Understanding 'what is investment'

Published: Saturday, April 2, 2011, 13:00 [IST]

The are many theories of investment and most are different from each other but the underlying objective is the same. Investment is the application of money for earning more money.

An amount deposited into a bank for a specific period is called fixed deposit. This is a type of too, and the interest that we receive during the period is the return on our investment. Similarly, many people tend to invest in stocks, bonds, commodities, real estate, different saving schemes etc., all with the single idea of increasing the individual's wealth by means of positive returns.

To be more specific, an investment is commitment of money, which is called capital, for the purchase of financial instruments or other assets to gain profitable returns. These returns can be in the form of interest, dividends, or appreciation of the value of the instrument, increase in the value of investment (capital gains).

For example, an individual invests by buying land and then leaving it for few years. After the span the price increases, i.e. it is more than the purchase price, this is called capital appreciation.

The individual or the organisation that invests, is called an investor.

An investment involves the choice made by an individual after some analysis or thought to place money in a fund or directly in an asset such as property, commodity, stock, bond, financial derivatives (e.g. futures or options).

All of these activities have a certain level of risk but provides the possibility of generating returns over a period of time. The investment that has not been thoroughly analysed can be more risky compared to what an investor would want, which would in effect raise the possibility of losing money or negative returns.

This is precisely why an investor is always suggested to understand the risks before investing in any of the instruments. The marking of a better investor is their understanding of risk and return level associated to an investment. Given below are some of the most common type of investment options available in India.