In Class 10, students are introduced to the basic concepts of investment, types of investments, risk and return, and the importance of financial planning. These fundamentals help students develop financial literacy from an early age.
Investment Basics Class 10 Notes
What is investment?
The money you earn is partly spent, and the rest is saved for meeting future expenses. Instead of keeping the savings idle, you may like to use the savings in order to get a return on it in the future. This is called investment.
Why should one invest?
One needs to invest to:
- Earn a return on your idle resources.
- generate a specified sum of money for a specific goal in life
- Make a provision for an uncertain future.
Investing wisely is most important to meet the cost of inflation. Inflation increases the cost of living. Due to inflation, money loses its value, which means when money loses value, then you will not buy the same amount of a good or a service in the future. This is why it is important to consider inflation as a factor in any long-term investment strategy. Remember to look at an investment’s ‘real’ rate of return, which is the return after inflation. The aim of investments should be to provide a return above the inflation rate to ensure that the investment does not decrease in value.
When to start investing?
If you invest early, then you will get more time to grow; interest helps to increase your income. The three golden rules for all investors are:
- Invest early.
- Invest regularly.
- Invest for the long term and not the short term.
What care should one take while investing?
Before making any investment, one must ensure to:
- Obtain written documents explaining the investment.
- read and understand such documents
- Verify the legitimacy of the investment.
- Find out the costs and benefits associated with the investment.
- Assess the risk-return profile of the investment.
- Know the liquidity and safety aspects of the investment.
- Ascertain if it is appropriate for your specific goals.
- Compare these details with other investment opportunities available.
- Examine if it fits in with other investments you are considering or you have already made.
- Deal only through an authorised intermediary.
- Seek all clarifications about the intermediary and the investment.
- Explore the options available to you if something were to go wrong, and then, if satisfied, make the investment.
What is meant by interest?
Interest is extra money you pay when you borrow money. This fee is mainly a percentage of the amount you borrowed. The rate of interest can be changed or stay the same over time, depending on the loan agreement.
What factors determine interest rates?
The factors which govern these interest rates are mostly economy-related and are commonly referred to as macroeconomic factors. Some of these factors are:
- Demand for money
- Level of government borrowings
- Supply of money
- Inflation rate
The Reserve Bank of India and the government policies which determine some of the variables mentioned above
What are the various options available for investment?
One may invest in:
- Physical assets like real estate, gold/jewellery, commodities, etc. and/or
- Financial assets such as fixed deposits with banks, small saving instruments with post offices, insurance/provident/pension funds, etc., or securities market-related instruments like shares, bonds, debentures, etc.
What are various short-term financial options available for investment?
A savings bank account, money market or liquid funds and fixed deposit are considered short-term financial investment options.
- Saving Bank Account: Saving bank accounts offer a low interest rate of 4% to 5% per annum, and the risk level is very low.
- Money market or liquid funds: It is short-term fixed income. Money market funds usually have 91 days for liquid funds and 1 year for money market funds. The liquid funds interest rate is near around 6.55% to 6.58% annually, and the money market fund offers 6.05% to 6.36% annually. The risk of this fund is very low, and it is usually processed within 1 working day.
- Fixed deposits with banks: Fixed deposits with banks are also referred to as term deposits and minimum investment periods. for bank FDs is 6 months to 12 months; the interest rate of FD is nearby 5.5% to 7.5%, depending on the bank. The risk factor of this investment is very low, but liquidity is moderate, meaning there is a penalty on premature withdrawal.
What are various long-term financial options available for investment?
Post Office Savings Schemes, Public Provident Fund, Company Fixed Deposits, Bonds and Debentures, Mutual Funds, etc.
- Post Office Savings Schemes: It is a Monthly Income Scheme (MIS). You can invest at least 1000 rs monthly. You can invest a maximum of 3 lakh for a single and 6 lakh for a joint. The interest rate is approximately 8%, the maturity period is 6 years, and you will get a 10% bonus at maturity.
- Public Provident Fund (PPF): It is a long-term saving plan with tax benefits, a maturity period of 15 years, and an interest rate of 8% per year compounded annually. You can start withdrawing money from the 7th year, but only 50% of your balance based on certain rules.
- Company Fixed Deposits (FDs): Companies borrow monthly from people for the short term for 6 months and the medium term for 3 to 5 years. The interest rate is 6% to 9% per year and can be paid monthly, quarterly or yearly. The interest rate is taxable.
- Bonds: Bonds are loans you give to the government or companies. You can earn a fixed interest regularly and get your full money back on the maturity date.
- Mutual Funds: Mutual funds are a way for people to invest their money together. An investment company collects money from many investors and uses it to buy a mix of assets like shares and bonds.
What is meant by a stock exchange?
A stock exchange is a place where people buy and sell shares of companies. There are two types of stock exchanges. The Regional Stock Exchange, which works only in a specific area or city, and the National Stock Exchange (NSE), which works across the whole country. Anyone in India can trade on it.
Total equity capital of a company is divided into equal units of small denominations, each called a share. For example, in a company the total equity capital of Rs 30,000,000 is divided into 2,000,000 units of Rs 10 each. Each such unit of Rs 10 is called a share.
What is a ‘Debt Instrument’?
A debt instrument represents a contract whereby one party lends money to another on predetermined terms with regard to the rate and periodicity of interest and the repayment of the principal amount by the borrower to the lender.
What is a Derivative?
A derivative is a product whose value is derived from the value of one or more basic variables, called ‘underlying’. The underlying asset can be equity, an index, foreign exchange (forex), a commodity or any other asset.
What is a mutual fund?
A mutual fund is a way for people to invest their money together. It’s managed by a company registered with SEBI (Securities and Exchange Board of India). This company collects money from many investors—like you and me—and then invests that money in different places such as stocks (shares), government bonds, company debentures, and other financial instruments.
What is an index?
An index shows how a specified portfolio of share prices are moving in order to give an indication of market trends. It is a basket of securities, and the average price movement of the basket of securities indicates the index movement, whether upwards or downwards.
What is a Depository?
A depository is like a bank wherein the deposits are securities (viz., shares, debentures, bonds, government securities, units, etc.) in electronic form.
What is dematerialisation?
Dematerialisation is the process by which physical certificates of an investor are converted to an equivalent number of securities in electronic form and credited to the investor’s account with his Depository Participant (DP).
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