When you save money, you put it into a relatively safe place to use in the future. So saving could be seen as ‘deferred spending,’ for example, saving for a holiday. But when you invest your money, you make an active decision to put your money into an asset to generate profit.
All investing involves risk, and different types of investments involve different levels of risk. This means it is not only profit, but an investor may also sustain a loss.
If you’re wondering where to invest money to get good returns, the answer is that it depends on many factors, and there’s no one-size-fits-all in a successful investment strategy. Whatever your goal, remember there are risks attached to investing as returns aren’t always guaranteed. You could make money or lose it.
Investment products are usually ill-liquid. As a result, investors have to relinquish their control over the cash and sometimes risk losing a part or even the entire investment.
Different types of investment products are:-
A bond could be issued by the government, municipal body, state, or corporation. Bonds provide interest on the investment. A vital feature of a bond is that capital invested or initial investment is protected. Therefore, bonds are considered the least risky investment vehicles.
A stock is a share issued by a company. A stock provides ownership in a company in proportion to the holding. A stock may provide dividends and an increase in its value. When a stock is traded at an exchange, it provides liquidity. Investing in a portfolio of stocks and bonds provides diversification and could hedge against high risk.
Investment in a mutual fund scheme is less risky because they apply the principle of diversification. A mutual fund scheme invests money across various financial securities per its investment objective. Mutual funds are typically managed by investment experts who understand the financial markets and could lessen the risk and increase the return over time.
A real estate investment could be for personal or commercial purposes. It could be a rental property or real estate trading. It is a costly investment and is much more complicated than buying stocks or bonds.
Commodities are most often used as inputs in the production of other goods. Consequently, these are considered the riskiest investments because their prices fluctuate constantly and are susceptible to uncertainty in the market.
Time frames play an essential part when you are setting financial or investing goals.
Your goals could be:
- Short, medium, or long term.
- For today, this week, this month, or this year.
- Short-term goals that build towards a more significant long-term goal.
Short Term Goals (1 – 3 years)
Short-term goals are generally focused on the next 1 to 3 years. Examples of short-term goals might be travel, purchasing a vehicle, paying for a wedding, or saving for a deposit for a property.
Medium Term Goals ( 4 – 6 years)
Medium-term goals tend to be a little bigger than your short-term goals and are generally those goals that you want to achieve in around 4 to 6 years. Examples of these goals could be saving for a deposit required for a house, starting a new business, buying an investment property, or paying off debt.
Long-Term Goals (7+ years)
Longer-term goals are generally focused on accumulating wealth for retirement. However, everyone is different, and an individual’s purpose could be to go for an extended vacation before retiring. Others may have different plans.
By safety, an investment means that there should be a certainty of the return of capital without its loss. The rating of investment generally depicts the protection of money.
A AAA bond signifies the highest possibility of the return of capital with accrued benefits to the bondholder. This is a prime characteristic of investments, as every investor invests with the expectation of getting back their money along with profit.
A credit rating agency sets a minimum bond rank to be classified as an investment grade:
- Standard & Poor’s denotes bonds rated BBB- or higher as investment grade.
- Moody indicates bonds rated Baa3 or higher as investment grade.
- Fitch denotes bonds rated BBB- or higher as investment grade.
Liquidity could be defined as an essential feature of investment, wherein it could be converted into cash on demand or at a periodic interval of time without loss of value.
It is an essential feature of any investment, as the yield on any asset, to a great extent, is a function of liquidity provided by the specific investment.
The market provides liquidity in marketable assets such as shares and mutual fund units. In contrast, non-sellable assets like fixed deposits could not be liquidated in the market but be offered for premature encashment.
Tax Efficiency in Investments
Some investments offer tax benefits, while others do not. Tax benefits available to buy could be any one of the following: –
- Investments can offer tax benefits on initial deposits. For example, PPF offers Section 80C benefits for deposits.
- Investments can offer tax benefits on returns generated. For example, interest on PPF, dividends on equity shares, etc., are tax-free.
- When redeemed, investments are tax exempted—for example, maturity proceeds of an insurance policy.
- An ideal investment offers a tax-efficient return proportionate to the risk with safety and liquidity.
Conclusion: Plan Your Investments As per Financial Goals
Individuals invest in improving the future—funds to be invested come from assets already owned, borrowed money, and savings or foregone consumption. One expects to enhance future consumption possibilities by foregoing consumption today and investing the savings.
Investment planning aims to achieve an expected return rate over a specified period while minimizing potential loss. Therefore, investors should understand what their investments must return to meet their goals. In addition, they need to grasp their current and projected lifestyle, their accumulated financial resources, and their ability to save.