Chapter 1: What is the meaning of Investment : Why Investing is Important ?

What is the meaning of Investment : Why Investing is Important ?

Investing is allocating money towards assets in the hope of making your future better. Investments are made with the view of earning returns, which grows your amount invested to a higher sum. 

1. Why Should You Invest?

Investing is essential to achieve your goals. It is the only way to make your future better. By making investments, you are also saving and accumulating a corpus for a rainy day. Apart from that, making regular investments forces you to set aside a sum regularly, thereby helping you instil a sense of financial discipline in the long run.

2. Impact of Inflation and the Importance of Investing

Inflation, in simple terms, is a surge in the price of materials and services. It decreases the worth of your money and reduces your purchasing power. When there is a rise in the inflation rate, you buy fewer things with the same amount of money. You have no control over the inflation rate. If you are to stay ahead of inflation, you need to have more money to purchase the extent of the goods you intend to in the future with the money you have today. But, money doesn’t grow on its own. If your money has to grow, then it has to earn returns. To earn returns, you need to invest. Therefore, making investments is necessary to tackle inflation. Inflation at the rate of 8% means that you need 8% more money than what you have to purchase the same item next year. 

● Here’s how inflation at 8% reduces the worth of Rs 1 lakh over eight years:

Amount in hand now

Rs 1,00,000

After one year

Rs 92,000

After two years

Rs 84,640

After three years

Rs 77,869

After four years

Rs 71,639

After five years

Rs 65,908

After 6 years

Rs 60,636

After 7 years

Rs 55,785

After 8 years

Rs 51,322

It is very important to earn inflation-beating returns, if not, you may not be able to afford materials and services in the future from the savings you are making now.

3. Types of Investments

You have numerous investment options to choose from. You have to assess your requirements and risk profile before deciding to invest in any particular investment option. Investments are broadly divided into active and passive. Active investment requires you to dynamically change assets in your portfolio, depending on the market and economic developments. You need to have enough time and knowledge of investments to indulge yourself in active investments. Equity investments are the best example of active investments. On the other hand, passive investments do not require you to be hands-on with your investments. You invest your money and stay invested for a certain duration of time. It is also referred to as the buy-and-hold strategy of investment. This strategy of investment is advisable for those who can’t spare time to manage their investments.