What is Investment? A Beginner’s Guide

What is Investment? A Beginner’s Guide

Have you ever checked your savings account and wondered if it is earning you enough money? If yes, you probably asked the question “What is investment?” itself. With rising prices every year, money saved in a bank account steadily loses its value, and this is usually when the search for “what is investment” begins.

This guide will take you through what is investment for beginners, the types of investment in India – and how to start investing in India as a beginner, in simple language and without the jargon.

The main question that arises here is: what is investment definition for beginners, and how does it actually help you build wealth over time? Simply put, investment involves putting your money to work. Instead of letting it gather dust in your bank account, you channel it into stocks, gold, property, mutual funds, or a variety of other instruments that multiply it over time.

Any investment is an exchange of a present risk for a future reward. By putting your money into any of these investment options, you are incurring a small amount of risk today in order to obtain a greater reward, say in the form of increased income or enhanced savings power, in the future

Different investment options carry different levels of risk, and it is important to note that no investment is completely guaranteed. Saving vs. Investing: What’s the Difference?

The terms saving and investing are used almost interchangeably, but the two actually have very different meanings and roles in personal finance. Money set aside for short-term goals is generally kept as savings, while money set aside for long-term goals is usually invested. The former is a safe, but low-yielding, form of parking your money, while the latter is exposed to a certain level of risk in order to yield better returns over a longer period of time. Think of savings as your crash pad and investments as your dream home – you need both, but the former is for short-term stays while the latter is for when you are ready to settle down. Similarly, while some personal finance advisors suggest you save a little extra for emergencies, any amount you keep as a saving beyond that is money that is not working for you and is therefore being wasted.

Different Types of Investment Options in India

There is no right or wrong investment, only wrong allocations based on individual financial goals, time horizon and risk appetite. Every investor must decide which combination of the following investment options will help him achieve his financial targets:

1. Fixed Deposits (FDs): These are low-risk instruments offered by banks and NBFCs that offer a pre-determined rate of interest to the investor for a set period of time.
2. Mutual Funds: This popular financial instrument lets you invest in a professionally managed basket of stocks, bonds and other securities.
3. Direct Equity/Stocks: Shares of a company can be bought directly, and the value of such shares fluctuates constantly.
4. PPF/EPF: The Public Provident Fund and Employees Provident Fund are excellent long term savings cum investment instruments backed by the government.
5. Gold: Physical or digital, gold has always been considered an excellent hedge against inflation.
6. Real Estate: Property can be rented out or sold at a profit, but requires a major initial outlay and has low liquidity.
7. National Pension System: This retirement benefit savings scheme helps you build a corpus of money that can be withdrawn as pension at a later date.
8. Alternative Instruments: P2P lending, for instance, has become a popular way to diversify one’s investment portfolio these days and will be discussed in detail below.

How to Start Investing as a Beginner in India

If you are new to the world of investing, here is some practical personal finance advice for you. First, create an emergency savings fund that can support you for six months in case of any financial emergency. Then, make sure you clearly define your financial goals and invest according to your time frame and risk tolerance. It is always important to do a risk profiling assessment of yourself to understand how much of your money you are willing to expose to risk. Finally, make sure you invest regularly, and in small, well-diversified installments, as and when you have spare money. You should also try to maintain different levels of risk across your various investment instruments in order to ensure that you maintain a proper risk-reward balance for each.

Some Best Investment Options For Beginners in India

As a beginner, it is a good idea to adopt a ‘balanced’ approach to investing, using a combination of the various options mentioned above. You might want to consider something as simple as keeping a small amount of emergency savings in a savings account or fixed deposit, investing regularly in mutual funds and keeping a little amount of gold as insurance against inflation. For your long term goals, consider opening a PPF or EPF account. As you get more comfortable with investing, you might also consider direct equity as an option for diversifying your portfolio. Remember, every step you take towards learning about finance is one step closer to financial freedom.

How P2P Lending Can Help You Diversify Your Investment Portfolio

Once your emergency savings and regular savings-investment accounts are in place, some investors may choose to consider alternate investment avenues in order to diversify their portfolio. P2P lending is a good option to do so. This is a completely digital lending platform wherein lenders can choose loans to fund based on their risk appetite, and earn a profit based on the interest paid back to them by the borrower. P2P lending can also be a good way to create non-correlated income streams, as the returns from P2P lending are not directly impacted by fluctuations in the stock market.

It is important to remember, however, that P2P lending is not a foolproof or guaranteed income stream, and there are risks involved. Since every P2P lending platform operates differently, with different levels and types of risk involved, you must always do extensive research before choosing which platform to invest with. Remember that P2P lending is different from investing in mutual funds or fixed deposits offered by banks, and you must consider all the possible risks involved before you get started.

FAQs:

1. What is investment in simple terms?
   Investment in simple words means to put your money to work instead of letting it sit idle in a corner. If you put a portion of your savings into instruments like stocks, gold, mutual funds or fixed deposits, there’s a chance of growing your money over time in exchange for taking some level of risk. 

1. What is the main difference between saving and investing?
   Saving inclines towards keeping money safe and easily accessible for urgent or short-term needs, usually in a bank account in return for low but steady interest. On the other hand, investing means to put money into instruments that carry certain risks while growing your wealth over a longer period of time. In short, savings for near-term needs and investments for long-term goals are both significant.

1. What are the most common types of investment options in India?
   While there are a lot of options in the market, the most common ones include fixed deposits, mutual funds, PPF and EPF, direct equity or stocks, real estate, and the National Pension System. Several investors also consider alternative instruments like P2P lending to diversify beyond the traditionally used options.

2. How should a beginner start investing in India?
   Prioritise establishing a safety net that sustains your needs for half a year before you venture into market trading. Furthermore, ensure you outline achievable financial objectives and assess your comfort with risk, opting for consistent, modest contributions across varied assets instead of committing a single large capital amount.

3. Is P2P lending a safe way to diversify an investment portfolio?
   Peer-to-peer lending serves as a compelling avenue for creating non-correlated income streams, primarily because its returns are not directly impacted by fluctuations in the stock market. However, it is essential to remember that such instruments are not foolproof, and you must perform extensive research on any platform you consider. Understanding how a platform evaluates borrower creditworthiness and identifying potential risks involved is a critical step before you get started.

Final Thoughts

Knowing what investment is, and the different options that exist, is the first step towards building lasting wealth. Start your journey to financial freedom today, with a basic savings account and fixed deposits, and move on to more complex instruments like mutual funds and P2P lending only when you feel confident enough.