The importance of Investment- Three golden rules
In this modern era, money plays an important role in one’s life. In order to overcome the problems in the future, they have to (investment) invest their money.
Investment of hard-earned money is a crucial activity of every human being. Investment is the commitment of funds which have been saved from current consumption with the hope that some benefits will be received in the future. Thus, it is a reward for waiting for money.
Savings of the people are invested in assets depending on their risk and return demands. You have to make sure Safety of money, Liquidity, the available avenues for investment, various financial institutions, etc.
Investment is a purchase of a financial product or another item of value with an expectation of favorable future returns. Investing is a serious subject that can have a major impact on an investor’s future well-being. Investors have a lot of investment avenues to park their savings.
The risk and returns available from each of these investment avenues differ from one avenue to another. Even if the person does not select specific assets such as stock, investments are still made through participation in a pension plan, an employee saving programme or through the purchase of life insurance or home.
In India, many investment avenues are available where some are marketable and liquid while others are non- marketable and some of them are highly risky while others are almost riskless. The investor has to choose Proper Avenue depending upon his specific need, risk preference and returns expected. Different investment avenues are as follows:-
Safe/Low-Risk Avenues: Savings Account, Bank Fixed Deposits, Public Provident fund, Government & Securities, etc.
Moderate Risk Avenues: Mutual Funds, Life Insurance, Debentures, Bonds. High-Risk Avenues: Equity Share Market, Commodity Market, Forex Market.
Traditional Avenues: Real Estate, Gold/Silver.
Investment is the employment of funds with the aim of achieving more income or growth in value. The essential quality of an investment is that it involves ‘waiting’ for a reward. It involves the commitment of resources, which have been saved or put away from current consumption in the hope that some benefits will add in the future. The term investment has been further categorized by financial experts and economists. It has also often been confused with the term Speculation.
Investment is the allocation of monetary resources to assets that are expected to yield some gain or positive return over a given period. These assets range from safe investments too risky investments. Investments in this form are also called “Financial Investments”.
One needs to invest to and earn a return on your idle resources and generate a specified sum of money for a specific goal in life and make a provision for an uncertain future. One of the important reasons why one needs to invest wisely is to meet the cost of inflation. Inflation is the rate at which the cost of living increases. The cost of living is simply what is the cost to buy the goods and services you need to live. Inflation causes money to lose value because it will not buy the same amount of a good or service in the future as it does now or did in the past.
The sooner one starts investing, the better. By investing early you allow your Investments more time to grow, whereby the concept of compounding increases your income, by accumulating the principle and the interest or dividend earned on it, year after year.
The three golden rules for all investors are:-
- Invest early
- Invest regularly
- Invest for long-term and not for short-term
It will also help to understand the investor’s facets before investing in any of the Investment tools and thus to scrutinize the important aspects of the investors before investing that further helped in analyzing the relation between the features of the products and the investor’s requirements.
Why investment is important?
Investments are both important and useful in the context of present-day conditions. Some factors that have made investment decisions increasingly important are:
- Longer life expectancy or planning for retirement
Investment decisions have become significant as people retire between the age of 55 and 60. Also, the trend shows a longer life expectancy. The earnings should, therefore, be calculated in such a manner that a portion should be put away as savings. Savings by themselves do not increase wealth; these must be invested in such a way that the principal and income will be adequate for a greater number of retirement years. The importance of investments decisions are further enhanced by the fact that there is an increasing number of Women working in organizations. These women will be responsible for planning their own investments during their working life so that after retirement they are able to have a stable income.
- Interest Rates
Another aspect which is necessary for a sound investment plan is the level of interest rates. Interest rates vary between one investment and another. These may vary between risky and safe investment s; they may also differ due to different benefit schemes offered by the investments. These aspects must be considered before actually allocating any amount. A high rate of interest may not be the only factor favoring the outlet for investment. The investor has to include in his portfolio several kinds of investments. Stability of interest is as important as receiving a high rate of interest.
