Not many people can understand investments. The term investment for a layperson is something quite scary. Managing finances and our savings using investment is not something everyone can understand; Honestly, I don’t as well.
Hearing the names of various types of investments, SIPs, mutual funds, Exchange traded funds, etc., spins our heads and the thought we all have is . . “Oh God!”.
So, let’s get to the general meaning of the term, investment and what it entails- for a lay person.
Investment, according to Wikipedia, is “to allocate money in the expectation of some benefit in the future. In finance, the expected future benefit from investment is called a return (to investment).”
So, what is it? Isn’t investment quite an over-used term these days. Earlier, investment was used only while referring to investing money in the stock exchange or market- but these days, investment is seen in education, homes, and various other luxurious and materialistic things. So, what are investments actually and how many types are they?
Investment is something that is bought with money, expecting it to generate income and/or profit. Are grouped under- Ownership, Lending and Cash Equivalents.
Ownership Investments entail investing in the stock market, business or in the real estate. When you buy a stock, you are actually buying and owing a part of the company you have invested in and you do have a right over that portion of the company. While investing in business, which is by far the most profitable investments; but entrepreneurship is not as easy as it seems. It is definitely the most risky investments and it involves more than just money. While investment in the real estate is quite profitable these days as the net worth of the land and houses keep on increasing. Investing in a property to sell, rent or re-sell is the type of investment one follows and it is appreciable over time.
Lending Investments is banking. It is safest type of investment and as a result the returns are low. Lending investments consists of savings account and bonds. When you open your savings account, you are investing your money in the bank. You can invest in banks in many ways- either through Recurring Deposits (RD) or via Fixed Deposit (FD). While, bonds are the investment, which is used to corporate junk bonds and international debt issues.
Cash Equivalents are the type of investment in which it is easier to convert the investment back into cash.
We have also heard a lot about Mutual funds and SIP and other such terms. So what are Mutual Funds? A mutual fund pools your and other investor’s money that you have invested and it is then invested in stocks- if you opt for an equity mutual fund; Fixed income securities/ debt mutual fund are the investment in the Government Securities, treasury bills, and Money Market instruments; While in hybrid fund, your money is capitalized in an assortment of stocks and bonds.
The disclaimer, that we all know by heart- “Mutual fund investments are subject to market risks. Please read the offer document, carefully before investing” is because in the mutual funds,
You could suffer a loss, if and when the stock market crashes.
While, an SIP is Systematic Investment Plan which is a method of investing in mutual funds- although it is not an investment in itself, but in this you capitalize the pre-determined amount of money at a specific time- once a week, or month or once every quarter. SIP is beneficial way to save if you have a long term investment goals.
nother thing is that you can also invest in debt mutual funds, through Things to remember are that:
- Money is invested in a mutual fund, which is an investment; But SIP is just a method of investing in Mutual Funds.
- Although, SIP is associated with mutual funds, it is not the only way to invest in a mutual fund.
But, always remember, “Never Put All Your Eggs in a Single Basket!”
By: Archa Dave
