KYC verification can purchase stocks from publicly traded firms through reputable stock exchanges. For long-term financial planning, equities are the best choice. Since stocks are influenced by several business and economic events, you must actively manage your investments. Furthermore, you must be prepared to take on the risks involved and realize that the profits are not assured.
Mutual Funds
Millennials are increasingly using mutual funds, which have been around for a few decades. A mutual fund combines the financial holdings of multiple institutional and private investors who have a common financial goal. A financial expert known as the fund manager oversees the pooled amount and makes investments in securities and other assets to bring investors the best possible returns. The three primary categories of mutual funds are debt, equity, and hybrid funds. Debt mutual funds invest in securities like bonds and papers, whereas equity mutual funds invest in stocks and equity-related instruments. Hybrid funds make transactions in both debt and equity products. The flexibility of mutual funds allows you to start and stop investing whenever it's most convenient for you. Anyone may think about making an investment in mutual funds. Investing in mutual funds doesn't require you to have time or expertise because the fund manager handles the construction of the portfolio; all you need to do is make an investment. However, it's advised to only make investments in funds that coincide with your goals and willingness to take risks. Due to their complete reliance on market fluctuations, the returns are not guaranteed. A fund's historical performance does not guarantee future returns.
Fixed Deposits
Banks and other financial organizations provide fixed deposits as an investment option where you can deposit a lump sum for a set amount of time and receive a specified interest rate. In comparison to equities and mutual funds, fixed deposits offer both assured returns and overall investment protection. You give up on the returns, though, because they don't change. The best option for the cautious investor is a fixed deposit. The rates of interest on fixed deposits are established by the banks depending on the RBI's policy review decisions and vary according to the state of the economy. Although fixed deposits are usually locked-in investments, they can frequently be used as collateral for loans or overdraft protection. Furthermore, there is a tax-saving fixed-interest option with a five-year lock-in.
Recurring Deposits
Another fixed tenure investment is a recurring deposit (RD), which enables investors to make a fixed monthly investment for a predetermined period and earn a fixed rate of interest. RDs can be obtained from post office areas and banks. The organization providing the interest sets the rates. An RD allows investors to generate a corpus over a particular amount of time by making tiny periodic investments. RDs offer simultaneously guaranteed yields and total capital protection. RDs are advised for risk-averse investors, just like fixed deposits.
Public Provident Fund (PPF)
An investment vehicle that offers long-term tax savings and a 15-year lock-in period is the Public Provident Fund (PPF). It is given by the Indian government, and your investments are guaranteed by the government itself. The Indian government undertakes quarterly modifications to the interest rate provided by the PPF. When the investor withdraws their corpus at the end of the 15 years, they do so completely tax-free. PPF also permits loans and partial withdrawals upon the fulfillment of specific requirements. You may renew your investment in a five-year block upon maturity, and you have the option to take early withdrawals under certain conditions.
Employee Provident Fund (EPF)
Another investment instrument focused on retirement, the Employee Provident Fund (EPF), assists salaried individuals in receiving a tax credit under Section 80C of the Income Tax Act of 1961. EPF contributions are usually deducted as a percentage of an employee's monthly pay, and the employer matches the same amount. Additionally, the amount of money that is withdrawn from the EPF at maturity is completely tax-free. Each quarter, the Indian government determines the EPF rates, and your investments are safeguarded by the sovereign. Under the Voluntary Provident Fund (PPF), you can make contributions over the minimum amount required. You must be aware, though, that your EPF account cannot reach maturity until you retire, and you can only access your investments upon satisfying certain criteria.
National Pension System
An alternative for tax-saving investments that is relatively new is the National Pension System (NPS). Investors who register for the NPS plan can receive greater returns than PPF or EPF and will be obligated to stay locked in until they retire. The reason for this is that the NPS provides plan alternatives that also make investments in stocks. A part of the NPS's maturity corpus must be used to buy an annuity that will offer the investor a regular pension; the rest of the fund is not entirely tax-free. Only 40 percent of the total corpus can be taken out in one lump amount; the rest is invested in an annuity plan. NPS membership is mandatory for certain government employees.
Weighing Different Types of Investments
You can choose from a wide variety of investing possibilities. Before deciding to invest in any certain investment option, you have to analyze your needs and capacity for risk. Active and passive investments are the two main categories of investments. Active investing requires modifying your portfolio's assets at frequent intervals based on market and economic indicators. To engage in active investing, you must possess sufficient time and investment expertise. The best example of an active investment is an equity investment. On the other side, passive investing eliminates the need for active investment management. You invest and keep it for a specified period. Another name for it is the buy-and-hold strategy for investing. For people who are unable to handle their money due to time constraints, this investing plan is recommended. The key differences between active and passive investments are displayed in the following table:
Parameter | Active Investments | Passive Investments |
Suitability | Apt for people with an in-depth understanding of finances | Everyone |
Cost of investment | Higher as you trade securities in your portfolio | Lower as you buy and hold securities for long term |
Risk involved | Higher as you buy and sell securities | Lower as you hold securities for a long term |
Return potential | Higher | Lower |
How to Choose an Ideal Investment Option
Choosing an investment vehicle can be difficult for investors because there are so many options available. It's possible that you are uncertain of where to put your money if you are inexperienced in investing. Financial losses could result from making an incorrect investment decision, which is something you would not want. Therefore, we recommend you to consider the factors that follow while making investing decisions:
Age
Young investors often have longer investing horizons and fewer obligations. You may make investments in cars with a long-term perspective and continue to grow your investment as your income increases over time if you have an extended professional life ahead of you. For youthful investors, equity-oriented assets such as equities mutual funds would therefore be a preferable choice than fixed deposits. But senior investors can opt for safer options, such as FDs. As you age, you have to adjust your investments.
