Investment - Definition, What is Investment, Advantages of Investment, and Latest News - ClearTax (2024)

Introduction

Investment is an asset acquired or money committed with a purpose to earn income in future. Investments are also made to benefit from future appreciation in the value of an asset.

Investment is a purchase of goods which is future-oriented, aimed at earning income in the future or creating wealth in the future. An individual may also seek to gain by selling the asset in future for a higher price.

Understanding Investment

Investment also includes money committed into a new business venture or for expanding an existing business or purchase of interest or share in a business or investment of an asset in a business. The purpose of investment is to make your money work for you or let your money grow.

There is always an element of risk associated with an investment. Risk is the likelihood of securing the return of the amount invested. The risk is low in cases such as investments in government securities. The risk is high in case of investment in stocks, new business ventures, business expansion, and so on.

Investments can be broadly categorized into:

1. Fixed income investments such as debentures and bonds which bear a fixed percentage of return such as interest.

2. Variable income investments, such as equities and real estate, do not provide a fixed return annually. The dividends or rental payments vary each financial year. And, their value appreciates in the long term.

Factors to consider Before Investing

1. Investments are made to meet short term financial goals as well as long term financial goals.

2. Investments are made to create future capital.

3. Investments are made, keeping in mind a target return on investment.

4. Investments include buying bonds, equities, real estate, and so on.

5. Business investments are made in plant and machinery, labour, research and development activities, real estate, and so on. Similarly, the construction of an asset, namely, a factory or a plant or a building, would also be an investment.

6. An individual's choice to spend money and pursue higher education is also an investment in knowledge and skills for their future.