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Financial Literacy

What Are Investments?

Investments refer to spending your time or energy on something while anticipating -

Income generation, or Value addition

For example, a farmer ploughs his field on a daily basis under the expectation that he may reap some returns in the form of grains after a specified period of time. This means that he gives his time and energy to anticipate future benefits within a certain time frame.

Types of Investments

Stocks: When you buy a company's stock, you become a small owner of that company. People who own a company's stock are called shareholders. They can make money if the stock price goes up or if the company pays dividends, which are a portion of its profits.

Bonds: Bonds are like loans you give to governments or companies. When you buy a bond, you're lending them money. In return, they promise to pay you back the money with interest over time.

Funds: Funds are like big pots of money managed by experts. They let you invest in different things like stocks, bonds, or commodities. Mutual funds are valued at the end of the day, while ETFs are like stocks and change in value throughout the day.

Investment Trusts: Trusts pool money from investors to invest in things like real estate. Real Estate Investment Trusts (REITs) invest in properties and pay investors for the rent they collect. REITs trade on stock exchanges, so you can easily buy or sell them.

Alternative Investments: These are investments other than stocks and bonds. Hedge funds and private equity are examples. Hedge funds can bet on different things in the market, while private equity helps companies get money without going public. Some alternative investments are now available to regular investors.

Options and Other Derivatives: These are financial contracts based on the value of something else, like a stock. Options give you the choice to buy or sell a stock at a certain price by a certain time. They can be risky because they use borrowed money to potentially make bigger gains or losses.

Commodities: Commodities are things like gold, oil, or crops. You can buy them directly or through agreements to buy or sell them in the future at a set price. This helps manage risk or make speculative bets.

What is the difference between Savings and Investments?

Savings store your money, investments make it grow. How?

When you invest, you also take up some risk of losing the money. Returns are usually not guaranteed. Then why invest?

The more risk you take, the more profit you can earn. Therefore, while putting your money in a bank account will earn you some interest, investing in different products can help you build your wealth faster.

Another important difference between the two is their purpose. Savings are usually made for short-term emergencies, whereas investments are done to build your wealth.

What is the right age to begin investing?

The 100 minus age rule helps decide how much of your investment portfolio should be in stocks and how much in bonds. It suggests subtracting your age from 100. The result tells you what percentage of your portfolio should be in stocks. The rest can be in bonds.

This rule assumes that as you get older, you should have less in stocks and more in bonds.

For example, if you're 35 and just starting to invest, the rule would say:

Stocks: 100 - 35 = 65%

Bonds: 35%

How to plan your investments?

You can build savings by simply storing away the money or by putting it in interest-earning accounts, but investment is not that easy.

Since there are many products and schemes available for us to choose, you cannot simply invest before deciding on -

  • Why you are investing?

  • Which product is the best for achieving your goals?

For example, if you plan to earn some extra money for a vacation you want to go on next year, you cannot put your money in a mutual fund that generally has a lock-in period of one to three years. This is where investment planning comes in.

Investment planning is the process of identifying financial goals and converting them through building a plan.We will discuss more on investment planning in the next unit. 

Ready to master the A2Z of Finance? Dive into our Finance Beginner Course now and start your financial literacy journey!

Importance of Investment

Investing today in whatever suited instruments of immense importance for Individuals.

  • Helps you beat inflation-  Inflation is a universal fact that will erode your money with time. It reduces the purchasing power of money. To beat this, your money needs to grow and the best way for this is to Invest.

  • Financial Independence- The passive income that comes out of investments that we do makes your money earn passive income for you. This gives financial stability and enables you to follow your passion and take bigger risks. 

  • Retirement Planning- You also become independent of any need during your retirement when you have a retirement corpus through investments.

  • Tax Benefits- Your investments could also help you save on taxes. PPF, ELSS, Tax-Saving Bonds, and long-term fixed deposits can give you tax benefits under section 80C of the Income Tax Act 1961.

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Units 5/11