ABC Home
Loans
Investments
Insurance
Payments
Download ABCD

Experience finance made simple on the new ABCD app!

Scan to Download the App

Playstore Appstore
1800-270-7000

Aditya Birla Sun Life AMC Limited

Aditya Birla Sun Life AMC Limited

    Our Menu
    Invest with Us
    Metaverse

    Aditya Birla Sun Life AMC Limited

    What is Financial Investment? Meaning, Types, Importance, and More

    Jan 09, 2023
    4 min
    4 Rating

    Ever wondered what financial investment means? Read this post for a detailed explanation.

    In India, you can find a wide range of investment solutions. But while there is no shortage of investment options, financial awareness is still quite low in the country, with only 27% being financially literate, according to a SEBI report.

    Whether you’re about to commence your investment journey or have been doing it for some time, it is essential to understand the world of finance and investments. To help you begin, here is a detailed explanation of what is investment in finance, its importance, types, and more. Take a look-

    What is Financial Investment?

    Financial investment is the process of using your capital from your income, assets, or savings to purchase assets, goods, or commodities to either gain appreciation or preserve your capital's value in the future. Here are a few reasons why people invest.

    • To preserve their capital

    • To generate post-tax returns

    • To beat the inflation

    • To build wealth

    • To meet a financial goal

    What is the Importance of Financial Investment?

    With the cost of everyday necessities achieving newer highs, it is not recommended to rely solely on your income to manage the current expenses and build a secure future. Instead, with a focused approach and careful analysis, prudent financial investments could help you strengthen your finances.

    You can use the wealth generated by investing to achieve various short- and long-term goals, like purchasing a car or home, retirement planning, or paying for a child's higher education or marriage.

    What are the Different Types of Financial Investments?

    Some of the most popular investment types are as follows-

    • Mutual Funds

    • Equities

    • Real Estate

    • Gold/Silver

    • Bonds

    • Bank Fixed Deposit (FD)

    • Government-backed schemes, like NPS, NSC, and PPF

    How Do Financial Investments Work?

    To better understand investment meaning, knowing how it works is essential. In simple words, investments work when you acquire an asset or security at a specific price and sell it at a higher price in the future. The difference between the buying and selling price is your profit or gain.

    But why will the price of the asset/security rise in the future? One of the primary reasons is demand and supply. For instance, let us assume that you invest in a property close to where the government plans to build an airport. With time, the demand for properties in the surrounding areas will rise, leading to higher rates.

    How to Start Investing?

    Now that you know the financial investment meaning and how investments work, let’s take a look at some tips that could help you begin your investment journey-

    • Gain Knowledge from Right Sources

      Knowledge is imperative to making the right investment decisions. Thankfully, there are now hundreds and thousands of online platforms where you can learn more about investing. However, ensure you carefully select reliable online sources for accurate and up-to-date information.

    • Know Your Risk Appetite

      Risk and returns go hand-in-hand. The higher the level of risk in an investment, the higher can be the potential returns. But you don't need to take unnecessary risks if it doesn't suit your investment style. So, before you start investing, analyse your risk appetite and choose investments accordingly.

    • Start Small

      As you're new to financial investments, it's essential to start small and grow with experience. Risking a significant amount when you're still learning could lead to losses and might also discourage you from future investments.

    • Know More About Taxes

      Taxes also play a critical role in investments. Know the tax implications on various investments to make smarter and tax-efficient investment decisions. You can also consult with a tax or investment advisor before investing.

    Investments and Diversification

    Diversification is a popular investment strategy that could help you minimize portfolio risk. It requires you to invest in various securities or products so that the portfolio risk is divided and you’re not over-exposed to any particular security/product. Aim to build a diversified portfolio according to your risk appetite, whether you're starting with investments or are already an experienced investor.

    Investments and Risk

    As mentioned above, risk and returns have a positive correlation. High-return potential investments also typically come with a higher level of risk. For instance, equities are popularly known as high-risk-high-returns investments.

    Moreover, even within an asset class, the risk level could vary between securities. For instance, small-cap stocks are potentially riskier than large-cap stocks. So, analyse your risk appetite and choose your financial investment types accordingly.

    Are You Ready to Invest?

    Investing is a smart way to build a brighter, more secure financial future. It can help you achieve your financial goals, enabling you to live the life of your dreams.

    However, you need knowledge and experience to make investment decisions that could deliver impressive results. So, keep learning and implement whatever you learn on a smaller scale to see the results. You can keep adjusting your approach until you have a strategy that aligns with your investment style and helps you achieve your financial objectives.

    Mutual Fund investments are subject to market risks, read all scheme related documents carefully.