An investment can be defined as something or an item that is purchased with the intention of getting an income from it or expecting a future price rise. So investment is an activity or a process. This activity consists of following;
1.The investment involves the action of purchase or acquisition.
2.There is something or some item which is purchased and we can call it an asset.
3.In the investment activity there is a purpose or intention involved which we can call a goal.
4.The goal of purchasing the asset is to gain income or for making profit.
In fact this sort of investment is an economic activity. Why because there is a return or profit generation in this activity of investment. There is another sort of investment where there is no financial gain or return generated from the investment. This is when we utilise the funds with us or invest the same to purchase assets like a TV set or a Mobile phone or a motor car. Here the assets are purchased for personal use. We can classify these investments as General investments or consumption investments. We are not focussing on this type of investments in this site.
An investment in the economic sense is sacrificing the personal use of today for future gains. That is the purchase of an asset or goods or items that are not used for consumption today but are used to generate wealth for tomorrow. When we come to the financial side of an investment it is the purchase of a financial asset for generating future income or can be sold in future, for generating profit, at a higher price.
An investment can be referred to any mechanism which is used for generating future income. In other words, investment includes the purchase of Real estate property(land building etc), Equity shares of limited Companies listed on Stock exchanges , Bonds issued by Central or state Governments or various Municipalities or Public sector undertakings, Debentures issued by Limited Companies , commodities like minerals, oil, metals including precious metals like gold etc. or Artwork like Paintings among several others.
As per the Dictionary, to invest is to allocate money in expectation of a future return. In finance the benefit from an investment is called a return. The return may consist of profit/gain realised from the sale of a property or an investment or it may be unrealised capital appreciation (rise in price)or investment income such as dividends from equity shares/stocks, interest from bonds, debentures or bank deposits, rental income from commercial or residential properties etc. It is not necessary that the price of an investment will always go up. Sometimes it may come down also. In that case instead of profit or capital gain, you may incur a capital loss or capital depreciation (fall in price). Return may also be the combination of income and capital gain. As for an example this happens when the shares purchased give us dividend and at the same time the share price also goes up.
Another way of putting things straight is to say that an Investment is simply putting money to work so that you can make more money. Let us make it very clear that Investing is not a get-rich-quick scheme, but rather a way to consistently grow the wealth/savings you already have. The good news is that even with a small sum of money you can start investing.
There are two concepts of Investments:
1.Economic or Physical Investments:
Economic or physical investments are made in physical assets. Physical assets are tangible assets which we can see and feel. The concept of economic investment means addition to the capital stock of the society. The capital stock of the society is the goods which are used in the production of other goods. The term investment implies the formation of new and productive capital in the form of new construction and produce of durable instruments such as plant and machinery. Plant and machinery is used to produce goods which again add to the capital stock of the society and on sale generate income. Inventories and human capital are also included in this concept.
Thus, an investment, in economic terms, means an increase in building, equipment, and inventory. To construct building you require land. Investment in Assets like land, building, plant and machinery, inventories, industrial metals, precious metals etc are called economic investments or physical investments. They yield future return in the form of income, rent, or capital appreciation. Investment in precious metals like gold and silver is quite popular in India. Gold prices go on increasing because of the limited supply and is also called a hedge against inflation. Art and artefacts are another type of physical investment which is popular among the elites. We are aware of the huge premium in he value of the paintings of famous painters in today’s world.
2.Financial Investments:
Financial investments are made in financial assets, We cannot touch and feel these assets. These assets exist in paper form or electronic form. Here people invest their money in assets which are financial instruments in nature that are expected to yield some gain or return over a given period of time. It means an exchange of financial claims such as shares, bonds etc.
Equity Shares
Financial investment involves contracts written on pieces of paper such as shares and debentures. People invest their money in Equity shares for getting dividend income and for growth of principal invested in the form of increase in the share price. Equity shares are financial instrument issued by Public limited companies listed on stock exchanges. The shareholder gains the voting rights in the company and become eligible for receiving dividend when declared. The stock market refers to the collection of markets and exchanges where regular activities of buying, selling, and issuance of Equity shares of the listed companies take place.
Mutual Funds
Another type of financial investment is investments in Mutual Funds which are becoming quite popular among new investors in India. Mutual funds are financial intermediaries and functions as Asset Management companies or Trusts which floats various types of mutual funds for investment by public.
Bank Fixed deposits
Bank fixed deposits are an important form of financial investment. This is the most popular form of investment among general public. It is estimated that 70 % of all financial investments flow into bank deposits. Bank fixed deposits offer lower rate of return as compared to other form of financial investments. But people put more money in bank deposits because of the safety and liquidity involved.
Bonds and Debentures
Bonds and Debentures are fixed income securities. Bonds are generally issued by Governments (both central and state), Municipalities and public sector undertakings.Debentures are debt securities with fixed income promised. These instruments are issued by Limited Companies for raising funds from public.
Other Financial Investments
Other form of financial investments include Public provident Fund, National saving certificates etc operated by central Govt. Though Life Insurance policies are instruments for hedging the risk of loss due to death, in India many people invest in these policies as a long term investment for achieving their goals like daughter’s marriage, higher education of child etc. Making up a retirement corpus for getting pension etc. People invest in these types of investment tools because in their view these investments are a commitment of money to derive future income in the form of interest, dividends, premiums, pension benefits and the appreciation of the value of their principal capital.
In primitive economies most investments were of the economic or physical variety whereas in a modern economy much of the investments are of the financial variety. The economic and financial concepts of investments are related to each other because financial investment is a part of the savings of individuals which flow into the capital market either directly or through institutions who gather the financial investments of people. These are then utilised by business people for investing in physical assets for producing goods and services.Thus, investment decisions and financial decisions interact with each other. Financial decisions are primarily concerned with the sources of money where as investment decisions are traditionally concerned with uses of money.
In this website we are confining ourselves to investments in Financial Assets mainly items such as Mutual Funds, Equity shares/stocks, Insurance policies, Bonds/Debentures and Bank deposits. We will go through each of them in detail in another occasion.