In the financial industry, there are two concepts that form the basis of most transactional activities. One is savings and the other is investments. There is a huge difference between the two concepts when it comes to execution. Investment in terms of financial context, means any money that is spent today in the hope of financial benefits that may be reaped in a future time frame. Any investment is the act of buying or creating assets with an expectation that the same would yield interest earnings or dividend or capital appreciation or any other return that is profitable as compared to the money put in initially. Almost all investments are differentiated from other kinds of transactions based on the aim of the money spent. Money spent on making investments is primarily with the aim of obtaining some sort of return in a specific period of time.
A lot of times people confuse savings with investments. Savings and investment are different from each other in their approach of utilizing the money involved. While saving may be understood as a passive way of accumulating wealth, investment can be seen as a more aggressive way of securing returns. Mostly, under savings, customers avail a savings account and stash away cash in that account. This cash can be used as and when required by the account holder.
Investments made in the finance industry can be divided into two distinct types namely, Traditional and Alternative. Let us look into each of these types one by one and see what investment categories fall into which type.
Investing in well-known financial products falls into the category of traditional investments. These include bonds, shares, real estate etc. These are categories which are quite popular among investors as active investment strategies to make your money grow. Following are the investment products that fall under the category of traditional investment.
A Bond can be understood as an IOU which is issued by an issuer (borrower) and to a lender. Generally, bonds are instruments used by public and private sector enterprises to raise huge sums of money which any bank is incapable of lending. These bonds are then issued in the public market by the borrowing entity and are bought by lenders for specific amounts of money. Thousands of lenders then come together to lend the required amount and the borrowing organization is able to raise capital for its operational or growth purposes.
However, since money is being lent to the issuer of bonds, there is also an interest component involved that is paid back to the investor in turn for his/her money. This interest is paid at a predetermined rate and for a specific period of time. Bonds fall under the category of fixed income securities since the interest on these can be exactly calculated for the time for which the bond is held. Bonds fall under the debt category and are therefore, comparatively safer financial instruments to invest in. However, with all financial tools risk is inversely proportional to returns and as such the low-risk attribute of this tool makes it a low return instrument as well.
Stocks or equity are shares that are issued by companies and are bought by the general public. This offers an avenue to companies to raise funds. Stocks entitle a customer ownership of a company. Shares, stocks and equity all imply the same thing. Shares are one of the most popular investment avenues in the world. This is because the returns offered by stocks is generally higher than any other financial instrument. However, to balance out the high return associated with stocks, the risk associated with these products is also quite high. Any business may issues different types of shares based on the financial urgency and need. In exchange for the money, shareholders are issued Stock certificates. Stocks are mostly divided into two basic types, common stocks and preferred stocks.
Small savings is another popular savings tool in the Indian financial market. The name itself suggests that these tools are meant for saving money in small amounts. The idea behind this financial tool is to enable the habit of saving in people from almost all economic sections. Some of the most common small savings tools are Sukanya Samriddhi Scheme, EPF (Employees Provident Fund), NPS (National Pension Scheme, Kisan Vikas Patra, Personal Provident Fund (PPF) etc. Almost all small savings schemes are initiated and facilitated by the government so as to enhance the spread and penetration of savings schemes in the country. Let us look into some of the most prominent schemes out of these.
Employees Provident Fund:-
Small savings is another popular savings tool in the Indian financial market. The name itself suggests that these tools are meant for saving money in small amounts. The idea behind this financial tool is to enable the habit of saving in people from almost all economic sections. Some of the most common small savings tools are Sukanya Samriddhi Scheme, EPF (Employees Provident Fund), NPS (National Pension Scheme, Kisan Vikas Patra, Personal Provident Fund (PPF) etc. Almost all small savings schemes are initiated and facilitated by the government so as to enhance the spread and penetration of savings schemes in the country. Let us look into some of the most prominent schemes out of these.
Employees Provident Fund:-
Employees Provident Fund is another small savings scheme that is primarily offered by your employer. This includes salaried individuals of both private and public organizations. Any company with a workforce of more than 20 employees is mandated to register for the EPF scheme. Around 12% each month is deducted from the salary and contributed towards the EPF account of an employee. This EPF account is maintained by the Employees Provident Fund Organization, commonly known as the EPFO. The amount deposited towards EPF is eligible for tax exemption under section 80C of the Income Tax Act.
National Pension Scheme:-
National pension Scheme is one of the most popular schemes for ensuring a regular pension amount to individuals working in both the private and the public sector. NPS is offered to individuals either as part of their corporate perks or is availed by individuals on their own. The amount set aside towards NPS is eligible for tax rebate under section 80C of the Income Tax Act. The scheme offers withdrawal of deposited amount only once the account holder reaches the age of 60 years. The corpus withdrawn on maturity is absolutely tax-free.
Mutual funds are financial instruments that are professionally managed and that invest money on behalf of any investor, in different securities. These mutual funds are classified into various types based on the type of securities that they invest in. Some of the most popular mutual fund types are balanced funds, stock funds, open-ended funds etc. These funds are classified based on their percentage allocation in different securities. So, an equity fund invests purely is equity and is a high risk high return product while a debt fund invests purely in debt and money market instruments and is hence a low risk low return financial product.
As the name itself indicates, fixed deposits are financial instruments that are one of the oldest and safest ways to save money. These are not necessarily active investment tools, but are rather a passive way to save and earn returns. A fixed amount of money is kept aside with a financial institution for a fixed number of days or months or years. In turn, interest is earned on this money. The rate of interest differs with the deposit tenure and also with the banking entity.
Property rates are soaring with every passing day which has made real estate a hot investment avenue for investors. Buying, selling and leasing of property offers substantial returns to investors. Appreciation of property makes real estate a good investment tool. With urbanization gaining ground rapidly, real estate prices in certain major cities like Mumbai, Bangalore, New Delhi, are skyrocketing. This has made these places hot hubs for real estate investors. Most investors take loans from banks to purchase real estate and then lease out or sell the same property to enjoy returns offered due to appreciation in price of the property.
