Investment is often perceived as a complex and intricate realm dominated by calculations and mathematics. But in addition to that perception, investment is actually an art of skillfully managing and multiplying money. However, beyond this perception lies a world of opportunities to secure our financial future.
This blog is for people who genuinely want to know everything about investing before jumping into an investing spree by buying a random stock on a friend’s recommendation and investing in an IPO because it’s trendy and gives fast returns.
So, Why Did The Concept of Investment Come?
Everyone works eight hours a day and uses their earnings to spend on necessities and sometimes save for luxury. However, on rare occasions, someone may fall sick, lose their job, or simply want to build wealth to secure their future when they might not be capable of earning.
In light of these circumstances, it’s inevitable to establish a solid provision of funds, which serves as a shield against future uncertainties and empowers people to pursue their financial or lifestyle aspirations with confidence.
How Investment Works?
Investment is nothing but the provision of money on a future date. The investment functions in such a way that it holds your money on promising assets that have the potential to generate returns or profits in the future. It could be any financial instruments- Gold, Real Estate, Stocks, Bonds, NFTs, Luxury items, vintage coins. It doesn’t mean that investment also turns into profits.
This piece give you a chance to familarize with the world of investing as we delve into key investment functions and explore different types of investments. Dive in to expand your knowledge.
What Are the Six Investment Functions?
The six investment functions encompass different elements of the investment process, with each playing a vital role in creating wealth and making sound financial decisions. Let’s learn these functions and gain a better understanding through examples.
1.Leveraging Time to Create Wealth
2.Accumulation of Funds With Savings
3.Estimated Higher Demand in the Future
4.Interest and Capital appreciation
5.Risk and Return
6.Consumption And Cashflows
1. Leveraging Time to Create Wealth
Skillfully using time as means to build a larger corpus is a key investment function, especially when working with shoestring savings. Contrary to popular belief, the size of your savings isn’t the only crucial factor. The power of compounding interest over an extended period of time is equally or more important.
To illustrate this, let’s consider an example:
Investing just Rs. 2000 per month for 20 years, 25 years, and 30 years, let’s examine the returns and accumulated wealth over a 10-year difference:
|Invested every month||Investment duration||Total investment||Total ReturnWith interest rate of 8%||Total WealthInvestment+ returns|
To conclude, this chart proves that one does not necessarily need a large sum of money to create wealth. It highlights the power of consistent investments over time. So the major function of investment is to use time effectively.
2. Accumulation of Funds With Savings
Saving and investing are often seen as the opposite ends of the spectrum. The assumption is that the more you save, the less you have available to invest, and vice versa. However, this investment function explains that when you invest, you also save.
Let’s take the above illustration as an example. By investing for a longer period of time, you are not only generating returns but also accumulating savings. Over a span of 10 years, the difference in accumulated savings is significant, nearly reaching a 50% increase. Meanwhile, the returns during these ten years experienced a substantial rise of 200%.
3. Estimated Higher Demand in Future
The success of an investment heavily relies on the future value of assets being invested in.
- We invest in gold because we anticipate higher demand in future. For instance, the price of gold surged from INR 18,500 in 2020 to an astonishing INR 60,000 in 2023.
- The same holds true for real estate investments; a property that was purchased for lakhs by your father in a Tier-3 city could now be worth crores.
- In addition to traditional instruments, modern avenues such as the stock market have also witnessed significant growth. Nifty and Sensex, the benchmark indices, have experienced substantial booms.
What ties these three examples is our third investment function – the anticipated future demand for the assets. This explains why pharmaceutical stocks experienced remarkable growth during the pandemic while other industries struggled to keep up with the rapid pace set by the pharmaceutical sector.
4. Interest and Capital appreciation
Interest and capital appreciation are imperative investment functions. They serve as indicators of whether an investment has been successful or not, making them pivotal prerequisites. The rate of return is a key measure that helps evaluate these aspects.
Lets understand this with an instance, Let’s consider you invest 200,000 at a 10% interest rate, even with simple interest, it grows to 220,000. This interest component contributes to capital appreciation, highlighting the role of investing in increasing one’s capital.
Now, the Interest can manifest as rent or dividends in different investment avenues, such as real estate or stocks. These components contribute to the overall growth of capital, emphasizing the role of investing in increasing wealth.
5. Risk and Return
The relationship between risk and return is often considered linear in this investment function.: the higher the risk, the higher the return. Simply put, higher uncertainty points towards the possibility of higher returns.
Let’s illustrate this with an example. Government saving schemes or fixed deposits (FD) are considered less volatile and secure, offering fixed returns. On the other hand, investments in gold, real estate, stocks, NFTs, and cryptocurrencies are uncertain as their prices fluctuate based on market conditions. Hence, they are perceived as high-risk, high-return investments.
However, it’s important to understand that such investments also carry the risk of potential losses, resulting in high-risk and no-return scenarios.
6. Investment Is Not For Consumption But For Generating Cash Flows
This Investment function revolves around the idea of ownership without immediate consumption of the invested asset. Instead, investors hold them for a certain period and sell them when there is a remarkable increase in capital appreciation. Alternatively, they may hold onto the investment to generate cash flows over time.
For instance, let’s consider investing in Sustvest, which offers an opportunity to invest in rooftop solar projects. When investing in such projects, you don’t consume them directly; rather, you expect to receive returns and cash flows in the form of passive income. This aligns perfectly with the principle of holding assets for generating wealth in the long term, making Sustvest a promising avenue for investors seeking sustainable and profitable investment opportunities.
The essence of investment function lies in utilizing capital to generate financial gains and cash flows, whether through capital appreciation or regular income streams, rather than immediately consuming the invested asset.
Types of Investments
Now that we have a basic understanding of the primary functions of investment, let’s explore the different types of investments.
1.Conventional or Traditional Investments
These investments involve putting money into well-known assets such as real estate, gold, bonds, and stocks, mutual funds, ETFs. The aim is to appreciate capital over time and, in some cases, generate income through rent or dividend payments.
These investments fall outside the realm of traditional investments. They include renewable energy assets, private equity, private debt, commodities, derivatives, and collectibles. Alternative investments often shows different levels of volatility compared to traditional investments and are frequently held by private institutions or high-net-worth individuals.
This type of investment differs from the previous two categories as it focuses not only on financial returns but also on environmental impact. Examples of sustainable investments include ESG (Environmental, Social, and Governance) focused investments, impact investing, and SRI (Socially Responsible Investing). Sustainable investments seek to generate positive environmental and social outcomes alongside financial returns.
Once you have a solid understanding of the various investment functions, you can embark on your investing journey by setting your goals, determining your risk tolerance, conducting thorough research, or seeking guidance from a financial advisor.
Diversification is a key strategy in investing, involving spreading your investments across various asset types to reduce risk and avoid over reliance on a single class.
Furthermore, adding sustainable investments to your portfolio not only provides diversification but also empowers you to contribute to energy conservation by owning a part of a solar park through Sustvest. With attractive returns of up to 15%, sustainable investments offer the potential to align your financial goals with environmental objectives, making them a compelling choice for mindful investors seeking both profitability and positive impact.
Always remember that having a grasp of the basics of investing will serve you well, as investment concepts are foundational knowledge that can guide you in making informed decisions and navigating the world of investments effectively.
Founder of Sustvest
Hardik completed his B.Tech from BITS Pilani. Keeping the current global scenario, the growth of renewable energy in mind, and people looking for investment opportunities in mind he founded SustVest ( formerly, Solar Grid X ) in 2018. This venture led him to achieve the ‘Emerging Fintech Talent of the Year in MENA region ‘ in October 2019.