Investment Industry

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What is Investment?

Investment is referred to as the concept of deferred consumption, which could be in the form of an asset, rendering a loan, keeping the saved funds in a bank account such that it might generate lucrative returns in the future etc. The options of investments are huge; all of them having different risk-reward trade off. This concludes that the investment industry in India is really broad and that is why understanding the core concepts of investments and accordingly analyzing them is essential. Only after thorough understanding of the investment industry, can an investor create and manage his own investment portfolio such that the returns are maximized with the minimum level of risk.

investment industry in India

The investment industry in India has been riding high since the last few years. India's equity market has doubled since March 2009, with ADRs like Dr. Reddy's Laboratories and Tata Motors only getting doubled and tripled. So, do we say that the Indian investment industry is overheated at the moment or may we infer that the stocks are fairly valued?

Warren Buffett has always mentioned that investment in India should always be a long-term story - as the industry has been growing from an emerging market to a developed one. The next 10 years in India will surely give good returns.

India's GDP growth was around 7 percent in 2010. The sustainable growth rate of India would however hover around 7%. Before becoming a mature economy, India has another 20 to 40 years to spare.

The overall contribution made by the financial services sector in India in the year 2009 was 15 per cent towards the GDP of the country.

Types of Investments

As stated earlier, the investment industry is huge; therefore the types of investments are also varied. Different types of investments are:

Cash investments:
Cash investments are generally risky and offer a low rate of interest. Some of the important types of Cash investments are; certificates of deposit (CDs) and treasury bills and savings bank accounts.

Debt securities:

This type of investment gives returns in the form of fixed periodic payments and the fixed capital appreciates at maturity. This is safe bait for the investors in the investment industry and has always proved to be the risk free investment tool. Though, it is generally low in risks, the returns are also lower than the other peer securities.

Investors can also buy stocks (equities) from the secondary markets and be a part of any business corporates that are listed in the stock exchanges. By this way, one can become a part of the profits that the company generates. But one thing that should be kept in mind is that stocks are generally more volatile and carries more risk than bonds.

Mutual funds:
They are usually a collection of stocks and bonds that a fund manager selects for an investor such that the returns are maximum. The investor does not have to track the investment, be it a bond, stock- or index-based mutual funds.

Derivatives are financial contracts, whose value is derived from the value of the underlying assets like equities, commodities and bonds. They can take the form of futures, options and swaps. Investors choose derivatives as they are used to minimize the risk of loss that result from variations in the underlying asset values.

The items that are traded on the commodities market are agricultural and industrial commodities and they need to be standardized. Commodities trading have always been giving high returns and thus they are the riskiest of all investment options. One, who trades in commodities, requires specialized knowledge and analytical capabilities.

Real estate:
Investing in real estate has to be a long term affair. Funds get hooked into the real estate sector for a considerable time period.

Comparison of investment options in India

Top Investment Area Investment Restrictions Return on Investment Risk of Loss
Gold No limit Offers high returns as gold prices are on a rise Low
Bank Deposit --- Offers upto 8.5 percent annual return depending on the bank and period Low
Mutual Funds No limit Equity Based: High Equity Based: High
National Saving Certificate (NSC) No limit Offers upto 8 interest calculated biannually No risk
Real Estate No limit Capital gains guaranteed for specified avenues also tax exemption are available on long term investments Low

Where to invest in India?

The financial sector in India, specifically the banking stocks have been doing well over the last five years. The current condition of the Indian banks seems to be strong and a lot of growth is expected in the near future. The IT stocks too have been faring well and that is why it is advisable that the investors invest in stocks of quality companies that have a good revenue track record. The other stocks in the Indian financial market include; consumer goods stocks, auto stocks and agriculture-related stocks. Some of the favorite stocks that investors can look forward to are Infosys Technologies, HDFC Bank, ICICI Bank.

Why to invest in India?

  • One of the major reasons behind investing in India is Inflation. Due to the constant rise in the cost of goods and services people in India are losing out on their real money value. Hence investing becomes very important to reap the benefits of your hard earned money.

  • Due to the decrease in mortality rate and higher life-expectancy people in India need to invest. To live longer you need money to sustain specially during old age.

  • Investing also saves you from paying heavy amounts as tax.

  • If you invest perfectly according to your requirements you can improve your current standard of living and also keep maintain a wealth reserve for the future.

Challenges of Indian Investment industry

The investing story in India has not been always that smooth. Pitfalls are sure to co-exist. The main hurdle on India's growth now is its infrastructure. On the other hand, infrastructure is India's biggest opportunity as well. The fiscal deficit of India also poses a big threat to the investment industry in India. For an emerging economy like India, it is recommended that an investor always balances the unique risks against the potential for high long-term growth. Accordingly the decision for investment should be made.

Of late, the Indian economy is turning out to be extremely conducive in terms of domestic and foreign investments. India Investments has been the major propelling force towards India's attainment of self-sustained growth by way of rapid industrialization. The pioneers of the investment industry has been Foreign Direct Investment (FDI) and Investments made by NRIs.

Foreign Direct Investments in India has been gearing up momentum every passing day. So, to view an economy which is entirely open to the global markets, the investment industry in India should be groomed in a manner that the maximum returns are achieved. It is advisable that the investment industry's potential should neither be overestimated nor underestimated. We should know how to deal with the complexities of the investment industry and grow along with it.

Last Updated on 4/14/2011

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