Inflation has become a continuous problem since the last decade. In these years of rising prices, several problems are associated coupled with a falling standard of living. Before funds are invested erosion of the resources will have to find an outlet which will ensure the safety of principal. Besides high rates of interest & safety of principal, an investor also has to always bear in mind the taxation angle. The interest earned through investment should not unduly increase his taxation burden.
Another reason why investment decisions have assumed importance is the general increase in employment opportunities. The employment opportunities gave rise to both male and female working force. More incomes and more avenues of investment have led to the ability and willingness of working people to save and invest their funds.
- Investment Channels
The investor in his choice of investment will have to try to achieve a proper mix between the high rate of return and stability of return to reap the benefits of both. Some of the instruments available are Corporate Stock, Provident Fund, Life Insurance, Fixed Deposits in the Corporate Sector, and Unit Trust Schemes, etc.
- Increasing Rates of Taxation
Taxation is one of the crucial factors in any country, which introduces an element of compulsion in a person’s savings. There are various forms of savings outlets in our country in the form of investments which help in bringing down the tax level by offering deductions in personal income.
Types of Investments
There are many types of investments and investing styles to choose from. Mutual funds, ETFs, individual stocks and bonds, closed-end mutual funds, real estate, various alternative investments and owning all or part of a business are just a few examples.
Buying shares of stock gives the buyer the opportunity to participate in the company’s success via increases in the stock’s price and dividends that the company might declare. Shareholders have a claim on the company’s assets in the event of liquidation but do not own the assets.
Holders of common stock have voting rights at shareholders meetings and right to receive dividends if they are declared. Holders of preferred stock don’t have voting rights but do receive preference in terms of the payment of any dividends over common shareholders. They also have a higher claim on company assets than holders of common stock.
Bonds are debt instruments whereby an investor effectively is loaning money to a company or agency (the issuer) in exchange for periodic interest payments plus the return of the bonds face amount when the bond matures. Bonds are issued by a corporation, the federal government plus many states, municipalities and governmental agencies.
A typical corporate bond might have a face value of INR 71000 ($ 1,000) and pay interest semi-annually.
Interests on these bonds are fully taxable, but interest on municipal bonds is exempt from federal taxes and may be exempt from state taxes for residents of the issuing state. Interests on Treasuries are taxed at the federal level only.
Bonds can be purchased as new offerings or on the secondary market, just like stocks. A bond’s value can rise and fall based on a number of factors, the most important being the direction of interest rates. Bond prices move inversely with the direction of interest rates.
- Mutual funds
A mutual fund is a pooled investment vehicle managed by an investment manager that allows investors to have their money invested in stocks, bonds or other investment vehicles as stated in the fund’s prospectus.
Mutual funds are valued at the end of the trading day and any transactions to buy or sell shares are executed after the market close as well.
Mutual funds can passively track stock or bond market indexes such as the S&P 500, The Barclay’s Aggregate Bond Index and many others, other mutual funds are actively managed where the manager actively selects the stocks, bonds or other investments held by the fund. Actively managed mutual funds are generally more costly to own. A fund’s underlying expenses serve to reduce the net investment returns to the mutual fund shareholders.
Mutual funds can make distributions in the form of dividends, interest and capital gains. These distributions will be taxable if held in a non-retirement account. Selling a mutual fund can result in gain or loss on the investment, just as with individual stocks or bonds.
ETFs or exchange-traded funds are like mutual funds in many respects but are traded on the stock exchange during the trading day just like shares of stock. Unlike mutual funds which are valued at the end of each trading day, ETFs are valued constantly while the markets are open.
Many ETFs track passive market indexes like S7P 500, the Barclay’s Aggregate Bond Index, and the Russell 2000 index of small-cap stocks and many others.
In recent years, actively managed ETFs have come into being, as have so-called smart beta ETFs which create indexes based on “factors” such as quality, low volatility, and momentum.