We have all come across the <a href="https://www.mid-day.com/news/india-news/article/basics-of-investing-five-tips-for-beginners-23348309" target="_blank" rel="none noopener">term investment</a>, but what is investment?
An investment is when you acquire assets and expect them to create wealth or higher income over a certain period of time. Some of the common asset classes are equities, debt market, real estate, and commodities.
<h2>Savings and investment&nbsp;</h2>
People often use savings and investments interchangeably, but, there is a difference between the two. Savings largely refer to short-term emergencies, whereas investments are for realising long-term financial expenses or contingencies requiring a large amount of money. Savings generally entail less risk compared to an investment and hence, the return is lower.
Take for example the money in your <a href="https://www.mid-day.com/business/business-news/article/savings-bank-account-holders-of-scheduled-banks-to-get-access-to-rural-postal-life-insurance--23644914" target="_blank" rel="none noopener">savings bank account</a>. It is generally considered to be safe and you earn a small interest on it, but it would be significantly lower than what you would gain by investing in other asset classes. Your bank may offer you an interest rate of 2.5 per cent on your savings bank account, however, this would be lower than the interest rate of 6.25 per cent offered on a fixed deposit with the same bank for one year.
Interestingly, an investment is done generally through the amount you save. Savings are essentially the remainder of your total income minus your total expenses. So, whatever is left after you pay your bills and meet your daily necessities is savings, and from these savings, you can allocate a portion for investment. So, the lower the expenses, the higher the savings and the higher portion can be allocated for investment.&nbsp;
Investments help you generate passive income. Active income refers to your salary income, where you work to earn the income. In passive income, you invest to earn the income without having to work for it directly.
As investments generally have some degree of underlying risks, it is important to understand your risk-taking appetite and to diversify the investments to realise the financial goal.&nbsp;
<h2>Why to invest?</h2>
The primary reason that people invest is to multiply their money. But why is it necessary? To meet your future financial expenses or goals. These financial expenses could range from buying a house (which is also an investment class), marriage expenses, your children&rsquo;s education loans, your vacations, your retirement, or any medical emergencies or financial setbacks such as job loss. Investments generally are for long-term purposes, and this helps you to compound your returns. &nbsp;
In compounded growth, you earn interest on the sum invested and its growth. For example, an investment of Rs 100 that earns 10 per cent interest, then in the first year, the interest would be Rs 10, but in the next, it would be Rs 11 as the amount becomes Rs 110 (Rs 100 investment and Rs 10 interest) instead of Rs 100. Similarly, this amount keeps getting compounded till the investment continues.
Additionally, you need to invest because of inflation. <a href="https://www.mid-day.com/business/business-news/article/explainer-why-do-prices-keep-rising-a-simple-guide-to-understanding-inflation-23644419" target="_blank" rel="none noopener">Inflation</a> reduces the purchasing power of money over time. So, the value of your money now would be lower in the future. Take, for example, the price of milk. Milk prices for one litre have increased from Rs 48 to Rs 62 in recent years. So, to buy a litre of milk you have to pay more now than what you did five years ago.
Thus, even if one does not plan to have a retirement fund or have financial expenses that require a large amount of money, inflation makes it necessary to invest as the value of money reduces gradually. &nbsp;

The main reason people invest is to grow their money to fulfil a future financial expense or goal

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The primary reason that people invest is to multiply their money to meet future financial expenses or goals

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