What is Investment? Types & Importance of Investment | ICICI Pru Life (2024)

Investment refers to putting your money in an asset with the aim of generating income. Financial investments come in different forms, such as mutual funds, unit linked investment plans, endowment plans, stocks, bonds and more. However, the primary goal behind all investments remains the same, i.e., to increase the value of your invested money.

Investing helps you grow your money which can then be used to meet your future financial goals. When you invest your money, it is likely to provide you with returns. These returns can either be guaranteed^{``</sup> or market-linked depending on where you invest your money. With guaranteed<sup>``} returns, the amount you receive is fixed at the beginning of the investment. With market-linked returns, you get the option to invest in equity and debt markets. Equity markets have the potential to provide high returns but carry high risks as well. Debt markets carry low risk and provide stable returns.

The longer you stay invested, the higher the returns you are likely to receive. These returns can serve as a source of income and help you fulfil your financial aspirations.

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There are multiple opportunities to invest in India. It is important to choose the one that aligns with your requirements. You can consider factors such as returns, risk, lock-in period, flexibility of investing money and withdrawing at times of need, and more.

Below are a few key options to invest in India:

Unit Linked Insurance Plans (ULIPs)

A ULIP is a life insurance plan that helps you save money as well as provides you with a life cover. It provides you with market-linked returns to fulfil your financial goals and a life cover to secure your loved ones financially in case of an unfortunate event. ULIPs offer you the flexibility to invest in equity, debt, or a combination of both funds as per your risk appetite. You can choose the amount you want to invest regularly in your ULIP. With a mandatory lock-in period of 5 years, ULIPs are best suited for the long-term investment horizon.

The premiums paid under the policy are eligible for deduction up to 1.5 lakh p.a. subject to conditions under Section 80C of The Income Tax Act, 1961. The returns from ULIPs are also exempt as per conditions mentioned under Section 10(10D) as per the prevailing laws.

Savings/endownment plans

An endowment plan is a life insurance plan that offers fixed returns along with a life cover. These are low-risk plans that help you save regularly for your future financial goals. You can choose the amount you want to invest regularly in your plan. The returns from these plans are not market-linked and hence, are free from market-related volatility. Depending on the type of plan you choose, you can receive the returns from the plan as lump sum or regular income.

You may consider investing in an endowment plan for your non-negotiable goals, such as your child's education or marriage, buying a house, and more.

The premiums paid under the policy are eligible for deduction up to 1.5 lakh p.a. subject to conditions under Section 80C of The Income Tax Act, 1961. The returns are also exempt subject to conditions prescribed under Section 10(10D) of The Income Tax Act, 1961.

Public Provident Funds (PPF)

You can invest in PPF through your bank or the post office. The returns on PPF are slightly higher than prevailing interest rates from banks. PPF investment comes with a lock-in period of 15 years. The minimum investment amount is ₹ 500 per annum, and the maximum is ₹ 1.5 lakh per annum. The contribution to PPF is eligible for tax deduction as per conditions mentioned under section 80C of the Income Tax Act, 1961. Returns recovered from PPF are exempt under the Income Tax Act, 1961.

Fixed deposits

A fixed deposit is a type of investment. You can deposit an amount as a fixed deposit with your preferred bank and earn fixed returns. They are low-risk investment options and come with a lock-in period.

Stocks

Investing in stocks refers to purchasing shares of listed companies. This requires an understanding of the stock market and carries high risk. The returns are market-linked and can be affected by market-related volatility.

Mutual funds

Mutual funds are market-linked instruments. Professional fund managers usually manage investments in mutual funds. You can select from a large number of options which include equity, debt or a mix of both funds. The investments can be made as lump sum, or in a periodic manner. The returns from mutual funds are market-linked and hence, are affected by market conditions.

Real estate

Purchasing real estate is a traditional investment option in India. With real estate investments, you can have the option to get a regular income in the form of rent or sell it for a lump sum amount. The returns from real estate can vary depending on market conditions, the property's location, and more.

Savings and investment are two different aspects of financial planning. Below are some key differences between the two:

a) Savings

This is the money you set aside from your income for a particular goal, such as buying a car, travelling, staying financially prepared for an emergency, and more. The risk associated with savings is minimal. However, savings do not offer any considerable growth of money.

b) Investment

When you invest your money in the right way, it grows in value and provides you returns. Your investments can be used to fulfil your financial goals such as buying a house, your child’s higher education, and more. Investments also carry a risk that may vary for different investment products.

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In India, investments are categorised as short-term and long-term, which has an implication on their taxability. Short-term investments require an asset to be held for 1 to 3 years, for example, a recurring deposit, mutual funds, and more. Anything beyond this is a long-term investment, such as insurance plans, Public Provident Fund, fixed deposits, National Pension Scheme, and more.

The need for investments cannot be stressed enough. While systematic savings can ensure that you have enough funds for a financial emergency, investments make sure that you do not lose out on the value of your money.

