Course 2 Module 1
UNDERSTANDING
INVESTMENTS
At the end of this module, you should be able to understand
about Investments, their importance, types of investments,
where to invest and how to plan to your money
WHAT ARE INVESTMENTS?
An investment always concerns the outlay of some asset
today (time, money, effort, etc.) in hopes of a greater
payoff in the future than what was originally put in. An
asset that is bought, which has the capability of
generating wealth or appreciate over time.
TYPES OF INVESTMENTS
Stocks, also known as company shares, are probably the most famous investment
vehicle in India. When you buy a company’s stock, you buy ownership in that
company that allows you to participate in the company’s growth. Stocks are ideal
long-term investments. But investing in stocks should not be equated to trading in
STOCKS the stock market, which is a speculative activity.
Mutual funds have been around for the past few decades but they have gained
popularity only in the last few years. These are investment vehicles that pool the
money of many investors and invest it in a way to earn optimum returns. Different
types of mutual funds invest in different securities.
MUTUAL
FUNDS
Fixed deposits are investment vehicles that are for a specific, pre-defined time
period. They offer complete capital protection as well as guaranteed returns. They
are ideal for conservative investors who stay away from risks. Fixed deposits are
FIXED offered by banks and for different time periods.
DEPOSITS
A RD is another fixed tenure investment that allows investors to put in a specific
amount every month for a pre-defined period of time. RDs are offered by banks and
post offices. The interest rates are defined by the institution offering it. It allows the
RECURRING
investor to invest a small amount every month to build a corpus over a defined time
DEPOSITS
period.
The PPF is a long-term tax-saving investment vehicle that comes with a lock-in
period of 15 years. Investments made in PPF can be used to earn a tax break. It's
rate is decided by the Government of India every quarter. The corpus withdrawn at
PUBLIC the end of the 15-year period is completely tax-free in the hands of the investor.
PROVIDENT FUND
EPF deductions are typically a part of an earner’s monthly salary and the same
amount is matched by the employer as well. Upon maturity, the withdrawn corpus
from EPF is also entirely tax-free. EPF rates are also decided by the Government of
India every quarter.
EMPLOYEE
PROVIDENT FUND
The NPS is a relatively new tax-saving investment option. Investors in the NPS stay
locked-in till retirement and can earn higher returns than PPF or EPF since the NPS
NATIONAL offers plan options that invest in equities as well.The maturity corpus from the NPS is
PENSION SCHEME not entirely tax-free and a part of it has to be used to purchase an annuity that will
give the investor a regular pension.
WHAT ARE INVESTMENTS?
An investment always concerns the outlay of some asset
today (time, money, effort, etc.) in hopes of a greater
payoff in the future than what was originally put in. An
asset that is bought, which has the capability of
generating wealth or appreciate over time.
TYPES OF INVESTMENTS
Stocks, also known as company shares, are probably the most famous
STOCKS
investment vehicle in India. When you buy a company’s stock, you buy
ownership in that company that allows you to participate in the company’s
growth. Stocks are ideal long-term investments. But investing in stocks should
not be equated to trading in the stock market, which is a speculative activity.
MUTUAL
Mutual funds have been around for the past few decades but they have
FUNDS
gained popularity only in the last few years. These are investment vehicles
that pool the money of many investors and invest it in a way to earn optimum
returns. Different types of mutual funds invest in different securities.
FIXED
Fixed deposits are investment vehicles that are for a specific, pre-defined
DEPOSITS
time period. They offer complete capital protection as well as guaranteed
returns. They are ideal for conservative investors who stay away from risks.
Fixed deposits are offered by banks and for different time periods.
A recurring deposit (RD) is another fixed tenure investment that allows
investors to put in a specific amount every month for a pre-defined period of
RECURRING
time. RDs are offered by banks and post offices. The interest rates are
defined by the institution offering it. It allows the investor to invest a small
DEPOSITS
amount every month to build a corpus over a defined time period.
The Public Provident Fund (PPF) is a long-term tax-saving investment vehicle
PUBLIC
PROVIDENT
that comes with a lock-in period of 15 years. Investments made in PPF can be
FUND
used to earn a tax break. It's rate is decided by the Government of India
every quarter. The corpus withdrawn at the end of the 15-year period is
completely tax-free in the hands of the investor.
EPF deductions are typically a part of an earner’s monthly salary and the
EMPLOYEE
same amount is matched by the employer as well. Upon maturity, the
PROVIDENT
FUND
withdrawn corpus from EPF is also entirely tax-free. EPF rates are also
decided by the Government of India every quarter.
The National Pension System (NPS) is a relatively new tax-saving investment
NATIONAL
option. Investors in the NPS stay locked-in till retirement and can earn higher
PENSION
returns than PPF or EPF since the NPS offers plan options that invest in
equities as well.
SCHEME
WHERE TO INVEST?
Since there are so many types of investment
vehicles, it is normal for an investor to get
overwhelmed. Someone new to investing would not
where to invest their money. Making the wrong
investment choice can lead to financial losses,
which is something that no one wants. This is why
you should use the following factors to decide
where to invest your money.
1. Age
Typically, younger investors have fewer
responsibilities and a longer time horizon. When you
have a long working life in front of you, you can
invest in vehicles with a long-term view and also
keep increasing your investment amount with an
increase in your income. This is why equity-oriented
investments like equity mutual funds would be a
better option for young investors, as compared to
something like fixed deposits. But on the other hand,
older investors can opt for safer avenues like FDs.
2. Goal
Investment goals can be either short-term or long-
term. For a short-term goal, you should opt for a
safer investment and use the return-generating
potential of equities for long-term goals. Goals can
also be negotiable and non-negotiable. For non-
negotiable goals like children’s education or down
payment for a house, guaranteed-return investments
would be a good choice. But if the goal is
negotiable, which means that it can be pushed back
by a few months, then investing in equity mutual
funds or stocks can be beneficial.
3. Profile
Another thing to think about when choosing an
investment option is your own profile. Factors like
how much you are earning and how many financial
dependants you have are also critical. A young
investor with a lot of time on hand may not be able
to take equity-related risks if he also has the
responsibility to take care of his family. Similarly,
someone older with no dependents and a steady
source of income can choose to invest in equities to
earn higher returns.
