What is an investment and what is its purpose?

The investment can be defined as a way to generate wealth in the future. It must be noted that the assets purchased today will give a profitable income in the long run. Find out more about various types of investments and the purpose they serve.
Created On: Mar 18, 2020 17:59 IST
Modified On: Mar 18, 2020 18:41 IST
Investment and its purpose
Investment and its purpose

Investment is a kind of act where assets are purchased which helps an individual to earn profit in the future. In other words, the investment can be defined as a way to generate wealth in the future. It must be noted that the assets purchased today will give a profitable income in the long run. The assets purchased today can be sold at a higher price in the future to earn a profit. It can also be defined as investing your money to make more money. The investor invests his money either in security, bonds, etc. in the hope of accumulating additional capital in their bank accounts. An individual can go for different types of investments. Broadly, there are two types of investment products:

1- Financial Assets

2- Non-financial Assets

Financial assets are non-physical assets and their value is determined through a contractual claim, such as bank deposits, bonds and stocks. Financial assets may be traded on financial markets. These are further classified into:

a- Fixed income products which include bank FD, PPF, etc.

b- Market linked products which include mutual funds, stocks, etc. 

Non-financial assets are physical assets such as real estate, vehicles, gold, etc. and also includes all intellectual properties, such as patents and trademarks. These are mostly preferred by the people while making an investment. 

Purpose of Investment:

Many of us wonder why investment is necessary? The simple answer to this question is financial security in the long run. The more early you invest the more profit you can avail out of your money.  This is because your money will get a sufficient amount of time to grow.  Investing helps in enhancing your employment income. In addition to this, you can also buy the things you want without thinking too much provided you have invested your money.  Investments can be long-term or short-term depending upon your requirements. For example: if you are planning to buy a home, then you will look for long-term investment plans and if you are planning to buy a laptop, then you will look for short-term investment plans. 

Different individuals have different purposes of investing depending upon their life goals. Some people invest for their retirement while others invest in a luxurious lifestyle. Thus, the purpose of investment varies from person to person. However, the key idea behind the investment is the same i.e., long term capital gains. 

Different types of investment plans available in India: 

1- RBI Taxable Bonds: The government of India has come up with 7.75% savings taxable bonds for a period of 7 years. The bond is issued to the investor in the form of a Demat and is accredited to the Bond Ledger Account (BLA). Additionally, as proof of the investment, a Certificate of Holding is provided to the investor.  

2- Public Provident Fund (PPF): When it comes to investments, PPF is one of the most popular investment options among Indians. Income Tax relaxation can be availed under this investment option subjected to a limit of INR 1.5 Lakhs a year. In addition to this, interest received on PPF and the amount received after maturity are exempted from tax under Income Tax Act. The tenure for PPF is of 15 years. 

3- Bank Fixed Deposit: In this investment option, the return earned is fixed and is known to the investor at the time of investing. The minimum period for investing in the fixed deposits in the bank is 7 years and the maximum period is of 10 years. However, interest received on band FDs is taxable. 

4- Direct Equity: In direct equity, an investor can choose the number of shares of a particular company to be bought. An investor must note that direct equity is a volatile asset and the investment is at risk. 

5- Equity Mutual Funds: It consists of the investment of different investors who share a common financial goal. A fund manager manages the investments of different investors and invests it into other investments like shares, bonds, etc. However, it must be noted that mutual funds are subject to market risks. 

6- Debt Mutual Funds: Debt mutual fund is also known as fixed-income fund and is less risky than the equity mutual funds. Here, an investor invests his money in securities such as corporate bonds, government securities etc. which in turn generates fixed interest.  

7- Senior Citizens Savings Scheme (SCSS): In SCSS, an individual above the age of 60 years can invest and avail the benefits of this scheme. The scheme can either be availed of from post office or from public banks for a period of 5 years and can be extended upon maturity for a period of 3 years. The interest generated is fully taxable.  

These were some of the investment options available in India. An individual must read all the terms and conditions before investing in any kind of investments. Individuals mostly invest to get profitable capital in the long run. Investments also help in levelling up one’s way of living in addition to financial security. 

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