What is Investment? A Beginner's Guide to Growing Wealth

Investments are often viewed as the gateway to building long-term financial stability and creating wealth. But what is investment meaning? In simple terms, it's investing your money in financial or physical assets in expectation of it growing in positive value or return. Whether it be stock investing or real estate, each type of investment has its own advantages and disadvantages.

If you are about to take that first step with your first investment or if you are about to move to the next level in this field, there are some things that you must realize before you go into investment plans. This guide will tell you everything you want to know!

What is Investment?

At its core, investment means laying down your money on assets or ventures that have the potential to generate returns over time. To define invest, it simply refers to laying down money, time, or anything of value on an activity or asset that you believe is going to appreciate in value.

A simple investment definition is the day-to-day activities of buying shares in a company, purchasing bonds, investing in real estate, or even funding your retirement through specialized plans. But before you start, it's very important to understand the features of investment. These are:

• Possibility of Growth: Investments can increase your wealth over time.
• Risk Factor: Every investment carries some degree of risk.
• Time Horizon: How long you're willing to wait for returns drives your investment decisions.

Types of Investments Simplified

Now that you understand what is investment let's examine the different types of investments that are available. Here are the types of investments:

1. Stocks

   Stocks are portions of ownership in a company. Essentially, when you buy a stock, you are buying part ownership of a company; hence, you get to participate in the company's productivity and profit. Stocks are in the high-risk, high-reward category and are usually only for those investors who are in it for the long haul.

2. Bonds

   Bonds are government and corporate debt instruments issued to raise money. When you buy a bond, you are essentially lending money to the entity in return for its agreement to pay you interest periodically, as well as the principal at the end of the term. Bonds are safer than stocks and are more for the conservative investor.

3. Mutual Funds

   Mutual funds gather money from many investors and put it into a diversified portfolio of stocks, bonds, or other securities. They are essentially professionally managed and are a great way for new and inexperienced investors to gain diversification without worrying about handling their portfolios.

4. ULIP (Unit Linked Insurance Plan)

   A ULIP plan is a hybrid, investment-cum-insurance product. It offers you dual benefits of investment—protection against life and market-linked returns—so that you can multiply your wealth while securing the future of your family.

5. Public Provident Fund (PPF)

   PPF is a government-backed savings scheme with tax benefits of investment. It also comes with a fixed interest rate and, hence, one of the safest investment options available. Having a lock-in period of 15 years, it's an excellent tool for long-term wealth creation.

6. Real Estate

   Investment in real estate refers to the buying of property either for rental income, resale, or appreciation in value. This investment requires huge capital, but on the other hand, real estate is a pretty stable and tangible investment.

7. Savings/Endowment Policy

   An endowment policy is an insurance-cum-savings plan that helps you meet your specific financial goals, like funding your child's education or retirement. It is a combination of life insurance protection with systematic savings that earn guaranteed returns at maturity.

How to Start Investing – A Dummy Guide

Investing can be overwhelming to start, but it's quite simple when broken down into simple steps. Here's how it's done:

Set Your Goals

First and foremost, ask yourself this: Why am I investing? If you want to save for a dream vacation, or you hope to buy a house or plan for retirement, then clearly defining your short- and long-term goals will give your investments a direction.

Know Your Risk Appetite

Are you comfortable taking risks for potentially higher returns, or do you want to play it safe? The answer to this question will determine the type of investments you should make. For example, stocks and mutual funds are great for risk-takers, while bonds and fixed deposits are perfect for conservative investors.

Educate Yourself

Take some time to understand the basics of what is investment, how it works, and the various options available before you put your money into anything. The more you know, the better decisions you'll make.

Start Small

You can start investing even if you don't have a fortune to invest—little amounts can grow over time due to compounding. Start with something simple, like a mutual fund or a recurring deposit, and watch how it boosts your confidence as it grows.

Diversify Your Portfolio

The golden rule of investing? Don't put all your eggs in one basket. Spread your investments across different asset classes to minimize risks and maximize returns.

What are the Objectives of Investment?

Investing is not just about increasing your wealth; it's about fulfilling dreams, safeguarding your future, and ensuring financial security for yourself and your loved ones. Let us now break down the key objectives of investment and how they fit in with your life goals. Each objective of investment has a unique role in shaping your financial journey.

1. Preserving Your Wealth

   The first and foremost purpose of investment is to safeguard your hard-earned money. Inflation, the silent order of wealth, can decrease the value of your savings over time. Investments in fixed deposits, government bonds, and PPF protect your principal while offering a small return to fight against inflation—what one could call building a shield around one's money.

2. Growing Your Money

   Investments such as stocks, mutual funds, and ULIPs increase your money to great proportions over some time. This goal becomes so tempting when you want to create wealth for the future. You even get returns on returns by compounding, and your money grows really fast, provided you invest regularly and for the long term. It is somewhat like planting a seedling and watching it grow into a tree over the years.