Inflation can reduce the worth of your money with time. A commodity that costs ₹ 10/- today can cost ₹ 50/- five years from now. Therefore, simply saving your money is not enough. You need to invest it so that your funds grow with time.

Investment plans can offer you high returns over time to build wealth and cater for your long-term objectives.

The earlier you start investing, the more time your money gets to grow. Starting early also allows you to invest in smaller amounts regularly to meet your goals, thereby making it easier on your pocket.

Power of compounding

Your investment earns returns. These returns are then re-invested to earn more returns. This process continues. Over time, this leads to significant earnings. This is called the power of compounding.

Below is an example to understand this better:

Mr. Sharma invests ₹ 10 lakh for 15 years at an interest rate of 5%. At the end of the first year, his investment amount becomes ₹ 10.5 lakh, i.e. he earns a return of ₹ 50,000 in the first year.

This amount gets re-invested. For the second year, the interest is earned at ₹ 10.5 lakh amount. At the end of the second year, his investment amount becomes ₹ 11.025 lakh, i.e. he earns a return of ₹ 52,500 in the second year. This is ₹ 2,500 more than the returns earned in the first year.

This process continues and by the end of the 15th year, his investment amount becomes ₹ 20,78,928.18. This means, he earns a total return of ₹ 10,78,928.18 in 15 years. This is because of the power of compounding. If his returns would not have been re-invested, he would have earned an interest of ₹ 50,000 x 15 = 7,50,000, which is about ₹ 3.3 lakh lesser.

More time to overcome any market fluctuations

Investments (especially market-linked investments) offer high risk. The returns can get affected by short-term market volatility. Starting early allows your investments to overcome these market volatilities and offer higher returns in the long term.

Achieve your financial goals earlier

You may have goals, such as buying a house or a car, starting a venture, retiring early, and more. When you start investing early, your investment provides you with returns at an early age. This enables you to achieve your goals sooner in life.

Beat inflation

Inflation is the increase in price of goods and services over time. This means you have to pay more to buy the same goods and services in the future. This can affect your budget.

When you invest early, you earn better returns. This enables you to stay financially prepared to beat inflation and stay worry-free.

Higher risk-taking ability

Age is an important factor when it comes to the ability to take risk. At a younger age, there are fewer responsibilities. This allows you to invest in high-risk instruments like equity or mutual funds to earn better returns.

As you grow older, your responsibilities increase and hence, your risk appetite decreases. You may then want to invest in instruments that offer low risk. These low-risk instruments may provide lower returns.

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Low-risk investments

The risk is negligible, but the return on investment may also be less than medium and high-risk options. These include instruments like government bonds, corporate bonds, treasury notes, and more

Medium-risk investments

The rate of return is moderately high here

High-risk investments

These investments offer the maximum potential for growth. These include instruments like mutual funds, ULIPs, equity, and more

ICICI Pru Guaranteed Income For Tomorrow (Long-Term)

This plan offers you a guaranteed`` income to cover your future financial needs. The plan also provides a life cover^` that protects your loved ones, in case of an unfortunate event. You can choose to pay your premiums^* monthly, half-yearly, or yearly. You can also choose to receive the income from the plan for 15, 20, 25 or 30 years. The premiums paid towards the plan are allowed as a deduction^{^} up to ₹ 1.5 lakh per annum under Section 80(C) of the Income Tax Act, 1961. The payouts received from the plan are also tax-free^{^} under Section 10(10D) of the Income Tax Act, 1961.

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Long-term investments offer a lot of advantages. Firstly, the amount of interest (return) you receive at the end of a term is substantially more than the short-term investments. With a longer period of investment, your money grows in value over the years. Moreover, long-term investments keep you safe from the volatility of the market. When you stay invested for a longer time, you can ride out the fluctuations in the market.

Long-term investments align well with big financial goals, like funding for your child's education or wedding, buying a house, or saving up for retirement. They give you time to build your wealth slowly and steadily with short-term tax^{^} benefits and allow you to save for significant milestones in life without hampering your current goals and lifestyle. However, every long-term investment option must be chosen carefully. You must understand the risk factors attached to an investment plan before making a decision.

First job

Since you are just beginning your investment journey, ELSS, Equity, and Term Insurance can be good options. These are all affordable instruments that do not require a lump sum investment. Moreover, the risk and reward are ideal for someone starting their career

Marriage

Health insurance for self and family becomes crucial at this stage. This ensures that you and your family stay protected against the costs of healthcare. So, you can focus on important goals, such as family planning and career planning

Birth of a child, buying a house, child education

ULIPs and savings plans make for a good choice here. These plans offer life protection and investment growth. Your loved ones stay financially secured and you can invest for long term goals

Retirement

Money back plans, unit-linked retirement plans, immediate annuity plans, and more such plans are ideal for retirement. The maturity benefits can help you maintain a similar standard of living in retirement as before, and the life protection component acts as a financial cushion for your family

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