Types of Investments

 You have numerous investment options to choose from. You have to assess your requirements and risk profile before deciding to invest in any particular investment option. Investments are broadly divided into active and passive. Active investment requires you to dynamically change assets in your portfolio, depending on the market and economic developments. You need to have enough time and knowledge of investments to indulge yourself in active investments. Equity investments are the best example of active investments. On the other hand, passive investments do not require you to be hands-on with your investments. You invest your money and stay invested for a certain duration of time. It is also referred to as the buy-and-hold strategy of investment. This strategy of investment is advisable for those who can’t spare time to manage their investments. The following table shows the major differences between active and passive investments:

 

Parameter	Active Investments	Passive Investments
Suitability	Individuals with an in-depth understanding of finances	Everyone
Cost of investment	Higher as you frequently trade securities (mostly equities) in your portfolio	Lower as you buy and hold securities for a longer period
Risk involved	Higher as you frequently buy and sell securities	Lower as you hold securities for a longer time
Return potential	Higher	Lower

 

You have to choose to adopt either an active or passive strategy after you have assessed your requirements and risk tolerance level.

Impact of Inflation and the Importance of Investing

Inflation, in simple terms, is a surge in the price of materials and services. It decreases the worth of your money and reduces your purchasing power. When there is a rise in the inflation rate, you buy fewer things with the same amount of money. You have no control over the inflation rate. If you are to stay ahead of inflation, you need to have more money to purchase the extent of the goods you intend to in the future with the money you have today. But, money doesn’t grow on its own. If your money has to grow, then it has to earn returns. To earn returns, you need to invest. Therefore, making investments is necessary to tackle inflation. Inflation at the rate of 8% means that you need 8% more money than what you have to purchase the same item next year. Here’s how inflation at 8% reduces the worth of Rs 1 lakh over eight years:

 

Amount in hand now	Rs 1,00,000
After one year	Rs 92,000
After two years	Rs 84,640
After three years	Rs 77,869
After four years	Rs 71,639
After five years	Rs 65,908
After 6 years	Rs 60,636
After 7 years	Rs 55,785
After 8 years	Rs 51,322

 

It is very important to earn inflation-beating returns, if not, you may not be able to afford materials and services in the future from the savings you are making now.

Importance of Investment

 Investing is essential to achieve your goals. It is the only way to make your future better. By making investments, you are also saving and accumulating a corpus for a rainy day. Apart from that, making regular investments forces you to set aside a sum regularly, thereby helping you instil a sense of financial discipline in the long run.