What is Investment

What is Investment?

What is Investment? Why Investing? Where to invest?

What is Investment?

Investing The word heed by society but still overlooked by them, whose meaning depends upon the mindset of the person, but theoretical speaking the mindset developed in these people are due to their lack of knowledge in the field of Investing. For e.g. A farmer would invest by keeping the crops in storage for selling them when their demand & price increases & for shopkeeper investing might be buying the product in retail price & then selling the same at the market price. So, theoretically speaking all of them were always right about investing but the thing that makes the investment, part of our life is profit. The Profit that ruled the world from the era when we came into existence.

Profit is just a piece of the Investment & the one those who were able to learn & adapted to the Investment according to their needs were able to leave their mark on the world with their examples. Legendary Investor Warren Buffet said that “The process of laying out money now to receive more money in the future”. The main motto of Investing is to make your money to work in one or different types of investment vehicles in the hopes of growing your money over time.

Investment is not something that you will learn in 1 hour, day or months, it is like something that will go on till the day you are alive. It was there before we originated & will be there when we will leave this world.

It is something that everyone must do it but the one should know about it & how one should rest assured at the time of Inflation. Another word that defines why Investment is necessary for our life.

Why should one Invest? 

Let me start with a small example when we were young, the price, say ₹100 at which we used to get milk & the quantity of milk that we get today at the same price might have changed. The main cause of this might be the development of Nation, quality of milk & many more but the thing that affected this is INFLATION & to beat the inflation according to us the following reasons are the best that one could explain –

1.Wealth Creation – Inflation basically stops the growth of the wealth but Investing helps to the wealth to grow.  The return in the Investment allows the money to compound making money to earn from money & helps in creating wealth.

2. Return – As we have said earlier that the value of money will change over the decade. For e.g. value of ₹100 last year might be near to ₹95 this year, as the Indian Inflation rate for 2018 was 4.74% & because of which you lost your ₹5 but the return that we get from Investment helps in maintaining the purchasing/acquiring power.

3. Financial Goals – Everyone dream of having his/her own car, buying a new home, to provide financial support to their parents & children. The investment might help to reach/fulfil your financial goals.

But the factor that affects the mindset of the person, the thing that stops many from entering into Investment is RISK. In simple language, the risk is something that causes the variability in your Investment. We all know no investment in the world is risk-free not even your life is risk-free.

But with risk people have a very common assumption, higher the risk higher the return. But I believe in the derivatives market most of the times risk can be subsidized with smart techniques like value picking. It is the real success mantra of most of the Market greats. Example A buy a thing whose fair value is ₹100 at ₹110 and B buys a similar object whose fair value is ₹100 at ₹70. Who according to you is better equipped to handle the risk……… Of course, B because derivatives generally tend to follow a principle ‘Regression to Mean’. One just has to be smart enough to spot the upward or the downward slope towards the mean. The following is the trade-off graph taken from Google that shows the correlation between risk & return.

Image of Correlation between Risk & Return

Image of Correlation between Risk & Return

The risk can be decreased by planning but the risk is something that stirs the feeling of the Investor. As it is said by Mike Tyson, “Everyone has a plan till they got punched in the mouth”.

Where to Investment?

But for the easy understanding it can be summarized in 3 small but meaningful ways –

  1. Equity

  2. Bonds

  3. Cash Equivalents

  4. Mutual Funds

You can also invest in the above mentioned 3 ways by directly or indirectly with the help of mutual funds.

1. Equity – strong>Stocks or Equity or Shares are a piece of a publically traded company that holder owns. Companies generally raise money by taking Debt or selling part of their company. This process of companies selling some stake of their venture to raise money in order to fund their future operations. This may happen when company does not want to take debt. In return for this money people become part of the journey with the firm. These shares are issued in the form of Initial Public Offering come first of all in primary markets/IPO market.

2. Bonds – When companies do not wish to sell their stake, they need capital for short term they take loans from banks and if they need cash for long-term investments, they generally issue bonds, which are simply long-term loans. There are types of bonds, government bonds, company bonds, bonds issued by municipalities. Bonds pay holders interest in the form of coupon payments and full principal refund at maturity. Bonds are rated by a credit rating agencies. They are also commonly known as fixed income instruments.

3. Cash Equivalents –strong> Cash Equivalents ensure to protect your Investment and reduces the risk whereas also return & this model was not designed for fighting the Inflation & after the deduction of taxes, the rate of return is quite low which might not help to pace up with Inflation. For e.g. Savings Account, Certificates of deposits & People Providend Fund, etc.

4. Mutual Funds –When you don’t have time for trading or want to take less risk, then you gave some of your Investment to some
agencies/Institutions that are an active trader in the stock market. They use that money to buy stocks & provide a limited rate of return (that might depend upon MF scheme). According to us, the advantage that MF provide over others are due to liquidity, whenever you want to enter & whenever you want to exist. The 2nd thing that MF provide that attracts everyone is Diversification & the last but most noticed factor is that who will handle our Investment? Don’t Worry, it is handled by well renowned & most respected Investor of the stock market. For eg.-ADITYA BIRLA SUN LIFE TAX RELIEF, ICICI PRUDENTIAL MULTICAP FUND, HDFC EQUITY FUND etc
Learn more on Finance and Investing on http://www.aaschente.com

 

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