3. Emergency Preparedness

   Life is full of uncertainties, and one has to be prepared for everything. Liquid investments—like savings accounts or short-term debt funds—help you build a financial cushion to handle the unexpected: an emergency, car repairs, or even losing your job. Just knowing you have that safety net in place gives you peace of mind.

4. Passive Income

   Investments can also create a stream of income for you. For example, renting out real estate, dividends from the stock market or interest from bonds can act like regular streams of income. This goal is beneficial, especially for retirees or when one needs extra monthly income streams.

5. Saving on Taxes

   Who doesn't love saving on taxes? Tax-saving instruments like ELSS, PPF, and ULIPs help you save on taxes and also enable your wealth to grow. For instance, under Section 80C of the Income Tax Act, certain investments are allowed deductions, meaning more money remains in your pocket as your investments grow.

6. Securing Comfortable Retirement

   Retirement may seem far away, but the earlier you plan for it, the better. Some investments available to you—pension plans, endowment policies, and ULIPs—help you build a corpus that guarantees you maintain your lifestyle even after retiring. This is like gifting yourself financially in the future to enjoy life without financial stress.

7. Achieving Financial Goals

   Whether it's buying your dream home, funding your child's education, or that long-awaited vacation, investments can help you achieve specific financial goals. By aligning your investment process with your milestones, you essentially create a roadmap to make your dreams a reality. It's not just about money; it's about the life you envision for yourself and your loved ones.

Categories of Investments

When it comes to investing, there isn't a one-size-fits-all approach. Different investment processes serve different goals, risk appetites, and financial situations. Understanding these can help you build a balanced portfolio that addresses your needs. Let's break them down in simple terms:

1. Ownership Investments

   Ownership investments are assets that you hold on to in the hope that their value will increase over time. They have the potential for greater returns but usually carry greater risk. Here are the most common types:
   • Stocks: When you invest in stocks, you basically own a part of the company. Your stock will rise as the company expands and becomes more profitable; moreover, you could even receive dividends. Stocks are great for long-term wealth generation.
   • Real Estate: Owning property, whether for the rental income or appreciation, is tangible. It is said that real estate is one of the most secure and fruitful options if it is held for the long term.
   • Businesses: When you start up or invest in a business, you are engaging in one of the purest forms of ownership investment. This can be very high-risk but also comes with the potential for very high rewards if the business does well.
   • Precious Metals and Commodities: Investment in gold, silver, or any other commodity is an ownership investment. It is a hedge against inflation and downturns in the economy.

2. Lending Investments

   Lending investments involve loaning your money to an institution, government, or corporation, expecting to periodically receive interest payments and to have your principal returned at maturity. These investments are usually less risky than ownership investments but usually yield lower returns.
   • Bonds: When you buy a bond, you are basically lending money to the bond issuer, either a government or a corporation. Bonds have fixed interest payments, so they can be very secure sources of income for conservative investors.
   • Fixed Deposits (FDs): Banks offer FDs, where you can deposit a lump sum for a fixed tenure and earn guaranteed returns with little to no risk.
   • Corporate Debt: Similar to bonds, corporate debt means lending money to businesses, usually paying a bit more than government-issued bonds because of the greater risk.

3. Cash Equivalents

   Cash equivalents are investments in low-risk tools that possess a high liquidity ratio; in other words, they are easily convertible into cash. While generally giving lower returns, they are quite good for goals with a short time horizon or for an emergency fund.
   • Savings Accounts: A savings account is probably the most primitive of all available cash equivalents, and it provides easy access to your money while paying a modest interest rate.
   • Treasury Bills: The government issues treasury bills as short-term investments with a guaranteed return. It is a fairly safe investment that people make in order to save their money for a few months.
   • Money Market Funds: These funds invest in short-term debt securities and provide better returns compared to savings accounts while still maintaining high liquidity.

Investments v/s Savings – Understanding the Difference

Yes, absolutely! While savings and investments are both important things to do for financial planning, they serve very different purposes and work differently. Let's break it down:

Savings

Savings generally refer to money put aside for immediate or short-term needs. You can think of it as your financial safety net—a reserve for emergencies, monthly expenses, or planned short-term goals like a vacation or the purchase of a gadget. Savings are:

• Low-Risk: Money in a savings account or fixed deposit is safe; there's virtually no chance of losing it.
• Liquidity: Your savings are always readily accessible in case you need them.
• Low Potential for Growth: Savings accounts pay low interest rates and thus do not even keep up with inflation.
• Example: Saving ₹10,000 in a bank account at a 4% annual interest rate would earn you ₹400 after a year. Though that's safe, over time, it wouldn't grow as much.

Investments

Investments, on the other hand, are for long-term growth. If you invest, you put your money into some assets, whether it be a stock, mutual fund, or even real estate, hoping that that particular asset grows in value. Investments are:

• Growth-Oriented: This is because investments can create greater returns in building wealth for achieving financial goals.
• Varied in Risk: It could range from very low-risk, like those of government bonds, to a high-risk investment, such as stocks or real estate.
• Goal-Based: They have goals set toward some long-term objectives for investment, be it for retirement, education, or the purchase of a house.
• Example: An investment of ₹ 10,000 in equities with an average annual return of 10% would, through compounding, earn you ₹ 25,937 after 10 years!

