Importance of Investment

How would you define an investment? An investment can be an asset that increases in value over time and ensures good returns for either a regular income or a single wholesome amount. For example, buying a home in a prime location can be a good investment. You can either earn a “second” income by giving it out on rent or by selling it for an appreciated value a few years down the line.

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Depending on your risk appetite, here is a look at various investment options that you can choose from:

Equity

Public-listed companies offer equity stocks to raise capital from the market. With this investment, you directly buy these company stocks and become a company shareholder (or a partial owner). Depending on the company’s performance, you can either earn good or poor returns on your investment.

Some listed companies also pay out small and regular dividends based on the company’s earned profits.

Pros
- Higher returns in a shorter duration
- Available for multiple listed companies across industry domains
- Single-time investment
Cons
- No guaranteed returns on invested capital
- Difficult to gauge when to buy or sell equity stocks
- High-risk factor
Mutual Funds

While equity allows you to invest in one, or a few listed companies, mutual funds enable you to invest money into stocks of tens or hundreds of companies at any given time. Mutual funds are considered less risky than equity investments as they are managed by professional fund managers who know where to invest your money.

Depending on your investment goals, you can invest in various mutual funds, including equity, debt, exchange-traded funds (ETFs), or balanced funds.
- Equity-Based mutual funds invest all (or a significant portion) of your capital into company stocks and equities – thus providing better long-term returns.
- Debt-Based mutual funds invest your capital into government-backed financial instruments like government bonds, securities, or treasury bills. These are considered safer than equity funds but provide lesser returns to investors.
- Balanced-Funds are a combination of both equity and debt funds. Compared to the other funds, balanced funds are more diversified as every investor’s portfolio comprises equity and debt funds.
Pros
- Professionally managed by fund managers who track the performance of your investments.
- Enables a larger investment pool as many investors invest capital into the same mutual fund.
- Enables a diversified investment portfolio with different asset classes.
- Encourages continuous savings through monthly SIPs instead of one-time investments.
- Ideal for achieving different investment goals.
Cons
- Past fund performance is no guarantee for future performance.
- Equity-based funds are subject to stock market volatility.
Government bonds

Compared to equity and mutual funds, government bonds (or securities) offer fixed and guaranteed returns to their investors. In India, government bonds are also backed by the Reserve Bank of India (RBI). Government (or debt) funds are issued whenever the government (or government agencies) want to raise capital for public spending – with the assurance of fixed returns (in the form of interest payments) to the investor.

For instance, the Indian government issues taxable bonds with 7.75% annual returns (over 7 years).

Pros
- The national government backs low-risk investment options like bonds
- Regular interest-earning that is credited every six months
- Guaranteed returns on investment
Cons
- Lower returns as compared to other forms of investments
- Government authorities can change the interest rate
Term Insurance

Term life insurance is the best investment tool if you look for financial security for your family and complete peace of mind. You may ask how term insurance is a type of investment, as it does not provide any returns at regular intervals nor on maturity.

Term insurance offers a health insurance cover for the insured’s entire life at a much lower premium. In an untimely death, the whole sum is payable to the deceased’s family members.

Pros
- Easier to understand as compared to other types of insurance.
- High insurance coverage for the lowest premium.
- Cost-effective
Cons
- No benefits or returns during insurance tenure nor on maturity.
- Viewed more as an expense
Unit Linked Insurance Plans (ULIPs)

Suppose you are looking to combine investments with insurance cover. In that case, ULIPs are your best choice as it is the only instrument that offers wealth creation and provides the safety of life insurance. Like balanced funds, ULIPs invest one portion of your money into life insurance, while the rest goes into equity markets.

This type of investment is ideal for individuals looking to stay invested for a longer period (5-10 years). Depending on your preference, you can either opt for a single premium (paid once at the beginning of the insurance policy term) or regular premiums (paid monthly, quarterly, or yearly throughout the policy term).

Pros
- Market-linked returns that are generally higher than regular life insurance policies
- Combines life insurance and investments under one umbrella
- Offers the flexibility of partial withdrawals whenever you need funds urgently
Cons
- Higher fund management and administrative costs as compared to mutual funds
- Higher premiums as compared to regular insurance policies
Public Provident Fund (PPF)

For Indian investors, PPF is popular as a safe and guaranteed investment option. Backed by the Indian government, the PPF scheme is aimed at helping both private and public employees build a post-retirement corpus. With a typical investment duration of 15 years, PPF offers tax-free returns in the form of interest payments (7-8% per annum) to its investors.

Salaried employees can easily open a PPF account at any local post office or through their bank. The invested capital for each financial year can range from Rs.500 (minimum) to Rs.1.5 lakh (maximum).

Pros
- Guaranteed returns that the Indian government backs
- The flexibility of extending the PPF tenure by a block of 5 years (up to a maximum of 15 years)
- Interest earned on the investment is tax-free
- Allows partial withdrawals from the seventh year of the PPF tenure
- Ideal for building a post-retirement corpus
Cons
- High lock-in period with no withdrawals allowed during the first 6 years
- Lower returns as compared to equity or mutual funds

Final thoughts

For investors, the importance of investments can be gauged from the fact that they can help offset inflation while providing them with a "second source" of income. The governments of most growing economies, including India, also encourage foreign investments in the form of FDIs. Foreign investments enable countries, significantly growing economies to create more jobs and provide better economic opportunities.

FAQ's

Q1: When is the right time to start investing?

Answer: Most investment experts agree that it is best to start investing money from a young age. This is because the more the investment duration, the better are the returns. In India, investors can start their investment with a capital of as low as 500/- every month.
Q2: As a beginner to the stock market, how should I choose the right stocks?

Answer: As a beginner, you should start investing in equities of blue-chip established companies to minimize your risk. Alternatively, you should consider investing in a prominent index fund or mutual fund.
Q3: How important is it to have a diversified investment portfolio?

Answer: As the investment mantra goes, “don't put all your eggs in one basket.” Build a diversified portfolio comprising stocks, insurance, mutual funds, and bank deposits based on your investment goals.

˜Top 5 plans based on annualized premium, for bookings made in the first 6 months of FY 24-25. Policybazaar does not endorse, rate or recommend any particular insurer or insurance product offered by any insurer. This list of plans listed here comprise of insurance products offered by all the insurance partners of Policybazaar. For a complete list of insurers in India refer to the Insurance Regulatory and Development Authority of India website, www.irdai.gov.in

Past 10 Years' annualised returns as on 01-04-2025

^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.

Tax benefit is subject to changes in tax laws. Standard T&C Apply
++Source - Google Review Rating available on:- http://bit.ly/3J20bXZ

^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

#The investment risk in the portfolio is borne by the policyholder. Life insurance is available in this product. The maturity amount of Rs 1 Cr. is for a 30 year old healthy individual investing Rs 10,000/- per month for 30 years, with assumed rates of returns @ 8% p.a. that is not guaranteed and is not the upper or lower limits as the value of your policy depends on a number of factors including future investment performance. In Unit Linked Insurance Plans, the investment risk in the investment portfolio is borne by the policyholder and the returns are not guaranteed. Maturity Value: ₹1,05,02,174 @ CARG 8%; ₹50,45,591 @ CAGR 4%

¶Long-term capital gains (LTCG) tax (12.5%) is exempted on annual premiums up to 2.5 lacs.

**Returns are based on past 10 years’ fund performance data (Fund Data Source: Value Research).

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