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 anticipating future benefits within a certain time frame.
Once you have read the aforesaid example, you already know what an investment means. Let us understand the meaning of this term in finance. Investments refer to purchasing or creating an asset, anticipating -
- Interest income;
- Rental income;
- Dividends and profits; or
- Any combination of the above mentioned returns.
For example: You purchased 100 shares of a company anticipating a dividend from these shares. In this case, shares are your investment and earning a dividend is your dividend income.
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 legendary investor, Warren Buffet mentioned “I made my first investment at the age of eleven. I was wasting my life up until then.”
The investment process varies from an investor to investor based on his understanding of concepts and experience.
There is no right age to invest. It all depends on your ability to take risk and the foresightedness to get going.
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.