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In this policy, the investment risk in the investment portfolio is borne by the policyholder.
Kotak e-Invest
Features
Ref. No. KLI/22-23/E-BB/492
Investment is the distribution of funds in assets like stocks, bonds, real estate, or mutual funds to grow your wealth over time with the expectation of generating future returns.
Earning money comes with the responsibility of saving and growing that wealth. One of the most popular ways to grow your money is to invest it. But what is the meaning of investment? Does it work like simply putting money in an account and leaving it to grow with time, or should you look into it actively for better results? Whatever your choice of investment is, learning the basics of investment should be your first priority.
Well, in the simplest terms, if you have to explain ‘investment meaning,’ you can consider it as allocating resources, like money, to generate future income or profit. It involves the purchase or creation of assets that have the potential to appreciate or generate returns over time. Investments can take many forms, from stocks and bonds to real estate and business ventures.
As mentioned above, investment works by allocating money to various financial instruments or assets to generate long-term returns. When you invest, you essentially purchase assets like stocks, bonds, mutual funds, or real estate, which have the potential to increase in value or provide income through dividends, interest, or rent. The returns you earn depend on the performance of these assets, which can fluctuate based on market conditions, economic factors, and the level of risk involved.
Another important aspect to keep in mind is that investments are of different types depending on the risk factor. Which means that higher-risk investments, such as equities, offer the potential for greater returns but come with increased volatility, while lower-risk investments, like government bonds, provide more stability but with lower returns. Over time, investments can benefit from the power of compounding, where the earnings generated are reinvested, leading to exponential growth.
There are several common types of investments, each with its characteristics, risk levels, and potential returns. Here are some of the most prevalent forms of investment:
When you buy shares of a company’s stock, you become a partial owner of that company. Stockholders can benefit from capital appreciation (an increase in the stock’s price) and dividends (a portion of the company’s profits distributed to shareholders).
Bonds are debt securities issued by governments or corporations. When you purchase a bond, you essentially lend money to the issuer in exchange for periodic interest payments and the return of the bond’s face value when it matures.
Investing in real estate involves purchasing properties with the expectation of appreciation in their value over time. When properties are sold, real estate can generate rental income and capital gains.
Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other assets. They offer diversification and professional management.
While commonly people tend to use these terms synonymously, savings and investment are two different types of financial strategies used to accumulate wealth. Let’s see how:
Savings refer to setting aside a portion of your income in a secure and accessible manner, typically in a savings account. The primary goal of saving is to ensure liquidity and safety with minimal risk, but the returns are usually low.
Investment, on the other hand, involves allocating money to assets like stocks, bonds, or real estate to generate returns over time. Investments carry varying degrees of risk but offer the potential for higher returns compared to savings.
Investment plans in India allow individuals to allot their money to various financial instruments, such as mutual funds, stocks, fixed deposits, or insurance plans, depending on their financial goals and risk tolerance. Here is how they function:
Investors choose an investment plan based on their objectives, such as wealth creation, tax savings, or retirement planning. Each plan offers different levels of risk and potential returns.
Investors can either make a lump sum payment or contribute regularly, like through a Systematic Investment Plan (SIP) for mutual funds. The amount invested accumulates over time.
The invested money is used to purchase assets or securities. The value of these assets may increase or decrease depending on market conditions, interest rates, or other economic factors. Some plans offer fixed returns, while others depend on market performance.
Certain investment plans, like Equity-Linked Savings Schemes (ELSS) or Public Provident Funds (PPF), offer tax benefits under Section 80C of the Income Tax Act, allowing investors to save on taxes.
Depending on the type of plan, investors may receive payouts in the form of dividends, interest, or lump sum amounts at maturity. For insurance-linked plans, benefits are provided in case of specific events like maturity or death.
Many investment plans offer the flexibility to switch between different funds or withdraw money after a certain period, depending on the terms of the plan.
You might wonder why you should put your hard-earned money in various investment tools. The reason is simple: making your money work results in its growth. It is better to invest it in market-related options rather than just keeping it safe at home or in a bank account. By investing money, you can achieve your financial goals like prepare a backup for your retirement, plan a family vacation, or buy the house of your dreams with your investment returns.
While the primary and most important reason to invest your hard-earned money is to make it grow over time, many other reasons can motivate you to invest.
Investing in secure assets like government bonds or fixed deposits helps preserve capital, ensuring your money remains safe even during economic fluctuations.
