What is an investment?
The Cambridge dictionary describes it as: the act of putting money, effort, time, etc. into something to make a profit or get an advantage.
In simple words, it is something you do TODAY for a benefit in the FUTURE. This benefit is usually in the form of money.
Now let’s look at your classic investment options in today’s day and age:
Stocks and equities
Bonds, debentures, and other debt instruments
Post office savings schemes
Here’s how these investment options typically work:
You give money to the financial organisation and buy an ‘asset’. In the case of mutual funds, you give the money to get it invested (the Fund buys assets on your behalf). This asset could be a share of a company’s ownership, a hard asset like gold, or a debt asset like Fixed Deposit/Bond.
In most cases, you get a regular payment from time to time for a period of time. This could be either in the form of an interest or dividend payment. This isn’t applicable for options like gold.
Over a period of time, the value of the asset increases. This could be because the company grew in value or the asset was suddenly ‘in demand’ or some other reason.
You sell your investment assets in future at a higher value and pocket the profit.
PPT-Your insurance is not an investment, but it can be one. Here’s how
Now let’s look at insurance:
You pay a premium.
The insurer promises a sum assured.
The policy mentions exactly what liabilities it covers.
During such a misfortunate event, you make a claim against the insurance policy.
The insurer then gives you part or the full sum assured.
This is true for most types of insurance – Term life, health, car, etc. Meaning, with most insurance options, there’s no scope for return or profit. This is why insurance is not an investment option. It is a way to protect your money. And by protecting your money, you offer security to your family, your health, your car, etc. Only investment-linked plans like Unit Linked Insurance Plan (ULIP) can be classified as investments.
But insurance can be an investment. Here’s how:
Let’s go back to the definition of investment again. It says an action today for a ‘benefit’ tomorrow. This benefit could be anything—even protection during life’s unfortunate events. Let’s understand with an example.
Fresh out of college, Pritesh Bhatia landed an engineering role in a top IT company in Bangalore. Being a smart cookie, he started investing Rs 4,000 or 10% of his salary every month.
Here’s how this money will grow over a 10-year period:
*Return = 12%
At this rate, Pritesh will take about 28-odd years to get anywhere close to the Rs 1 crore mark.
But what if an emergency strikes Pritesh before the 28 years end:
A cancer diagnosis. The treatment could cost lakhs of rupees.
An accident that permanently disables Pritesh.
An untimely death.
It’s quite likely that Pritesh would fall short of money for his treatments or in the case of a loss of income due to disability. He would only have a few lakhs in his investment account.
‘Investing’ in insurance
It takes time for investments to grow—sometimes a long time. But time may not always work in your favour. While this money grows, you can count on an insurance to keep you safe. For example, Pritesh could have ‘invested’ a little bit of time, energy and money buying a Term insurance policy worth Rs 6,420 plus taxes. This would have ensured he had Rs 1 crore with him AT ALL TIMES.
With a Term insurance, it may seem like your money is not evidently present in your accounts. But it is present with you throughout. You get to see this money only when danger lurks around.
And that is why you need to ‘invest’ in Term insurance.