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What is an Investing?
Investing refers to allocating money or resources to generate income or profit over time. Investors typically purchase financial assets, such as stocks, bonds, real estate, or mutual funds, to achieve capital appreciation, receive dividends, or earning interest.
Investing involves assessing potential risks, conducting research, and considering factors such as the investment’s time horizon and the investor’s financial objectives. Successful investing often requires a well-thought-out strategy, diversification, and a long-term perspective.
Savings vs Investments
| Feature | Savings | Investment |
|---|---|---|
| Goal | Short-term (emergency funds, upcoming purchases) | Long-term (retirement, wealth growth, future goals) |
| Risk | Low | High (potentially) |
| Returns | Low (typically below inflation) | High (potentially, outpaces inflation) |
| Liquidity | High (easy access) | Low (may have lock-in periods or penalties for early withdrawals) |
| Typical Examples | Savings accounts, CDs, money market accounts | Stocks, bonds, mutual funds, ETFs, real estate |
| Average Annual Return | 0.5% – 1.5% | 7% – 10% (historically, with potential for higher or lower) |
| Minimum Investment Amount | Varies by account (often low) | Varies by asset (can be low for some ETFs, higher for others) |
| Government Insurance | Yes, up to specific limits | No |
| Suitable for | Risk-averse individuals, short-term needs, readily available cash | Risk-tolerant individuals, long-term goals, building wealth |
Types of Investment Plans
Equity Stocks
Investing in shares of companies can yield substantial returns, but the stock market involves risks due to price fluctuations.
Mutual Funds
Mutual funds pool money from multiple investors to invest in diversified portfolios of stocks, bonds, or other securities.
Fixed Deposits (FDs)
FDs offered by banks provide fixed interest rates for a predetermined period, offering a stable but lower return compared to equities.
Public Provident Fund (PPF)
A government-backed savings scheme with tax benefits, offering a fixed interest rate and a long-term investment horizon.
Real Estate
Investment in residential or commercial properties can generate returns through rental income and property appreciation.
Government Bonds
Issued by the government, these fixed-income securities provide a steady return but are considered low-risk.
National Pension System (NPS)
A long-term retirement-focused investment option with a mix of equity, fixed deposits, corporate bonds, liquid funds etc.
Gold
Investing in physical gold or gold-related instruments can act as a hedge against inflation and economic uncertainties.
Why Start Investing Early?: Examples
- Start investing early to leverage the power of compounding and maximize your wealth over time. Early investments allow your money to grow exponentially, providing long-term financial security.
- With examples, discover how starting early ensures the achievement of financial goals, risk mitigation, and the building of a substantial retirement corpus. Learn why time is a valuable asset in the world of investments, allowing you to capitalize on market fluctuations and create a robust financial foundation for the future.
Example: Consider investing INR 10,000 annually from age 25 to 35, earning an average annual return of 8%. By age 60, the investment could grow to around INR 3,28,515. Starting at age 35 with the same annual contribution and return rate, the final amount would be around INR 1,45,560. The extra ten years of compounding significantly increases the wealth.
Example: An investor starts with INR 1,00,000 at age 25 and experiences a market downturn, resulting in a 20% loss. However, with a long-term horizon, the investment has time to recover. If the same downturn occurs at age 45, the recovery window is much narrower.
Example: Investing INR 5,000 monthly from age 25 to 60, with an average annual return of 12%, could result in a corpus of approximately INR 6,29,71,946. If the investment is delayed until age 35, the final amount may be around INR 1,91,91,489. Starting early allows for more time for investments to grow.
Example: Saving for retirement by investing INR 15,000 monthly from age 25 to 60, with a 7% annual return, could accumulate around INR 5,57,16,631. If the investment is postponed until age 35, the final amount might be approximately INR 2,33,36,933. Starting early ensures a more substantial retirement corpus
Investment and risk
What is Investment Risk?
Investment risk refers to the uncertainty associated with the potential return of an investment. The higher the potential return, the higher the risk involved. There are different types of investment risks, including:
- Market risk: The possibility of the entire market declining due to economic factors or other events.
- Asset-specific risk: The risk associated with a particular investment, such as a company going bankrupt or a property losing value.
- Interest rate risk: The risk that rising interest rates will reduce the value of your fixed-income investments.
- Inflation risk: The risk that inflation will erode the purchasing power of your investment returns.
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