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An investment is an asset purchased in order to generate income or for capital appreciation. Investing is putting money to work. Investment into an asset means anything which puts money in your pocket.
Investing ensures present and future long term financial security. Not only does one end up with more money in the bank, demat account in the form of shares, mutual funds etc, but one also ends up with another income stream. Investing is the only way to create wealth and generate passive income. One of the ways in which an investment like stocks, mutual funds, bonds and ETF\’s provide income is in the form of dividend. Many investments pays dividend monthly, quarterly or annual distributions. This is a form of passive income which could ultimately replace one\’s paycheque.
Investing also helps in beating inflation. Inflation tends to eat into our savings and investment helps in beating inflation in the long run.
If an individual wants safe and secure instruments he should invest in short term instruments like fixed deposits, debt funds, recurring deposits. If an individual is looking at long term investments wherein he is looking to create a corpus, he should choose equity. People whoi like to take risks should go for equity because the risk-reward ratio is very high in equities. For individuals who are risk averse, going for fixed income instruments is the only good choice since he would have sleepless nights if the value of his investments were to go down.
Now coming to the investment products, the product chosen depends on a person\’s risk appetite, duration, financial goal, amount of investment etc. Let us now discuss different types of investments.
- Stocks- Investing in stock represents taking part ownership in a company. This is meant for those investors who are loking at double digit kind of returns in the long run. There are risks involved in stocks since the prices may fall owing to poor results, mismanagement in the company or downturn in the economy as a whole. But this is the only asset class where true wealth is created.
- Bonds- These are fixed income instruments which provide a consistent return in the form of interest. They have very low amount of risk as the chances of default are minimal. Although there have been recent cases of default by some companies like DHFL, IL&FS, they are mostly safe and secure.
- Commodities- These generally tend to move in opposite direction compared to stocks. It is a good way to diversify one’s portfolio. Examples of commodities couldf be wheat, corn, gold, silver etc.
- Real estate- This is one of the favourite asset classes of investors in India. Many people book a flat and put it on rent. But the problem with real estate is that it is an illiquid asset class and there are a lot of charges and taxes inviolved in buying and selling it.
- Mutual funds- This is an alternate method to investing in stocks particularly for those who do not have time and knowledge to track the markets. This does not give returns as high as direct equity but it is better than instruments which provide fixed income.
- Bank fixed deposits- This is the deposit made by an individual in a bank account which promises to pay back the account holder a fixed percentage of interest along with the principal amount. This has extremely low risk.
- Gold- This is considered as one of the safe havens and performs well when the equity markets tumble. It is an effective hedge against inflation.
An investor should invest in a mix of equity and debt. Lower the age, higher should be the exposure in equities and lower in debt instruments. Open your demat account with a broker and start investing to create a good corpus of wealth.
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