What is Investment? Meaning, Importance and Types

Picture this: You've just received your first salary, and while treating yourself to that long-awaited smartphone feels tempting, a small voice in your head wonders if there's a smarter way to use this money. That's what is investing. Let’s learn what is investment, its meaning, and importance and how can you start your investment journey.

Definition of Investment

When you invest, you're essentially putting your money to work. You can think of it like planting a mango tree in your backyard, you plant a sapling or sow a seed today and take care of it, knowing that it will bear fruit in the future. Similarly, investment means committing your resources (usually money) to assets or ventures that have the potential to grow your wealth and generate returns over time.

Why Should You Invest? 

You would have heard how your parents or grandparents bought their house for a few lakhs, and today it's worth a crore. That's the power of investing. With rising expenses and the ever-climbing cost of living in India, keeping your money idle in a savings account is watching inflation eat away at your hard-earned cash. When you invest, your money works to help you build wealth, beat inflation, and achieve your life goals like buying a house, funding your child's education, or your startup idea.

Types of Investments

Investing options come in a variety of hues and colours. You can choose where to invest based on your risk-taking ability and the time left to achieve your investment goal.  Here's what's available for you to choose from:

Fixed Deposits (FDs): The classic Indian favorite investment due to the fixed nature of returns from FDs. Banks, Non-Banking Financial institutions, and other institutions like post offices allow you to open a Fixed Deposit with guaranteed interest payment and repayment of principal at the end of the period of FD. This form of investment works well for those who like lower levels of risk and look for guaranteed returns.

Mutual Funds: Think of these as a tiffin service for investments. You contribute money, and a professional fund manager manages your money and makes investment decisions on your behalf. Based on the nature of the mutual fund, it could invest in stocks, bonds, commodities, foreign equities, or a combination of all of them.

Stocks: This is buying a small piece of companies you believe in. When the company grows, so does your investment and you could also earn passive income in the form of dividends.

Real Estate: The traditional Indian go-to investment. From apartments in upcoming areas to commercial spaces in city centers you could choose to invest in real estate either for your use or as an investment. However, investments in real estate are not liquid.

Government Schemes: Options like PPF and Sukanya Samriddhi Yojana offer secure returns with tax benefits.

How Does an Investment Work?

Let's break this down with two simple examples you see around you every day.

First, think about your local kirana store. When it started, it might have been just a small shop selling basic groceries. The owner probably invested ₹1-2 lakhs initially to stock up supplies and set up the shop. Over time, they reinvested their profits to add more products, maybe set up air conditioning, started home delivery services, and even opened another branch. Today, that same shop might be worth ₹25 lakhs. That's an investment at work – putting in money and watching it grow through business expansion.

Or consider your friend who bought a 2BHK apartment in an upcoming area in a metro city like Bangalore for ₹45 lakhs in 2010. They put in their savings, took a home loan, and waited. As tech parks came up nearby, metro connectivity improved, and more facilities developed in the area, that same apartment is worth ₹95 lakhs today. Plus, they earn ₹25,000 monthly in rent. This is another way investment works, through property appreciation and rental income.

Different investments work in different ways:

• Equity investments grow through company profits and market perception

• Debt investments earn through regular interest payments

• Real estate generates rental income and appreciates in value

• Mutual funds combine these methods for a balanced approach

Importance of Investments

In today's India, where a simple movie outing can cost ₹1,000, investing isn't just important, it is a must-do. It can help you in numerous ways as listed below. 

• Stay ahead of rising prices 

• Create a safety net for medical emergencies

• Build a corpus for major life events

• Generate passive income streams

How to Start Investing?

Starting your investment journey is made easier thanks to the advances in the digital and financial sectors. Here's how:

1. Begin with your goals - Whether it's saving for an MBA or your dream wedding

2. Get your KYC done (it's as essential as your Aadhaar card)

3. Create an emergency fund in a liquid investment like an FD/liquid mutual fund.

4. Start small - Even ₹500 monthly in a mutual fund SIP is a good beginning

5. Research and understand where you're putting your money

6. Consider starting with a mix of safe options like FDs and growth-oriented choices like mutual funds

Benefits of Investing

The benefits of investing stretch far beyond just watching your bank balance grow. Here's what you're gaining:

Financial Independence: Imagine not having to check your account balance before making every purchase. Smart investing helps you build that freedom, one investment at a time. Whether it's planning a dream vacation or handling unexpected expenses, your investments work as your financial backbone.

Multiple Income Streams: Think of it as having multiple taps of water running into your tank. Your salary is one stream, but your investments can create several others like dividends from stocks, rental income from property, or interest from bonds. During tough times, like the recent pandemic, these extra income streams can be a real lifesaver.

Wealth Creation: Unlike your salary, which requires you to work actively, investments create wealth while you sleep due to the benefits of compounding action.

Tax Benefits: Many investments in India come with tax advantages. From ELSS mutual funds to PPF to Tax Saver Fixed Deposits, you save taxes along with building your wealth.

Protection Against Inflation: Remember how a plate of paneer butter masala that cost ₹120 five years ago now costs ₹250? That's inflation eating into your money's value. Smart investments help your wealth grow faster than the rising costs of living.

Legacy Creation: Your investments can benefit not just you but generations to come. Whether it's funding your children's education or leaving behind a substantial inheritance, investing helps you create a lasting financial legacy.

Learning and Growth: As you navigate through different investment options, you develop crucial skills like financial planning, risk management, and market understanding. These skills benefit not just your investments but your overall financial life.

Remember, investing isn't just about getting rich quickly it's about growing your wealth steadily. Start early, stay consistent, and watch your money grow