Goal
Investment objectives might range from short-term to long-term. For short-term goals, you should choose a safer investment; for long-term objectives, you ought to think about the large potential return of stocks. You can also have some standards that are both negotiable and non-negotiable. Guaranteed-return investments would be an excellent choice for non-negotiable objectives like a down payment on a home or the education of children. Investing in equities or equity mutual funds can be beneficial if the goal is negotiable, meaning it may be postponed by a few months. Remember that if these investments do well, you may reach your objectives before your expectations.
Profile
Your profile should also be taken into account while selecting an investing option. Relevant factors include your income and the total amount of dependents you support. Young investors with plenty of free time might not be able to take on equity-related risks if they also have family responsibilities. In a similar vein, an older person with an adequate source of income and no dependents might choose to make investments in stocks to enhance their profits. For this reason, it's argued that when it comes to investing, there is no one-size-fits-all solution. To maximize returns, investments must be properly planned and carefully selected. The different potential investments discussed in this article have been outlined in the following table:
Investment | Type | Return Potential | Risk Level | Potential to Beat Inflation |
Direct Equity | Active | Very high | High | Very high |
Mutual Funds | Both active and passive | Moderately high | High | Very high |
Fixed Deposits | Passive | Moderately low | No risk | High |
Recurring Deposits | Passive | Moderately low | No risk | Low |
PPF | Passive | High | No risk | Low |
EPF | Passive | High | No risk | Moderately high |
NPS | Both active and passive | Moderately high | Moderate | Moderately high |
Planning Your Investments
Choosing the most suitable investment for your needs and profile is the initial step in investment planning. When you are planning your investments, have the following points in mind:
Make thoughtful investing choices after conducting sufficient research.
Avoid falling into schemes that promise large rewards quickly.
Periodically review the stocks and mutual funds you have invested in.
Think about how your investment returns will be affected by taxes.
Stay careful of complicated resources that you cannot understand and keep things simple.
What is the Best Time to Invest?
As soon as feasible, you should begin making your investments. Time is money, especially when it comes to investing. You will get higher returns on your investments the earlier you start and the longer you stay invested. Consider the example that follows. Assume you and your brother, who is now 35 years old, begin investing Rs 1 lakh a year when you reach 25 and keep doing so until you are 58. Let's say you both invest in a plan that yields 10% annual returns. When your investments mature, let's compare how they stack up against each other:
Age | You (25 years) | Brother (35 years) |
25 | Rs 1,10,000 |
|
26 | Rs 2,31,000 |
|
27….. | Rs 3,64,100 |
|
…..35 | Rs 20,38,428 | Rs 1,10,000 |
36 … | Rs 23,52,271 | Rs 2,31,000 |
… | .. | … |
… 56 | Rs 2,21,25,154 | Rs 78,54,302 |
57 | Rs 2,44,47,670 | Rs 87,49,733 |
58 | Rs 2,70,02,437 | Rs 97,34,706 |
The table above illustrates the significant disparity. Since you started early, you generated a lot more money than your brother. The horizon for your brother's investments is ten years shorter. While your brother did not fully utilize the potential of compounding, you did. Thus, it is best that you start investing as soon as possible.
Conclusion
You now know what an investment is, as well as the many plans and advantages. To get the best returns, start investing early. Pick the right investment plans, keep an eye on the assets you have invested, and see your money multiply. It's crucial to remember that market-linked investment plans are subject to loss risk because of market volatility. Therefore, before entering into an investment, it is best to consult with a financial advisor.
FAQ
Q1. What is investment?
Investing is the purchase of an item to increase wealth and preserve funds from appreciation or earned income. The primary objective of investing is to generate a profit over a specific amount of time or gain an additional source of income.
Q2. What are the three types of investments?
The three main types of alternatives to investing are cash equivalents, loans, and ownership. Such products are purchased to make money, make a profit, or do both.
Q3. How do investment plans in India work?
The system of categorization of investments in India between short-term and long-term segments affects their taxability. Short-term investments, such as mutual funds and recurring deposits, call for an asset to be kept for a period of one to three years. Anything greater than this is considered a long-term investment, including the National Pension Scheme, fixed deposits, insurance products, and the Public Provident Fund.
Q4. Why are investments important?
You might wonder why it's necessary to comprehend the idea of investing when you could concentrate on setting aside a larger portion of your salary for savings. A reserve fund can be established by setting up an amount of your monthly income, but it may not be adequate for supporting your family in circumstances of an emergency. Understanding "what is an investment" can help you see how investing your money can provide riches and assist you in achieving your objectives in life.
Q5. What are the main goals of investment?
Among the main goals of investing are:
Safeguarding and securing cash
Rapidly growing your funds
Obtaining a consistent and supplementary source of income
Lowering income tax obligations
Making retirement plans
Reaching financial objectives
Q6. How do I start investing?
The following four crucial factors should be taken into account if you want to invest profitably in India:
Determine the financial objectives you have
Diversify your investments.
Verify how long the investment will last
Conduct periodic reviews
Q7. Why invest when you can save money with zero risk?
The amount of risk you are prepared to accept when investing will determine how much your money grows. Two potential risks that can restrict saving are the lack of growth and the degradation of money as a consequence of taxes and inflation. People frequently wind up spending the money they have on hand as well. Therefore, investing can assist you prevent needless expenditures and protect your funds from inflation.
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