What is the investment?
The world is becoming more expensive every day, whether daily necessities, buying a home or education. To cope with all these expenses, people invest their money in profitable businesses, stocks, etc. Investment is an asset in itself; it is a process of saving money or allowing them to grow.
It is a way to generate money for one’s future, children’s education, retirement, or any other purpose. By investing the capital in stocks or businesses, one can generate a consistent income for themselves. Others put their money in real estate, whose value increases over the period of time and hence their money.
In all, investment is all about putting your hard-earned money in assets that can help your saving grow gradually with time.
Investment and Risk
Investing capital always has some risk, whether it is only one per cent. The basic nine risk factors that investors have to face and tackle are:
1. Market Risk
Factors like economic development can lead to the market’s collapse, which declines the value of investments. The drop in the shares’ market price, known as equity risk, is also one major factor.
2. Liquidity Risk
This is the kind of risk one when they cannot sell their investments at a higher or desirable price. Sometimes, it is also possible that the investment does not get sold at all. In this case, all the capital goes to waste.
3. Concentration Risk
When your money is concentrated in only one investment, higher risks are dangling over your head. It is always better to diversify the capital into different places.
4. Credit Risk
The debt investments like bonds face this risk. The company or bank in which you are issuing your bond should have a high credit rating. Otherwise, sometimes due to financial problems, they ran out of money and are unable to pay back your interest.
5. Horizon Risk
If you have to sell your shares immediately due to some emergency, then there is a risk of losing money. If the market is not doing well at that time, you will lose by selling your capital. This is known as horizon risk.
6. Longevity Risk
This is the risk of using up all your savings. It is mostly applicable to retired people or those who are on the verge of retirement.
7. Foreign Investment Risk
While investing in companies based in foreign countries, one has to be aware of foreign investment risks. The change in financial, political, or government policies of the country severely affect the market.
8. Inflation Risk
Inflation Risk depends on the purchasing power of the goods and entities. Their demand in the market decides their value and of your capital. Bond markets usually face this inflation risk.
9. Reinvestment Risk
It is the risk that an investor faces when their previous investment all of a sudden gets stopped or cancelled. One has to find a new place to invest that might not be good or profitable in this scenario.
Why is the investment required?
Before you made up your mind about investing or not, it is best to take a look at the essentials of investments. Different investors may have different reasons, but the overall outcome of investing is to make a profit. Some of the important reasons why investment is required are:
1. Save Money
The basic reason for investment is to preserve your hard-earned money. One always has to take care of not losing or outliving their savings. Investing your money in fixed deposits or even in a saving account ensures the safety of your cash. The return may not be so high, but the goal of your capital protection is perfectly met.
2. Growth of Money
The second most important benefit and reason for investment is the growth of money. By investing your money in profitable assets, one can ensure a return over some time. The best way to gain stable growth is real estate, commodities and mutual funds. The risk is high in these investments but with greater risk comes greater profit.
3. A Steady Income
Investments are the best way to guarantee yourself a steady side income. The fixed deposits that pay consistent interest or stocks are its best example. These investments help you pay your everyday expense after retirement. They also act as a good secondary revenue to pay college expenses or EMIs.
4. Reduce the Tax Burden
The tax rate has been rising tremendously, so in this condition, the investment comes to your aid. Apart from money preserving and its growth, investment can also help you to pay off your tax. Investing in funds like Public Provident Fund (PPF) can reduce tax liability by deducting your overall revenue.
5. Save For Retirement
It is not possible for anyone to continue working forever, and also, burdening your children is also not an accurate option. The investments help one to spend their golden years happily and comfortably. Either the high return or stable income meets all the expenses after retirement.
6. Help Financially
Since the expenses are growing at a rapid rate, having an investment helps one a lot for both the long and short term. They can help you meet your current financial needs. Buying a house, paying for school and college or starting up your business, investments can really help you to achieve all this.
In today’s world, investments have become vital to living a stress-free and comfortable life. Everyone is investing money in different things and places. It is a way to grow and save your earnings and secure your present and future.
Investments come with various risks, but if done right and at a proper place, one can avoid all these risks. Remember that although it has risks, its benefits overshadow everything else. Financial aid, saving money for retirement, and unburdening you from tax are some of its advantages. Do thorough research, and find the best place and way to invest for you and your family’s future.