Features Of Investment: India has crossed the 10 CR mark for the number of retail investors. During the sharp spikes and falls in the markets over the past two years, India has seen a sharp increase in the number of retail investors.
More and more people are looking for alternative investments that go beyond traditional routes such as gold, fixed deposits, and real estate. This blog will take you through the meaning, advantages, and features of investment.
What Is An Investment?
By definition, an investment is an asset that generates income and/or appreciates in value. Gold and land are the most traditional investments known to man. Both appreciate in value and generate income.
Other investment instruments are stocks, bonds, and cryptocurrencies.
The term investment could mean different things to different people.
One feature of investment that is common is –
They are purchased or acquired with the perspective that over time, they will be worth much more in the future and provide a second source of income.
The act of investing, whether traditional or modern, is focused on making money and rising in value in the future.
What are the Features Of Investment?
Real estate, gold, bonds, stocks, and cryptocurrency are all investments, the only difference being that they are different types of instruments.
They are all bought/acquired hoping that it creates wealth in the future.
Wealth generation is one of the features of investment. Read ahead for more features.
1. Return and Risk
Return on Investment (ROI) is the primary reason for buying investments. Higher the return, the higher the risk. Every investment instrument carries a certain amount of risk to it. If you’re comfortable with lower risk, then conservative methods of investing are always available. Higher risk instruments can either wipe away your wealth or multiply your investment.
2. Liquidity and Collateral
An investment is said to be liquid when it can quickly be converted into cash without having to lose money. Liquidity refers to how quickly and easily the asset can be converted into cash. Stocks and gold can be easily converted into cash whereas fixed assets like real estate take a lot of time to get converted into cash.
If you’re not comfortable with selling off your assets, then investments can also be used as collateral, allowing you to borrow funds by offering them as security.
In times of cash crunches, recession, and high inflation, investments can act as a safety net to avoid using your savings for emergencies and expenses. They also serve the purpose of storing surplus capital.
4. Plan For Retirement
Traditionally, the only way retired personnel could retire would be to depend on their pension or their children to take care of them.
Investments allow you to plan for the future and also invest in other instruments besides your pension scheme.
5. Tax Implications
Certain investments can allow you to claim deductions on taxes. These instruments are mostly government issued such as sovereign gold bonds, Post Office Savings Schemes, etc. Even insurances have certain tax benefits.
All investments are subject to taxation and are exempt to a certain limit set by the government as per the Income Tax Act.
Advantages Of Investment
Now that we’ve taken a look at the features of investment, let’s take a look at why they generate so much wealth.
1. Long-Term Returns
Excluding the short-term volatility that all securities face, in the long run, most stocks provide consistent year-on-year returns. This especially applies to large-cap companies, which have managed to perform and sustain even in the hardest hit years like the recent pandemic.
If you observe the historical performance of the indices, you’ll notice that the markets have given generous returns to investors over time.
2. Dividend Income
Owning even one share of a listed company makes you a part of the owners of the company. That makes you privy to voting rights, profit or loss, and dividends. Dividends are the profits of the company that are distributed back to the shareholders. Usually, dividends are paid at the end of the quarter.
Remember that dividends are not obligations. Companies can choose to pay dividends or reinvest in the company.
Dividends can raise the overall returns you receive from your investments.
Purchasing equity, even if it’s a single share, makes you a part owner of the company. This gives you voting rights as well as ownership of the company, even if in part.
4. Hedge against Inflation
Over time, the purchasing power of money has fallen and it is very evident with the rising cost of literally everything. Investments allow you to hedge against inflation, especially when the cost of living is rising faster than the average per capita income.
Even traditional instruments such as fixed deposits offered by banks cannot beat inflation of 7%. Rising prices mean that companies earn more and you as a shareholder, can witness an appreciation of your investments.
5. Transparency and Security
The Indian stock market has seen record highs in terms of volumes, participants and growth. None of that would have been possible without trust in the system and that trust is kept by SEBI.
Today, investments are safer and verifiable through the SEBI Act, which mandates public disclosure of all listed companies and their financial statements, making it harder for chances of fraud and embezzlement.
Because of SEBI, companies cannot make decisions that would otherwise harm their shareholders. That being said, the market still carries a fair amount of risk.
Every investor’s perspective on the term “investment” is different. Some might prefer taking extreme risks and most might be comfortable with moderate to low amounts of risk. What’s important is that you start investing and making your money work for you, just as much as you work to make money. That’s all for this blog on Features of Investment. Happy Investing!
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