What is an investment?

Investment involves making of a sacrifice in the present with the hope of deriving future benefits. Two most important features of an investment are current sacrifice and future benefit. Investment is the sacrifice of certain present values for the uncertain future reward. It involves numerous decision such as type, mix, amount, timing, grade etc, of investment the decision making has to be continues as well as investment may be defined as an activity that commits funds in any financial/physical form in the present with an expectation of receiving additional return in the future. The expectation brings with it a Probability that the quantum of return may vary from a minimum to a maximum. This possibility of variation in the actual return is known as investment risk. Thus every investment involves a return and risk. Investment has many meaning and facets. However, investment can be interpreted broadly from three angles –

  • Economic
  • Layman
  • Financial

Economic investment includes the commitment of the fund for net addition to the capital stock of the economy. The net additions to the capital stock means an increase in building equipments or inventories over the amount of equivalent goods that existed, say, one year ago at the same time. The layman uses of the term investment as any commitment of funds for a future benefit not necessarily in terms of return. For example a commitment of money to buy a new car is certainly an investment from an individual point of view.

Financial investment is the commitment of funds for a future return, thus investment may be understood as an activity that commits funds in any financial or physical form in the presence of an expectation of receiving additional return in future. In the present context of portfolio management, the investment is considered to be financial investment, which implies employment of funds with the objective of realizing additional income or growth in value of investment at a future date. Investing encompasses very conservative position as well as speculation the field of investment involves the study of investment process. Investment is concerned with the management of an investors’ wealth which is the sum of current income and the present value of all future incomes. In this text investment refers to financial assets.

Financial investments are commitments of funds to derive income in form of interest, dividend premium, pension benefits or appreciation in the value of initial investment. Hence the purchase of shares, debentures post office savings certificates and insurance policies all are financial investments. Such investment generates financial assets. These activities are undertaken by anyone who desires a return, and is willing to accept the risk from the financial instruments.