The Concept of Investment

Delving Deeper

The core definition of investment provided is excellent: allocating resources (usually capital) into financial or real assets with the expectation of future benefits. Let's expand on this:

• Allocation of Resources: Investment requires committing resources – often money, but also potentially time, effort, or other assets – to a specific purpose.
• Expectation of Future Benefits: The crucial element is the anticipation of receiving something of value in the future. This could be increased income, capital appreciation (growth in value), or other non-monetary benefits (security, social status).

Financial Investment vs. Real Investment: A Detailed Comparison

• Financial Investment:

  • Description: Involves the purchase of intangible assets that represent claims on future cash flows or ownership rights. These assets are typically traded in financial markets.

  • Examples (from the book):

    • Stocks (representing ownership in a company).
    • Bonds (representing a loan to a company or government).
    • Mutual funds (representing a diversified portfolio of investments).
    • Other market instruments (derivatives, options, futures, etc.).

  • Characteristics:

    • Liquidity: Generally more liquid than real investments, meaning they can be bought and sold more quickly and easily.
    • Regulation: Subject to regulation by financial authorities (e.g., SEBI in India).
    • Transparency: Market prices are readily available and reflect market sentiment.
    • Divisibility: Easily divisible; can invest in small amounts.
    • Passive Income Potential: Possibility to earn dividends or interest.

• Real Investment:

  • Description: Involves the purchase of tangible assets that have intrinsic value. These assets may or may not be traded on organized markets.

  • Examples (from the book):

    • Real estate (land, buildings).
    • Gold and precious metals.
    • Infrastructure projects.

  • Characteristics:

    • Tangibility: Possesses inherent physical value.
    • Potential for Appreciation: Value can increase over time due to factors such as scarcity, inflation, or increased demand.
    • Inflation Hedge: Often considered a hedge against inflation.
    • Less Liquid: Generally less liquid than financial investments; selling can take time and may incur higher transaction costs.
    • Management Intensive: Real estate, in particular, often requires active management (maintenance, repairs, tenant management).

Key Differences Summarized:

In Conclusion:

Choosing between financial and real investments depends on individual circumstances, risk tolerance, and financial goals. A well-diversified portfolio may include both types of assets to balance risk and return.