Knowledge Desk
Knowledge Desk
Financial education helps people in being financially literate and develop a positive attitude towards managing their income, expenditure, assets and liabilities properly, which would lead them to a situation of better financial well-being.Financial planning is must for every household. Financial planning goes beyond savings. It is an investment with a purpose. It is a plan to save and spend future income and should be carefully budgeted.
Savings are the surplus of income over expenditure.
- Income-Money earned from various sources like Salary, Wages, etc.
- Expenditure-Money spent on various items which include essential and non-essential items.People usually meet their short term goals with savings.Money in savings account of a bank earns a small amount of interest and it is easy to withdraw it.
Investing money makes it grow for you. Any increase in the value of the investment over a period of time, or investment income/returns that you receive, gets you that much closer to your financial goals.
One should start saving and investing early in his or her life. The earlier you start, the better you will be placed in meeting your goals like owning a house, financing your child’s education, funding for your retirement, etc.
Items that you own and have economic value are your assets and items which you owe to others or have borrowed from others are your liabilities.
For example, if you save and then invest in a fixed deposit, it is your asset. On the other hand, if you borrow funds/ take a loan from a bank or any individual, it is your liability.
Money borrowed to meet the shortfall of money when expenses are more than funds available in hand is called debt.
Three Pillars of Investment
Safety
This is about how well-protected the principal and return on the investment are. For instance, if you lend ₹100/-to someone, will it be repaid on time? Or, is your capital of ₹100/-safe? Safety means your money invested is protected and there is every possibility that on the agreed date, or may be even before, it would be returned whenever needed.
Liquidity
Return
What is the return you will get on your investments? It could be in the form of income, appreciation of capital invested, or both. Income means an investment’s earnings in the form of interest or dividend payment. Capital appreciation means the increase in the market value of the investment over a period of time.
By ADAM HAYES
What is an Investment?
An investment is an asset or item acquired with the goal of generating income or appreciation. Appreciation refers to an increase in the value of an asset over time. When an individual purchases a good as an investment, the intent is not to consume the good but rather to use it in the future to create wealth.
An investment always concerns the outlay of some resource today—time, effort, money, or an asset—in hopes of a greater payoff in the future than what was originally put in. For example, an investor may purchase a monetary asset now with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit.
Investing vs Saving
What is an Investment Plan?
Key Takeways
An investment involves putting capital to use today in order to increase its value over time.An investment requires putting capital to work, in the form of time, money, effort, etc., in hopes of a greater payoff in the future than what was originally put in.
An investment can refer to any medium or mechanism used for generating future income, including bonds, stocks, real estate property, or alternative investments. Investments usually do not come with guarantees of appreciation; it is possible to end up with less money than with what you started. Investments can be diversified to reduce risk, though this may reduce the amount of earning potential.
How an Investment Works
The act of investing has the goal of generating income and increasing value over time. An investment can refer to any mechanism used for generating future income. This includes the purchase of bonds, stocks, or real estate property, among other examples. Additionally, purchasing a property that can be used to produce goods can be considered an investment.
In general, any action that is taken in the hopes of raising future revenue can also be considered an investment. For example, when choosing to pursue additional education, the goal is often to increase knowledge and improve skills. The upfront investment of time attending class and money to pay for tuition will hopefully result in increased earnings over the student’s career.
(i.e. a gold ETF).
Return on Investment
The primary way to gauge the success of an investment is to calculate the return on investment (ROI). ROI is measured as:
ROI = (Current Value of Investment – Original Value of Investment) / Original Value of Investment
Investments and Diversification
Types Of Investment
Stocks/Equities
A share of stock is a piece of ownership of a public or private company. By owning stock, the investor may be entitled to dividend distributions generated from the net profit of the company. As the company becomes more successful and other investors seek to buy that company’s stock, it’s value can also appreciate and be sold for capital gains.
Pension Plans
The Indian government has from time to time implemented several plans to offer financial security in the form of pensions. These plans mainly entail financial products that enable investors to make small savings and ultimately build a retirement fund. Some of the popular pension schemes include the National Pension Scheme, Senior Citizens Savings Schemes, PMVVY, etc.
Bonds/Fixed-Income Securities
Mutual Funds
ETF
Commodities
Commodities are often raw materials such as agriculture, energy, or metals. Investors can choose to invest in actual tangible commodities (i.e. owning a bar of gold) or can choose alternative investment products that represent digital ownership.
Systematic Investment Plan (SIP)
Systematic Investment Plan (SIP) is an investment route offered by Mutual Funds wherein one can invest a fixed amount in a Mutual Fund scheme at regular intervals– say once a month or once a quarter, instead of making a lump-sum investment. The installment amount could be as little as INR 500 a month and is similar to a recurring deposit. It’s convenient as you can give your bank standing instructions to debit the amount every month.
SIP has been gaining popularity among Indian MF investors, as it helps in investing in a disciplined manner without worrying about market volatility and timing the market. Systematic Investment Plans offered by Mutual Funds are easily the best way to enter the world of investments for the long term. It is very important to invest for the long-term, which means that you should start investing early, in order to maximize the end returns. So your mantra should be – Start Early, Invest Regularly to get the best out of your investments