What Is Investment & How Does It Work? (2024)

3 min read Apr 8, 2024

How does investment work?

Investing entails acquiring assets like equities or bonds with the anticipation that their value will appreciate over time or generate additional income. For instance, investing in company shares allows you to benefit from price appreciation when the company performs well. Similarly, investing in bonds involves lending money to entities like companies or governments in exchange for regular interest payments. However, it's crucial to acknowledge that investing carries inherent risks. While investments have the potential for income generation and capital appreciation, there's also a possibility of losses. Successful investing requires time, patience, and a tolerance for risk. Nevertheless, with careful decision-making, embarking on an investment journey can be immensely rewarding.

Asset classes and investment avenues available in India

Asset classes can be broadly classified into equity, debt, fixed income, gold and real estate. For retail investors, equity and debt are the most easily accessible as there are different investment avenues available through which you can invest in them.

Asset Classes

Equity or stocks
Investing in equity involves purchasing shares of listed companies through stock exchanges. Investing in equity helps you to earn inflation-beating returns and accumulate wealth over the long term. This allows investors to benefit from long-term wealth accumulation and inflation-beating returns. However, equity investments are subject to market volatility and require a comprehensive understanding of market dynamics. While investors with an understanding of the market and a considerable risk tolerance can consider investing in direct equities, those who are conservative can consider long-term investing in equity Mutual Funds.

Debt of fixed income
Debt investments offer lower but stable returns compared to equity. Fixed income instruments like bonds and debt mutual funds provide investors with a steady income stream while minimising market volatility.

Investment avenues

Mutual Funds
Mutual funds enable investors to access multiple asset classes like equity, fixed income, and gold through pooled investments. Managed by professional fund managers, mutual funds offer diversification and risk mitigation benefits, making them suitable for diversified investment portfolios.

Funds from many investors are pooled to buy a diversified portfolio.
Managed by experts aiming for optimal returns.
Reduces risk by investing in a variety of assets.

Unit Linked Insurance Plans (ULIPs)
ULIPs are insurance plans that also offer the option to invest in debt and equity.

Part of the premium goes to insurance, and part is invested.
Offers options to invest in stocks or bonds.
Provides tax benefits under certain conditions.
Suitable for those looking for investment with life cover.

Public Provident Fund (PPF)

It is a Government-backed fixed income investment option that offers secured and guaranteed returns.
It offers tax-free returns on both interest earned and the principal amount (1.5Lakh/yr).
It is a long-term investment with a tenure of 15 years, which can be extended further.
It is suitable for those individuals who are looking for a risk-free and long-term investment opportunity.

Fixed Deposits

Fixed Deposits offer guaranteed returns with a fixed interest rate over a specific period.
They are not influenced by market volatility, making them a safe choice for risk-averse individuals.
Interest rates are typically higher than those on Savings Accounts.
Suitable for investors who are seeking safe, short-term to medium-term investments.

Difference between Savings and Investment

Savings

Savings refers to a part of income not used by investors. It is simply money set aside for future use, not actively engaged in any financial growth.
Main goals are safety and liquidity. Savings are kept in reserve to manage emergencies, short-term objectives, or for potential opportunities.
The risk involved is very low to no risk. This is because they are typically held in secure forms such as Savings Accounts, Fixed Deposits, or cash.
Typically, offer minimal returns, usually in the form of interest from Savings Accounts or Fixed Deposits, which are lower than inflation rates over time.

Investment

Investment is putting money into assets to generate income or profit. It involves using capital to grow wealth over time.
It helps individuals grow your money and achieve long-term financial goals, such as preparing for retirement, purchasing a house, or funding education.
Investment comes with varying degrees of risk, providing the opportunity for greater returns as well as the possibility of losing the principal amount.
Generally, offers higher returns compared to savings, with the potential for capital appreciation, dividends, or interest earnings.

How do investment plans in India work?

Investment plans in India are financial products designed to help individuals save and accumulate wealth. These plans are frequently offered by banks, financial institutions, and insurance companies, and cater to a range of investment goals and risk appetites.

Key options include Fixed Deposits, Mutual Funds, and government schemes like PPF and National Pension System (NPS). Investors select their preferred options based on their financial objectives, risk tolerance, and investment horizon, with the intention of achieving capital growth, generating income, or enjoying tax benefits.

Objectives of investment

Maintain financial security: Investments are a way to safeguard your financial future. By allocating resources into various assets, you can ensure a safety net against unexpected expenses, inflation, and other financial uncertainties.
Accumulate wealth: Investing allows your money to grow over time through the power of compounding, market appreciation, and reinvestment. It is a strategic approach to increasing your financial assets and building substantial wealth.
Receive regular returns: Certain investments, like dividend-yielding stocks, fixed income securities, and real estate, can provide a steady stream of income. This is particularly appealing for those seeking regular earnings alongside capital appreciation.
Minimise tax liability: Many investment vehicles offer tax advantages, such as tax deductions on contributions and tax-free or tax-deferred growth. Utilising these can significantly reduce your overall tax burden, enhancing your financial efficiency.
Prepare for retirement: Investing is crucial for retirement planning. It enables you to accumulate a corpus that can support your lifestyle in the absence of regular income. Proper investment planning ensures financial independence and comfort in your retirement years.
Achieve your financial objectives: Whether it is buying a home, funding education, or going on a vacation, investments can help you reach your financial goals. By selecting the right investment mix, you can grow your funds to meet specific objectives within desired timelines.

Also Read: How to invest in a Systematic Investment Plan (SIP) - 6 easy steps

Conclusion

Investing intelligently is pivotal for realizing financial aspirations, and Axis Bank is committed to supporting investors on their journey. Whether seeking stability through fixed deposits or exploring growth opportunities with mutual funds, Axis Bank offers a comprehensive range of investment options tailored to diverse investor needs. However, it's essential to acknowledge that investment decisions carry inherent risks, and individuals should seek professional advice before making financial decisions.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
Mutual Fund investments are subject to market risk, read all scheme related documents carefully. Axis Bank Ltd is acting as an AMFI registered MF Distributor (ARN code: ARN-0019). Purchase of Mutual Funds by Axis Bank’s customer is purely voluntary and not linked to availment of any other facility from the Bank. T&C apply.