Investments

What is an investment?

An investment is nothing but buying of a certain asset / commodity which may become a source of wealth sometime in the future. This commonly refers to buying of stocks but actually it may be buying of anything that has a value which is expected to increase in the future and provide periodical benefits. It can also refer to investing time in doing something which might benefit you in the future, like reading this blog for example ;-)

Why invest?

Although one might think that their income and a savings account is sufficient for them to have a decent lifestyle, it may not be enough to sustain that lifestyle for a really long duration. You may need more money in the future due to unforeseen circumstances.

Savings accounts have low interest returns as compared to the returns made by investing. The greater growth potential of investing is primarily due to the power of compounding and the risk-return trade-off. So, in a nutshell, when you invest you're putting your existing money at work in order make more money out of it in the long run. One should always keep in mind their lifestyle goal and invest accordingly.

To conclude, investing will help you earn some extra money using the excess money you already have. This will increase your income (through dividends) and you'll be able to save more money which will financially secure your future.

Types of investments

In this section I'll try to explain to you three of the most popular (in my opinion) investment options in our country work.

Stocks or Shares

This is an ideal long-term investment option. When you buy shares of a company, you're essentially buying a part of the company itself. This entitles you to rightfully claim your part of the profits the company makes. The company gives the profits it makes in the form of dividend. The total amount of money you get off this depends on the total number of shares of the company owned by you.

Another way to earn money from shares is buy low and sell high. This means that you buy the shares of a company in bulk when the price per share is low and resell them all or some of them when the price per share increases.

You can find more information on how to actually buy and sell stocks here.

Mutual Funds

This has been quite a buzzword post demonetization in India. We've all heard over the course of the past two years that investing in mutual funds is beneficial but how does this concept work?

It is quite simple, remember how buying shares at a low price and selling them at a high price brings you a profit? Great, now the problem is that even the "low price" per share of some of the companies out there is actually pretty high. Some of them are so high that the common Indian person may not be able to afford them on their own. This is where the mutual fund investor comes into play.

The fund investor drafts their mutual fund policy and advertises it to gain some clients. The investor then takes a small amount of money from each of the clients. A small amount of money collected from a large number of clients provides the investor with a large amount of money which they can use to buy shares of some of the top performing companies. When the prices of the shares goes up significantly, the investor can sell their shares and divide the profits among the clients after deducting a service fee.

To know more about how to actually invest in mutual funds, I would recommend the readers to visit this link

Public Provident Fund (PPF)

PPF is a tax-free investment scheme offered by the Government of India. Many people use a PPF account to save money for their life post-retirement. So what is a PPF account and how does this scheme work?

The core working of this scheme is similar to a bank account but the minimum principal, interest rates and duration vary a lot. You can open a PPF for a duration of 15 years or you can extend it in 3 blocks of 5 years each. You have to make a monthly or yearly (your choice) deposit of money into this account without fail. The minimum yearly deposit amount is ₹500 and the maximum yearly deposit amount is ₹1,50,000.

The government decides a quarterly interest rate according to which you get your quarterly returns added to your account balance. Once the PPF account matures i.e. after 15 years, you get to withdraw all your money (including interest returns) at once. In this scheme, the returns gained due to interest are tax-exempted.

Find more information about PPF here.

To gain information about more investment options, I would highly recommend the readers to go through this link: Best Investment Options



Disclaimer:

1) This blog post provides personal finance educational information, and it is not intended to provide legal, financial, tax or any type of official advice.

2) None of the images used in this post are owned by me. They belong to their respective copyright holders.