Investment is the process of allocating money in assets with the expectation of creating wealth, financial freedom and achieving different financial goals over time Like retirement plans, education and for purchasing properties.
Decision of investing in a particular asset class depends upon the risk and reward associated with it and financial goal of the investors. For example, to get regular and consistent income from investments, invest in a mature company which provides dividend to the shareholders while to create wealth rapidly through compounding of capital gain, one should focus on value investing and growth investing. However there is always risk associated with the different asset classes. Risk associated with different financial instrument is presented in below image.
Some people often get confused between trading and investment and they think both are the same things but here we are representing a small table to differentiate between them. The basic difference between it lies in the time horizon and the approach method to creating wealth.
Purpose of Investing
- Beat Inflation: Over time, inflation erodes the purchasing power of money. Investments often yield returns that outpace inflation.
- Grow Wealth: Strategic investing can multiply your money over time through compounding.
- Generate Income: Some investments offer regular income, such as dividends from stocks or interest from bonds.
- Achieve Financial Goals: Investments can help meet specific milestones like buying a home or funding a child’s education.
Type of Investment
Fix deposit and saving instruments are also the type of conventional investment but here we talk about the non conventional investment instruments.
Stocks
Stock markets are places where shares of publicly listed companies are bought and sold. Holding stocks of a company represents ownership in the company. Market participants make profit by capital gains and dividend. Participants can buy and sell stock, bond and other securities at exchanges like NYSE, NSE, NASDAQ etc.
Bonds
Bonds are the debt instruments issued by the government, municipalities or corporations. When investors purchase bonds, they are eventually lending money to the issuer in exchange of regular interests and return of principal money at maturity. Risk and returns associated with bonds are lower than stocks.
Mutual Funds
Mutual fund is a diversified portfolio of assets like stocks, bonds, money market instruments, or other securities with lower risk than individual stocks, it is managed by a fund manager. Fund is pooled from multiple investors and invested in different mutual funds according to the investor’s objective.
Exchange-Traded Fund (ETF)
An Exchange Traded Fund (ETF) is a type of investment fund that holds a collection of assets—such as stocks, bonds, commodities, or a mix—and is traded on stock exchanges, much like individual stocks. ETFs aim to track the performance of a specific index, sector, commodity, or asset class. Types of ETFs are Index (ETFS&P500, Nifty50), Sector ETF(Technology, Healthcare), Bond ETF (govt and corporates bond)etc.
Real State
Real estate refers to property consisting of land and the buildings on it, including natural resources like crops, minerals, or water. Investing in real estate can be done directly by purchasing physical properties or indirectly through financial instruments like Real Estate Investment Trusts (REITs), real estate mutual funds, and crowdfunding platforms. Many investors are attracted to real estate because it offers potential income through rent, long-term capital appreciation, and diversification benefits within an investment portfolio.
Commodities
The commodity market represents a separate but related sector where investors can trade in raw materials instead of company shares. While the stock market deals with equity ownership in companies, the commodity market allows traders to invest in physical goods like oil, gold, and agricultural products. Commodity prices are influenced by supply and demand, weather, geopolitical events, and global economic trends.
Cryptocurrency
Cryptocurrency is a decentralized digital asset based on blockchain technology. Examples of cryptocurrency are Bitcoin, Dogecoin, Ethereum etc. Cryptocurrency market operates 24/7 and it highly volatile and fast price moving market.
Investment Strategy
Investment strategy is the method of investing money such that investors can achieve their objective of financial goals. There are different types of strategies by which investment is done.
For example we talk about growth investing in this type of investing, the investors invest money in the stock of a company which is growing faster than market. Such companies are in a growth phase in which companies often invest their profit in the company itself rather than providing the dividends to the shareholders. A growth investor buys it expecting future earnings to rise significantly, even if the stock is expensive now based on current earnings. For example, Think of investors buying Tesla in 2015–2020, not because it was cheap, but because of its expected future dominance in EVs.
Investing in undervalued stocks that are trading below their intrinsic value is called value investing. Value investing is popularised by Warren Buffet. A value investor buys it when it’s undervalued, expecting the market to eventually recognize its true worth. Warren Buffett bought Coca-Cola in the 1980s — he focused on its strong brand, stable cash flow, and long-term value.
In income based investing people invest in stocks which give regular incomes in the form of dividends and interest. This type of investment is more suitable for the retiree. Passive investment in the market index (S&P500, Nifty50 index) is called index investing.
Risk of Investing
Investing is a powerful way to grow wealth over time, but it’s important to recognize that it also comes with certain risks. Being aware of these risks helps investors make more informed decisions and build portfolios that align with their risk tolerance.
Market risk is one of the most common risks investors face. It refers to the possibility of losing money due to a decline in the overall market. Even strong, well-performing assets can lose value when markets experience downturns.
Credit risk mainly applies to bond investors. It is the risk that the bond issuer may fail to make interest payments or repay the principal. When a company or government defaults, bondholders can suffer significant losses.
Liquidity risk arises when an investor cannot quickly sell an asset without affecting its price. This is especially relevant in markets with fewer buyers or for investments that are not traded frequently.
Inflation risk occurs when the return on an investment does not keep pace with rising prices. Over time, inflation can erode the real value of returns, reducing purchasing power.
Currency risk affects those investing in foreign markets. Changes in exchange rates can impact the value of international investments, either positively or negatively, depending on the direction of the currency movement.
Understanding these risks is essential for anyone looking to invest. By diversifying investments and aligning them with personal financial goals and time horizons, investors can better manage these uncertainties.
Final Thought
Investing wisely is the key to long-term financial growth and stability. Start early, stay consistent, and focus on building a diversified portfolio rather than chasing quick gains. Always invest with a clear goal, do thorough research, and be patient—wealth grows over time, not overnight. Remember, every great investor once started with small steps. Stay disciplined, trust the process, and let your money work for you.