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A Guide to Know About the Investment & Importance of Investment

Importance-of-Investment

“A penny saved is a penny earned” is the advice we often receive from our elders. It is true to some extent but not entirely. A penny saved cannot be called an earning until you invest it to earn more money. But what is an investment, and why should you invest at all? In this article, we will help you understand the importance of investments and a lot more. So let’s get into the article straight away.

What is Investment Definition?

Any act of using money to purchase an asset or an item that will help in generating more money in the future is known as investment. In other words, an asset purchased to earn more money from it instead of using it for consumption is known as investment.

Let’s understand this with an example. When we go to the market to purchase fruits and vegetables for consumption, it is called expenditure. On the other hand, the money spent by the vegetable shop owner to purchase the products is known as an investment because he intends to sell those products to make more money.

What is the meaning of Investment in Comparison to Savings?

Often people use the terms “saving” and “investment” interchangeably. But, it is important to note that both are different. Let us see how and why –

Basis Savings Investment
Objective Putting a portion of money aside for future use. Purchasing an asset or an instrument to earn returns.
Protection against inflation Money lying in the bank account loses its value due to a rise in inflation. Invested money increases in value and beats inflation.
Risk Very low or negligible risk Comparatively riskier
Liquidity Highly liquid Comparatively less liquid
Returns No or low returns in the form of savings bank interest. Potential to earn high returns

Types of Investments

With the wide variety of investment options available in the market, it sometimes becomes difficult to choose the most suitable one. Investments are broadly classified into three categories – ownership investments, lending investments, and cash equivalents. Each category comprises different types of investments.

Now that we have learned “what is an investment,” let’s go deeper and get to know about the popular investment types in India.

Stocks: Stocks or equity shares are issued by companies to raise capital from the market. Buying these shares means buying a portion of the company’s ownership. The prices of equity stocks are dependent on the changes in the market, making them a high-risk and high-return investment option.

Bonds: Bonds are fixed-income generating investment instruments that are issued by the government or an institution. Investing in bonds means lending money to the issuing institution and earning a predetermined fixed rate of interest on it.

Mutual Funds: Mutual funds pool money from investors and invest in a variety of asset classes to get returns. These funds are managed by expert fund managers, and the earnings are distributed among the investors in the ratio of their investment.

P2P Investment: P2P lending is a new-age investment type in which the investors lend money to borrowers directly without the intervention of a middleman. While it is similar to investing in debt instruments, P2P lending provides relatively higher returns.

Why Should You Invest?

As discussed above, there are a variety of investment options available in the Indian market. But before investing your hard-earned money, you should understand “why should you invest?”. Let’s understand the importance of investing in this section –

  1. To Preserve Your Capital

Idle money loses its value due to the rise in inflation. The amount of goods you can buy using INR 100 today is much less than it was 5 years ago. All this happens due to inflation. Keeping your money idle can wash out a large chunk of your capital and decrease your purchasing power.

Having said that, it is worth understanding the importance of investment for individuals. Investing in the various investment options can help preserve your capital and also increase it.

  1. To Create Wealth

In addition to preserving your capital, investment can also help you create more wealth and grow your capital. All individuals aim to grow their capital over a period of time to achieve their objectives. Therefore, you must explore the different investment options to determine which investment would help you earn enough returns to meet your objectives.

  1. To Generate a Steady Passive Source of Income

Investments like bonds, fixed deposits, dividend-paying stocks, and P2P lending can help you generate a steady source of income. These investments provide regular monthly interest, which can help you pay for your day-to-day expenses.

  1. To Plan Your Retirement

If you start investing now, you can save up a good amount by the time of your retirement. Whether it is a world tour you want to plan or anything else, you can bank upon this retirement fund for your financial needs during your golden years.

  1. To Achieve Your Financial Objectives

Every investor has a reason to invest. For some, it might be purchasing a car or a house, while for others, it could be children’s education, retirement plans, or simply wealth creation. Some investments are highly liquid, while some others, like PPF, have long lock-in periods.

Whether it is a short-term goal or a long-term goal that you aim to achieve, investing in the right instruments can help you achieve them.

How Should You Invest?

By now, you must have already understood the importance of investing money and made up your mind about parking your idle money in the right investment instruments. Now the question is “how to invest” to earn maximum returns while also keeping the risk at a minimum.

Here are the 3 things you must consider in order to choose the right investment option for your needs.

Analyse Your Investment Objective

The first step is to analyse and determine the reason why you want to invest. For instance, if your investment objective is to purchase a house, you would want a relatively safer investment option but still want high returns.

Assess Your Risk Tolerance

The next step is determining your risk tolerance. Risk tolerance is the amount of risk you are willing to take or the amount of money you can bear to lose in order to earn high returns. If you are someone who has a low-risk tolerance, options like P2P investments are the best choice for you.

Time Period

After determining your investment objective and risk tolerance, it is now important to determine the amount of time for which you can keep your money invested. In other words, depending on your investment objective, you might want to determine the time by which you want to receive your funds.

When Should You Invest?

While there is no right time to start investing, and you can start this journey at any time in your life after you start working, it is always better to start as early as possible. The earlier you start investing, the larger your corpus will be by the time you retire.

But remember to do thorough research and understand the various aspects of investments before you start this journey to avoid major losses and earn maximum returns.

Which is the Best Investment Option for Risk-Averse Investors?

If you are a risk-averse investor and still want to earn high returns, you should choose P2P lending. P2P lending is a fixed-income investment option that acts as a bridge between lenders and borrowers.

P2P lending provides higher returns than other traditional investments like FDs while keeping the risk very low. P2P investment platforms like LenDenClub can help you start your investment journey.

Understood ‘What is Investment?’  Now Get Started

Now that we have discussed all that you need to know about the what, why, how, and when of investing, you can start your investment journey with LenDenClub’s P2P lending platform. But why LenDenClub? Read below to find out –

P2P investments can beautifully balance your risk and reward and help you meet your goals. So start your P2P investment journey today with the LenDenClub website and app. Sign Up Now!

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