Course 2 Module 1

UNDERSTANDING
INVESTMENTS

At the end of this module, you should be able to understand

about Investments, their importance, types of investments,

where to invest and how to plan to your money

 WHAT ARE INVESTMENTS?
An investment always concerns the outlay of some asset

today (time, money, effort, etc.) in hopes of a greater

payoff in the future than what was originally put in. An

asset that is bought, which has the capability of

generating wealth or appreciate over time.

TYPES OF INVESTMENTS
Stocks, also known as company shares, are probably the most famous investment

vehicle in India. When you buy a company’s stock, you buy ownership in that

company that allows you to participate in the company’s growth. Stocks are ideal

long-term investments. But investing in stocks should not be equated to trading in

STOCKS the stock market, which is a speculative activity.

Mutual funds  have been around for the past few decades but they have gained

popularity only in the last few years. These are investment vehicles that pool the

money of many investors and invest it in a way to earn optimum returns. Different

types of mutual funds invest in different securities.

MUTUAL
FUNDS
Fixed deposits  are investment vehicles that are for a specific, pre-defined time

period. They offer complete capital protection as well as guaranteed returns. They

are ideal for conservative investors who stay away from risks. Fixed deposits are

FIXED offered by banks and for different time periods.

DEPOSITS
A RD is another fixed tenure investment that allows investors to put in a specific

amount every month for a pre-defined period of time. RDs are offered by banks and

post offices. The interest rates are defined by the institution offering it. It allows the

RECURRING
investor to invest a small amount every month to build a corpus over a defined time

DEPOSITS
period.

The PPF is a long-term tax-saving investment vehicle that comes with a lock-in

period of 15 years. Investments made in PPF can be used to earn a tax break. It's

rate is decided by the Government of India every quarter. The corpus withdrawn at

PUBLIC the end of the 15-year period is completely tax-free in the hands of the investor.

PROVIDENT FUND
EPF deductions are typically a part of an earner’s monthly salary and the same

amount is matched by the employer as well. Upon maturity, the withdrawn corpus

from EPF is also entirely tax-free. EPF rates are also decided by the Government of

India every quarter.

EMPLOYEE
PROVIDENT FUND
The NPS is a relatively new tax-saving investment option. Investors in the NPS stay

locked-in till retirement and can earn higher returns than PPF or EPF since the NPS

NATIONAL offers plan options that invest in equities as well.The maturity corpus from the NPS is

PENSION SCHEME not entirely tax-free and a part of it has to be used to purchase an annuity that will

give the investor a regular pension.

WHAT ARE INVESTMENTS?
An investment always concerns the outlay of some asset

today (time, money, effort, etc.) in hopes of a greater

payoff in the future than what was originally put in. An

asset that is bought, which has the capability of

generating wealth or appreciate over time.

TYPES OF INVESTMENTS
Stocks, also known as company shares, are probably the most famous

STOCKS
investment vehicle in India. When you buy a company’s stock, you buy

ownership in that company that allows you to participate in the company’s

growth. Stocks are ideal long-term investments. But investing in stocks should

not be equated to trading in the stock market, which is a speculative activity.

MUTUAL
Mutual funds  have been around for the past few decades but they have

FUNDS
gained popularity only in the last few years. These are investment vehicles

that pool the money of many investors and invest it in a way to earn optimum

returns. Different types of mutual funds invest in different securities.

FIXED
Fixed deposits  are investment vehicles that are for a specific, pre-defined

DEPOSITS
time period. They offer complete capital protection as well as guaranteed

returns. They are ideal for conservative investors who stay away from risks.

Fixed deposits are offered by banks and for different time periods.

A recurring deposit (RD) is another fixed tenure investment that allows

investors to put in a specific amount every month for a pre-defined period of

RECURRING
time. RDs are offered by banks and post offices. The interest rates are

defined by the institution offering it. It allows the investor to invest a small
DEPOSITS
amount every month to build a corpus over a defined time period.

The  Public Provident Fund  (PPF) is a long-term tax-saving investment vehicle

PUBLIC
PROVIDENT
that comes with a lock-in period of 15 years. Investments made in PPF can be

FUND
used to earn a tax break. It's rate is decided by the Government of India

every quarter. The corpus withdrawn at the end of the 15-year period is

completely tax-free in the hands of the investor.

EPF deductions are typically a part of an earner’s monthly salary and the
EMPLOYEE
same amount is matched by the employer as well. Upon maturity, the

PROVIDENT
FUND
withdrawn corpus from EPF is also entirely tax-free. EPF rates are also

decided by the Government of India every quarter.

The  National Pension System  (NPS) is a relatively new tax-saving investment

NATIONAL
option. Investors in the NPS stay locked-in till retirement and can earn higher
PENSION
returns than PPF or EPF since the NPS offers plan options that invest in

equities as well.
SCHEME
WHERE TO INVEST?
Since there are so many types of investment

vehicles, it is normal for an investor to get

overwhelmed. Someone new to investing would not

where to invest their money. Making the wrong

investment choice can lead to financial losses,

which is something that no one wants. This is why

you should use the following factors to decide

where to invest your money.

1. Age
Typically, younger investors have fewer

responsibilities and a longer time horizon. When you

have a long working life in front of you, you can

invest in vehicles with a long-term view and also

keep increasing your investment amount with an

increase in your income. This is why equity-oriented

investments like  equity mutual funds  would be a

better option for young investors, as compared to

something like fixed deposits. But on the other hand,

older investors can opt for safer avenues like FDs.

2. Goal
Investment goals can be either short-term or long-

term. For a short-term goal, you should opt for a

safer investment and use the return-generating

potential of equities for long-term goals. Goals can

also be negotiable and non-negotiable. For non-

negotiable goals like children’s education or down

payment for a house, guaranteed-return investments

would be a good choice. But if the goal is

negotiable, which means that it can be pushed back

by a few months, then investing in equity mutual

funds or stocks can be beneficial.

3. Profile
Another thing to think about when choosing an

investment option is your own profile. Factors like

how much you are earning and how many financial

dependants you have are also critical. A young

investor with a lot of time on hand may not be able

to take equity-related risks if he also has the

responsibility to take care of his family. Similarly,

someone older with no dependents and a steady

source of income can choose to invest in equities to

earn higher returns.