Investments are designed to increase your wealth over time through appreciation and compounding, enabling you to accumulate more than you originally invested.
Certain investments, such as dividend-paying stocks or rental properties, provide a regular income stream, supplementing your primary income source.
Investments like the Public Provident Fund (PPF) or tax-saving mutual funds (ELSS) offer tax benefits, reducing your taxable income and helping you save on taxes.
Investing in long-term plans like pension funds or National Pension Scheme (NPS) ensures you have sufficient funds to maintain your lifestyle during retirement.
You can start investing as early as you want, and your budget allows you to. Investing early will offer you the following benefits:
Starting early allows your investments to benefit from compounding, where the returns generated on your initial investment start earning their returns, leading to exponential growth over time.
Early investments provide a longer time horizon to recover from market downturns, allowing you to ride out volatility and potentially earn higher returns.
By investing early, you can reach your financial goals, such as buying a house or funding education, sooner, thanks to the accumulated returns.
Investing in growth-oriented assets like equities helps you outpace inflation, ensuring that your purchasing power increases or remains stable.
Starting young gives you the advantage of time. It allows you to take on higher-risk investments with the potential for greater returns, as you have more time to recover from any losses.
On the basis of your risk profile, different types of investments that align with your comfort level and financial goals are available. Let us take a look at them:
These include government bonds, fixed deposits, and savings accounts, which offer stable returns with minimal risk, making them suitable for conservative investors.
Medium-risk options like balanced mutual funds or corporate bonds provide a mix of growth and stability, offering moderate returns with some risk.
High-risk investments, such as equities or real estate, have the potential for high returns but come with significant risk, making them ideal for aggressive investors willing to accept volatility.
Investments play a critical role in wealth creation by generating returns that increase your net worth over time, enabling you to build a financial cushion.
Investing aligns with your financial goals, whether buying a home, funding education, or planning for retirement, by helping you accumulate the necessary funds.
Investments like dividend-paying stocks, bonds, or rental properties can provide a steady stream of passive income, supplementing your primary income source.
Return on Investment (ROI) is a financial metric used to evaluate the profitability of an investment or project. It measures the gain or loss generated relative to the initial investment cost. The formula for calculating ROI is as follows:
ROI = (Net Profit / Initial Investment) x 100%
Where:
Suppose you are considering investing in a rental property. You purchase a rental property for ₹200,000, and over a year, you earn ₹20,000 in rental income. Additionally, you incur expenses such as property taxes, maintenance, and mortgage interest, totaling ₹8,000 for the year.
To calculate the ROI for this rental property investment, you can use the formula:
First, calculate the Net Profit:
Now, plug the values into the ROI formula:
The ROI for this rental property investment is 6%. This means that for every dollar invested in the property, you earned a 6% return in profit over one year.
Investment is a fundamental financial concept that allows individuals and organizations to build wealth, achieve financial goals, and secure their financial future. Whether you are a beginner or an experienced investor, understanding the various types of investments and their associated risks and returns is essential to make informed decisions. It is important to remember that all investments carry some level of risk, and it is crucial to align your investment choices with your financial goals, risk tolerance, and time horizon.
1
Low-risk options like index funds, mutual funds, or fixed deposits are typically the best investment options for beginners, as they offer diversification and require less active management.
2
You can start investing with as little as ₹500 or ₹1,000 in mutual funds or systematic investment plans (SIPs). The amount needed varies depending on the type of investment.
3
Stocks represent ownership in a company and offer the potential for high returns with higher risk. At the same time, bonds are loans to a company or government, offering lower but stable returns with lower risk.
4
Compounding occurs when the returns on your investments generate additional earnings over time, leading to exponential growth as both the initial investment and accumulated returns earn interest.
5
In India, investments are taxed differently. Equity investments are subject to capital gains tax, and interest from fixed deposits is taxed according to one’s income tax slab.
6
Your risk profile depends on age, income, financial goals, and risk tolerance. Conservative investors may prefer low-risk options, while aggressive investors might opt for high-risk, high-return investments.
Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.
Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors
In this policy, the investment risk in the investment portfolio is borne by the policyholder.
Kotak e-Invest
Features
Ref. No. KLI/22-23/E-BB/521
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The content has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Further customer is the advised to go through the sales brochure before conducting any sale. Above illustrations are only for understanding, it is not directly or indirectly related to the performance of any product or plans of Kotak Life.
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