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Meaning and Definition of Investment

The term ‘investment’ can refer to any mechanism used for generating future income. In economics an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance this includes the purchase of bonds, stocks or real estate property among several others.

Hence investment means putting money to work to start or expand a project or to purchase an asset or interest, where those funds are then put to work, with the goal to income and increased value over time. Additionally a constructed building or other facility used to produce goods can be seen as an investment. The production of goods required to produce other goods may also be seen as investing.

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Types of Investments

Investing intimidates a lot of people. There are a lot of options, and it can be hard to figure out which investments are right for your portfolio. The investment landscape can be extremely dynamic and ever evolving.

But those who take the time to understand the basic principles and the different asset classes stand to gain significantly over the long haul. The important step is learning to distinguish different types of investments.

Most people are aware of stocks and bonds but are unaware of other available options. Investments are classified into three categories. These include owned investments, lending instruments, and cash equivalents. With so many investment types, making the right choice may seem confusing.

Investors must conduct extensive research on investment options and review their investment goals. Investment are generally bucketed into three major categories: stocks, bonds and cash equivalents. There are many ways to invest within each bucket. Here are a few types of investments available within these categories:

1. Ownership

             These investment types allow investors to own assets and earn profit through their holdings. These include the following:

              a) Stocks: Known as shares or equities these investment product allows investors to gain ownership of companies and a part of their profits. Investors acquire ownership based on the number of share they hold in public companies. Stocks are traded on the equity markets and it is recommended that investors include such investments in their overall portfolio to earn high profits.

                b) Real estate: Some investors acquire properties to lease or resell them at a profit later. However individuals are advised to not consider their personal homes as a type of investment. These is because self-occupied homes are not purchased with the objective of earning profits.

                 c) Precious objects: Precious things like gold, silver, art and artefacts are also considered as investments. However this may not always be a prudent investment decision. These objects face the risk of physical damage and require regular maintenance and safe storage, which may reduce the actual profits made at the time of sales.

                  d) Business: Several individuals invest time and money to commence personal business. These may either be manufacturing or services. Such investments may be profitable in the longer duration.

                   e) Life insurance: This is one of the safest types of investments in the long term. In the case of the demise of the insured during the tenure of the policy, the beneficiaries receive the policy benefits. Furthermore the life insurance premium amount is eligible for tax deductions under section 80C of the Income Tax Act, 1961. This may be a good choice for risk-averse investors.

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2. Lending investments:

With these instruments, investors acquire debt that is repaid at a later date. Such products have lower risks but offer lower returns on the investments. 

Here are some products classified under this category.

                  a) Bonds: This kind of investment is a commonly used term for several types of debt investments. Investors loan money to the issuer when they acquire bonds. The issuer repays this amount over a period of time along with a fixed rate of interest. Most investors include bonds in their overall portfolio.

                   b) Certificate of Deposits (CDs): CDs are issued by banks and are promissory notes. When investors acquire CDs, they are unable to withdraw their money prior to the maturity date and earn a higher interest when compared to their savings account.

                    c) Treasury inflation-protection securities (TIPS): TIPS were first launched in June 2013 and were linked to the Wholesale Price Index (WPI). These instruments are expected to protect investor’s capital against inflation and guarantee real returns on their investments.

3. Cash and cash equivalents:

Most investors include some money in the form of cash within their investment portfolio. Certain cash equivalent investments product like money market funds or time deposits with maturity less than 3 months are also available for investors. These instruments are easily convertible to cash. These kinds of investments have law risks and yield lower returns.

4. Alternative products:

This asset class includes all other investment alternatives. Some of these instruments are not categorized as ownership or lending. 

Here are some examples of such products.

                 a) Real-estate investment trusts (REITs): This is an alternative to purchasing investment properties. REITs are companies that invest in real estate and investors are able to earn profits through their investments.

                 b) Venture capital: These fund is offered to start-up ventures or small businesses. Investors known as venture capitalists, expect these companies to grow in the future and earn returns. Sometimes, the investors may even become partners and acquire equity stake, which allows them to be a part of managing the business.

                  c) Commodities: Commodity investment include investing in certain resources that affect the overall economy. These comprise oil, food grains and other resources.

                   d) Mutual funds: Professional managers invest the pool of money collected from several investors in mutual funds. Most funds are launched with basic investment criteria, such as debt funds, equity funds or balanced funds.

                    e) Index funds: These are similar to mutual funds but are linked to indices like the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). These are often passively managed because the money is invested only in the index stocks.

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