Key Differences Between Savings and Investments – A Tabular Presentation

Investments As Per Life Stages

Your investment process must change as your life stage changes. Let us now take a detailed look at how you can step up to the plate with your financial plans for different phases of life:

Starting Your Career

At this stage of just starting your career, the emphasis should be on laying a sound financial foundation. Low-cost and high-growth options such as equity mutual funds, SIPs, and term insurance make excellent choices. SIPs help you invest small sums regularly in equities, inculcating good financial discipline.

Plus, with term insurance, you get adequate protection in terms of life insurance plans at a low premium, thus providing financial security to your family members. The earlier you start investing, the more time the power of compounding works, which grows your wealth substantially over the long term.

Marriage and Family Planning

After you get married and have to start planning for a family, you know you have to start worrying about money for not only you but also your significant other and your future kids. Health insurance becomes a necessity in covering medical emergencies and protection against the rising costs of healthcare.

Savings plans and a balanced investment process with both equity and debt funds can offer a mix of safety and growth. These are to make sure that the short and long-term needs of your family are taken care of as well as ensuring that their financial future is secure.

Buying a Home or Planning for Your Child's Education

Big goals, such as buying a home or financing your child's education, need considerable financial resources. ULIPs, or unit-linked insurance plans, provide both insurance and long-term wealth creation and, hence, would be an ideal investment avenue.

Savings policies with assured returns would also systematically enable you to build the corpus required for such big-ticket expenses and would also bring financial stability to your family.

Retirement Planning

When you near retirement age, capital preservation and stable cash flow become the key factor. Concentrate on low-risk investments such as money-back plans, annuity schemes, or retirement ULIPs.

These guarantee you periodic payments that will provide financial independence to preserve your lifestyle in your old age. If you invest properly now, you will have a safe and comfortable retirement with no financial worries.

Types of Investments Based on Your Risk Profile

Investments can also be classified based on the risk profile:

Low-Risk Investments

Fixed deposits, government bonds, and PPF are very good options for a risk-averse investor. They value safety and predictability in returns; thus, they are perfect for those who want to keep their capital safe while earning modest growth over time.

Fixed deposits are provided by banks and financial institutions, and they pay a fixed amount of interest for a predetermined amount of time. Government bonds are issued by the government, which practically has almost negligible chances of default. PPF is yet another source that provides complete safety along with tax benefits of investments and excellent returns, provided you are dealing with it for the long term.

Medium-Risk Investments

Medium-risk investments are the tradeoff between growth and security. Medium-risk investment options such as balanced mutual funds and ULIPs offer an average return while maintaining a decent risk. Balanced mutual funds invest in a combination of equities and debt securities, thus giving you protection against fluctuations.

ULIPs are quite different because they combine insurance with investments, whereby you can choose from various funds depending on your risk appetite. These would be ideal for those looking for a balance between growth and protection of their money.

High-Risk Investments

High-risk investments like stocks and equity mutual funds would also be very good for investors with a high-risk appetite. These investments target maximum returns but come with high volatility. Stocks involve investing in companies directly, where one can have a high potential for capital appreciation and dividends. Equity mutual funds pool money from various investors to invest in equities, spreading risk but still targeting high returns.

Although high-risk investments can yield great rewards, they do require a deep understanding of market dynamics and a long-term perspective to ride out short-term fluctuations.

Importance of Investment

Investing is much more than a routine financial decision; it's a proactive way to shape your future and secure your dreams. Here's a deeper look at the importance of investment:

• Beats Inflation: With time, the cost of living rises while reducing the purchasing power of money. Investments help counteract inflation since they will grow your wealth faster than increased expenses, safeguarding your financial health.
• Secures Your Future: Whether it is building a corpus for retirement, funding your child's education, or buying your dream home, investments provide a solid financial foundation for the most important milestones in life. They make possible the realization of dreams that may otherwise seem impossible.
• Provides Financial Freedom: The returns on investment will free you from living from one paycheck to the next. You can open a business; you can go on that vacation you've been waiting for; you can do that one thing you love to do but don't have any money for if you just invest consistently and wisely.
• Provides Peace of Mind: The uncertainty of life demands financial readiness. A well-structured investment portfolio provides security to feel confident and secure in knowing that you are prepared for any unforeseen difficulties or future goals.
• Helps You Build Wealth in a Systematic Manner: Investment is the discipline of building wealth in a systematic manner over a period of time. With regular investment, coupled with compounding and diversification, your investments will start growing in value, building substantial financial reserves.

Conclusion

The real investment definition is not just about growing your money; it's about creating a financial roadmap to a secure and fulfilling life. Be it life insurance plans, ULIP plans, or investment plans, PNB MetLife has a wide range of solutions tailor-made to meet your unique goals. Browse through our endowment policy options and other tax-saving instruments to take the first step toward a brighter financial future.

Disclaimer: