Investment Products – Why Are They Important?

September 12, 2023 Anuja Maniyala Financial Modeling, Knowledge

Have you ever wondered why youngsters buy investment products right after joining a workplace? If not, let me tell you that investment is an important task that will safeguard your financial position in the future. No wonder adults focus on making their money work for them. Another reason to consider dedicating a certain portion of your salary to growth is that saving money cannot fulfill your luxurious dreams and protect you from financial emergencies. If you have dodged investing your earnings in valuable financial instruments, take time to read this article today because now is the time to understand the phrase “prevention is better than cure”.

The Meaning of Investment

Allocation of a certain portion of your money to an asset with the ability to produce income or grow in value is an investment. This is done by believing that the chosen financial instrument can increase the value of your money in the future. It is done with an expectation to receive more than the invested amount after a period. For example, some companies consider startups to drop a certain part of their profits believing that the chosen entity’s services and products can attract more customers letting the business flourish and thereby send higher dividends to their investors. A range of investment vehicles are available to investors. Some of them are real estate, securities, and commodities.

Importance of Investment

Working for someone or your own company alone is not going to help you become wealthy. You need to take risks and pick a financial instrument to invest your money. Once you make an investment, you will be exposed to the below benefits.

Money growth
Retirement planning
Higher returns
Achievement of financial goals
Savings on tax
Get into business:
Support communities or people
Reduced taxable income
Welcome new ventures

Money Growth:

Investment is a means to let your money grow. Most financial instruments for investment have the ability to provide returns on your amount over a period. This is why many people choose investment products like bonds, certificates of deposit, and stocks. The returns build over time and help you generate wealth.

Retirement Planning:

Working individuals who have the habit of allocating a certain amount of their salaries to investment products like mutual funds, bonds, stocks, businesses, real estate or metals can peacefully enjoy financial security at the end of their retirement age. They can enjoy the funds that are generated from financial instruments. The rate of return depends on the undertaken level of risk. Greater the risk, the greater the reward. However, one should consider their risk tolerance and then enter agreements with investment entities. This is why it is suggested to check your risk tolerance from the beginning of your career to learn about the concept of risk and reward.

Higher Returns:

Anyone who finds a higher-return-producing place to put their money can experience a bank account with increased wealth. Savings accounts have a lower rate of return compared to investments. This is why it is important to pick financial instruments to increase the value of your money.

Achievement of Financial Goals:

Investing is an activity with the potential to produce a higher rate of returns on the deposited money. When the returns accumulate over a period, you can achieve your financial goals such as purchasing a car, owning a home, admitting your offspring to college, or becoming a business partner.

Savings on Tax:

Some assets have tax exemptions. This highlights the point that you can save a certain sum from going into the government’s bank account. That being said, you have to note to invest in investment vehicles that have tax offers to enjoy the tax benefits.

Get Into Business:

If you are into supporting small businesses to get established in the industry, investing in them can do that. Once a business with the intention to introduce new services and products earns a good reputation, it will earn the capacity to grow and thereby send a strong return associated with investment to you.

Support Communities or People:

It is a fact that budding communities and artists need support to flourish in the world. If you are keen on helping them grow as an entity, time to choose good investment products. You may use your returns from other investments to support them.

Reduced Taxable Income:

Another reason to consider investing in finance is the offers that are given to investors. For example, if you lost your money on an investment, the government may provide you with a discount or proposal to compensate for the loss to some extent.

Welcome New Ventures:

As mentioned earlier, many startups fail due to a lack of financial assistance. If you can be kinder and invest in their company’s stocks, you may contribute to their success and enjoy a good rate of return on your investment. Let innovative products and services reach millions of people.

Points to Consider Before Making an Investment

Trying out new things is a nice way to experience the thrill and benefits that come out of it. However, experimenting with money is never advisable unless you are filthy rich. You need to follow certain tips to become a good investor with the ability to make informed decisions regarding your finances. This is why a list of points to be considered for investment is presented below for you.

Set goals
Fix a timeframe
Identify your risk tolerance
Research:
Allocate assets
Hire a financial advisor
Start with low costs
Choose products wisely
Consider automation

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Set Goals:

The first question to ask yourself is “Why am I investing?” want to live in your dream home? Or do you like to go on a vacation to Disneyland? If your goals are short-term, choose investment products that mature quickly or offer returns at a faster pace. Achievement of long-term plans needs long-term investment. So, choose an investment plan as per your intentions.

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Fix a Timeframe:

We discussed setting a goal. The next step that follows goal setting is picking a timeframe. If your aim is to meet the college expenses of your child who is now 3 years old, you have to wait for more than a decade to withdraw your money with increased value. This means that is a long-term goal. Any investment plan with 5 or more years of maturity period is a long-term investment. Suppose, you want to travel to Italy in the next 2 years, you have to continue working and depositing a certain portion of your income for 2 years ie., a short-term plan. An investment with a maturity period of less than 3 years is a short-term plan. On the other hand, if your chosen investment product gives a return between 3 years and 5 years, it is categorized as a midterm plan.

Identify Your Risk Tolerance:

Some financial instruments carry a higher risk compared to others and they also give higher rates of returns. The question is are you capable of handling risk, if yes, how much of it? Most investors who choose vehicles like mutual funds lose their hope as soon as they see news about dropping market prices and redeem their funds in the middle. They face the actual loss after redeeming their funds because the prices go up after the bear market. In short, pick investment plans with a risk tolerable to you. Never make the mistake of investing in a product with higher risk if you cannot keep calm.

Research:

One important fact ignored by beginners is research. They enter the investment field without any knowledge about the investment products and the nature of the market. A lack of understanding of the functionality of the market and assets can let them make incorrect decisions that can adversely impact their bank balance. Get out of your comfort zone, buy some books, watch relevant news, or interact with experienced investors to educate yourself.

Allocate Assets:

As discussed earlier, there is a range of financial instruments within your reach. If your portfolio has different asset classes, ensure to get your investments well-diversified. Diversification of your portfolio can help you mitigate loss incurred by one class as the well-performing asset can compensate for it. Real estate, mutual funds, stocks, retirement accounts, and many other investment types are available products. Diversification of your portfolio can not only protect you from losses but also substantially increase your chances of becoming wealthy. That being said, never pick assets as per the expected highest rate of return, ensure to invest as per your risk appetite.

Hire a Financial Advisor:

This is no brainer; having an expert in investments to provide guidance is a plus to new beginners. Because subject matter experts know in and out of the market and use their expertise in handling portfolios with ease. If you do not know anything about financial products, the best option is to find and connect with an investment advisor. They will evaluate your profile, personal goals, and accordingly make an appropriate plan for your investment.

Start With Low Costs:

Newbies often drop their available capital into financial products. Dedication of a large portion of your income can destroy your mental health when price changes become unfavorable. This is why pick inexpensive products with low risk such as exchange-traded funds, small mutual funds, and individual stocks. Also, connect with an investment advisor who charges an affordable fee.

Choose Products Wisely:

Sometimes dealing with assets with guaranteed returns is the best option. For example, if your ambition is to receive 4 lakhs after 3 years to meet your expenses then invest in instruments with guaranteed return. Alternatively, if you are rich and keen on letting your money work for you and bombard your bank balance after 10 years to provide education to your child, find a product with higher returns. End of the day, your risk appetite should define your investment goals.

Consider Automation:

If you don’t have the energy and time to have regular meetings with a financial advisor, consider automated investments. This is a concept that employs computer algorithms for the selection and trading of exchange-traded funds(ETFs), stocks, or any eligible investment products. They are perfect for investors who want tailored retirement advice or financial plans. The parameters you give determine the investing pattern. Age, goals, risk tolerance, and income are common inputs considered by the systems to create a personalized strategy for you. The icing on the cake is that they are cheaper compared to other investment entities.

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Common Kinds of Investment Products

Investment products are classified into different types based on their nature and industry. The most prevalent kinds of financial instruments are discussed below to enlighten you.

Bonds
Stocks
Mutual fund
Exchange-traded funds
Retirement plans
Options
Commodities

Bonds:

Bonds are debt securities that provide the lender an interest on the principal amount. The issuer of bonds is usually a government body. Investors lend an amount to the lender and receive an interest in the future. These are less riskier in nature and generally offer lower returns. These are considered more secure compared to the products that involve non-government bodies. That being said, there are chances of issuer defaulting.

Stocks:

Stocks are securities that permit the investors to get partial ownership of the company. The other name for stocks is shares or equities. The individuals who own shares in a company are referred to as shareholders. They receive dividends from the company after it makes a profit. Shares are a means to raise capital for the company. The investors have the choice to buy or sell their shares. Shares carry higher risk which is why they offer a higher rate of returns.

Mutual Funds:

Mutual funds are pools of money invested by people who share common interests. They are managed by a fund manager. It is one of the investment products that have a portfolio of bonds, stocks, and other securities managed by a professional. Every included fund has a specific goal. Some are growth oriented whereas others may be chosen because of their stable-performing nature. All you have to do is choose an option that is right for you.

Exchange-traded Funds:

These are one kind of investment products that has features similar to mutual funds. These are pools of securities that are traded on an index throughout the day. These are also similar in nature to stocks. They don’t require active management as much as mutual funds which is why they are less expensive in nature.

Retirement Plans:

A retirement plan is a plan made to credit pension on a regular basis to the retired person. Employers usually provide a retirement plan for their workers. However, if they refrain from offering one, you can purchase one from the financial institutions. These are not exactly investment vehicles but they can let the retired person invest in other securities in the future alongside leading a financially-secure life.

Options:

These are contracts that give the investor a choice to buy or sell securities but there is no obligation to do so. Options are further divided into call options and put options. The former reflects the right of the investor to buy a security or an asset. The latter indicates the right of a trader to sell a security or an asset. These are speculative in nature, which is why you must be cautious when considering them.

Commodities:

Energy, metal, meat, livestock, and agricultural products are categorized under commodities. These are a unique way to diversify your portfolio. These are traded in any market. These carry a higher risk as demand and supply can be affected by unforeseeable factors such as epidemics, unexpected weather conditions, and disasters that include human-made and natural. You can invest in commodities through exchange-traded funds (ETFs), options, futures contracts, and other available ways in the market.

Futures:

These are contracts that mandatorily need the buyer to buy an asset or the seller to sell a security at a fixed date in the future for a set price. These are vehicles that allow the parties to speculate the price of the commodity or financial instrument.

Certificate of deposits(CDs):

These are lump sums of money deposited for a fixed period which when matured hit the bank account of the investor along with interest. The banks pay the interest to the depositor. The maturity period of the certificate of deposits can be a few months, a year, or 5 years as per the choice of the investor. If you are looking for a safer investment product, then certificates of deposit are the right choice for you.

Real Estate:

Any land or property with the ability to generate income or appreciate its value over a period is considered a real estate investment. These kinds of financial vehicles are good at building wealth for the investor. Townhouses, homes, and condominiums are usually considered residential investments. Commercial real properties may be office buildings, warehouses, storage facilities, or retail stores. They are capital gain-generating tools as the value of the properties appreciates over time.

Conclusion:

Investments play an important role in generating wealth and safeguarding one’s future. Investment may not only mean depositing a sum in a bank or a financial institution alone to get an interest on the principal. The sale and purchase of assets and commodities also come under investments. Any task that results in increasing the value of money over a period is an investment. Investors usually get into choosing financial instruments for money growth, retirement planning, higher returns, achievement of financial goals, tax savings, business purposes, supporting communities, reducing taxable income, and welcoming new ventures. A newbie in financial planning must consider the below points to become aware of the market conditions and test strategies for increasing the value of money.

Set goals – setting targets as per your financial needs and requirements.
Fix a timeframe – deciding a period of maturity; short-term, mid-term, or long-term.
Identify your risk tolerance – assessing risk tolerance based on your capacity to handle a loss.
Research: – learning about the market and the chosen financial instruments.
Allocate assets – finding the right asset classes as per your risk tolerance and market conditions.
Hire a financial advisor – availing services of an expert to understand the investment process and manage your financial health
Start with low costs – Choosing affordable securities and advisory services to avoid going bankrupt
Choose products wisely – picking appropriate investment products for diversification of portfolio to mitigate risks
Consider automation – letting automation take care of your portfolio to reduce the required effort, time, and money

Prevalent investment products that are popular in the current world are bonds, stocks, mutual funds, exchange-traded funds, retirement plans, options, and commodities. In simple words, investments are a crucial part of one’s life, and negligence to consider them can affect one’s future. Don’t forget to consider your goals and financial health before buying a security or property to lead a financially and mentally secure journey.

FAQS

Q. What makes investment so important in one’s life?

Investment attracts capital gains and generates wealth for the investor. Whereas a normal person who doesn’t take risks may not be exposed to an improved financial position. Another key reason to allocate a portion of your savings to investments is their ability to project your financial position after retirement and explore new ways to enjoy the freedom which includes traveling around the world and bearing medical expenses if required.

Q. Can I pick any investment product to earn higher returns?

No, to begin with, you have to consider your risk tolerance and then choose investment products that have the capacity to increase your bank balance. On the contrary, you can pick a range of financial instruments to diversify your risk and portfolio. Mutual funds and certificates of deposit are seen as one of the safest options by investors.

Q. What is the range of investment options at my reach?

Innumerable options are available for an investor. All you have to do is assess your risk-handling capacity, funds, lifestyle, and goals. Bonds, stocks, mutual funds, exchange-traded funds, retirement plans, options, and commodities are the most common investment products.

Author: Anuja Maniyala

Anuja Maniyala is a intern at IIM SKILLS. She worked as a creative content writer for AADOX and Quoteslyfe in the past. She has identified her passion for writing after working as a banker in some well-known companies like Wipro and HSBC. Her current target is to become an author of a unique and creative self-help book. Her enthusiasm and curiosity to learn about the human mind and behavior makes her different from the rest of the world.