What is an Investment?

In financial words, an investment is an asset purchased to generate income in the future, or we can say, investments are considered avenues to grow ones’ wealth. For example, if you buy an apartment, it can generate income for you in two ways:

• If you sell it at a higher price, you will earn a profit due to capital appreciation or capital gain.
• If you rent it out, you will have an additional income (passive income)

A point to consider

The safety of the principal amount is a significant point of concern while investing, as risk and reward move proportionately with it. Hence, if you go for low-risk investments, the returns will be less. However,  if you are prepared to take higher risks, you can aspire for higher returns.

What are the three types of investments?

There are various types of investments or asset classes from which a person can choose. Each asset class has distinct characteristics, risks, and benefits.

Growth investments

These are apt for investors who are willing to lock their investments for a prolonged period and can withstand market ups and downs. For example, youths ( 22-35 years) can invest in the market for a lengthy tenure.

Shares and Mutual Funds

Stocks and mutual funds are considered as growth investment because they can grow the value of your principal amount and help to build wealth, provided you remain invested for a prolonged period. But, remember, there is also a risk associated with shares. Stock prices are volatile and can fall below the purchase cost, which means you will not earn any profit, instead, your principal amount will decrease and you will be in loss.  Thus, people who can withstand such ups and downs should invest in shares.

Property

The property also comes under a growth investment because the prices of houses and lands can rise substantially over a prolonged tenure providing a high return. However, it also carries a risk of loss as the value of a property can sometimes depreciate too. 

Defensive investments

These investments are more focused on generating stable income and are considered less risky than growth investments as there is no loss of the principal amount involved. However, they provide low returns.

Cash Equivalents

It includes the balance in savings accounts and fixed deposits. They provide the lowest possible returns of all the investment types.

The cash equivalents don’t offer any chance of capital gain. However, they generate regular income and reduce the fear of risk elements in an investment portfolio.

Gold

Gold is considered a haven or defensive investment in India unless there is some major crisis in the world economy due to which gold prices fall drastically.

Fixed interest investments

Bonds

A bond is a loan that you lend to the company or government, which means when you purchase a bond, you are permitting the bond issuer to borrow your money and return it with a fixed interest.  The issuer pays interest once or twice a year, and the principal amount is paid at the maturity date of the bond. 

As compared to stocks, bonds are considered safer; however, they also generate low returns. The significant risk involved with a bond is that the issuer can default. Hence, government bonds and corporate bonds are considered the safest — for example, RBI (Reserve Bank of India) Taxable Bonds.

Bottom line

Make your investment wisely after going through all the terms and conditions whether you choose to invest in mutual funds, stocks, property, or bonds. After investing, it is essential to go through market updates so that you can decide the right time to exit, which means you should be able to make a considerable profit from the invested source when you sell it.