We all talk about investing but do we understand what it really means to invest? Ask a child and the most common answer will be storing money in a bank.
For many adults too, investments are linked to our banking relationships. Asking your banker or your bank relationship manager where to invest your money is a common practice.
Thankfully, in today’s day and age, investing can be done in many other ways with dynamic outcomes. The key is in being able to distinguish genuine investments from other options parading as investments.
Money in your bank savings account is not an investment, its just money lying in the bank. The bank does pay you an annual interest. However, in most banks, that figure is lower than the annual inflation rate which means your money loses value at the end of the year rather than giving you a profit as an investment should. A better option is to perhaps to lock into a bank fixed deposit which pays a higher interest if you keep your money invested for longer periods.
Your Provident Fund
Many people who earn a salary have an Employees Provident Fund account with automatic contributions from their salary and from the employers getting deposited monthly. This is also a form of investment as the money is then put into a large pool of managed assets which deliver a defined and announced return on an annual basis. The longer you leave your money in the pool, the more of it you will have when you access it.
Some even have a Public Provident Fund Account which works similarly, except that it’s a voluntary contribution. This is also an example of an investment.
The house that you live in is not an investment and talking about how much monetary gain you have on this asset is a worthless point.
Your Insurance Plan
If you own an endowment or a money-back plan from an insurance company, although you will get money from the policy, this is not a pure investment plan. It’s mixed up with insurance which causes all kinds of problems in analysing this product as an investment and returns are also sub-optimal. Insurance-based unit-linked plans are better classified as investments but come with some rigidity which one has to watch out for.
The house that you live in is not an investment and talking about how much monetary gain you have on this asset is a worthless point. It is an investment if you are able and willing to sell it at any point to the highest bidder. Often the family home is sold only to buy another home. This is different from investing in residential property for the sake of generating profit. Buying a home is about your lifestyle and not about your investment.
Your financial securities
Financial securities, be it mutual funds, stocks, bonds or any other kind of ‘paper’ investment is done with the sole purpose of growth. This growth may be in the form of capital gains, dividends or interest. Whatever it is, these are investments made with the objective of clear future returns.
In jewellery form, at best its an asset for a rainy day. If you regularly buy gold to hold for value appreciation and no other purpose then that can be classified as an investment. You can take a loan against it and have some expectation of return in the long run.
Differentiating between what is an investment and what is for your use otherwise is important to create a clear idea about your net worth and financial health.