There are various reasons for which people are ready to sacrifice their present money. Some of the main reasons for investment are briefly described below:
1. Income
Income is one of the main reason for the investment. Most of the people invest their present fund so as to earn some income in the future. Some people purchase shares of different companies to receive annual dividend where as others invest their current income in bonds, debentures or fixed deposits to earn interest.
2. Appreciation
Appreciation is also one of the main reason that forces people to make investment. Appreciation refers to the increase in value. People invest their fund in real or financial assets not only for the current income but also for capital appreciation. For example, most of the people buy real assets (gold, land etc.) or financial assets (shares) with the expectation that it’s price will raise in the nearest future.
3. Liquidity and Security
Liquidity and security is another reason for which people invest their fund. Most of the people like to maintain adequate liquidity for unseen contingencies which force them to invest their present fund in highly liquid securities such as treasury bills, saving accounts, and so on. People also invest money in saving accounts or in financial or real assets for the security. For example, for marriage, education etc.
4. Capital Preservation
As you know that the purchasing power of the money decreases due to the inflation. It means that what you can purchase for a dollar today can’t be purchased at a same price in the future. So, people invest their present fund in various assets to compensate the effect of inflation. Suppose you have $1000 and you want to hold this cash with you. The inflation rate is 10%. After one year the value of your fund will be decreased by 10%. It means that the purchasing power of your fund will be $900 in next year. If you have invested this amount in either 15% fixed deposit or other securities, you would earn 5% more after upsetting the inflation.
5. Tax Planning
People also make investment to get the benefit of tax saving. There are lots of investment alternatives which provide the tax saving benefit to the investors. For example, insurance plan, provision fund, etc. If people purchase insurance plan they do not have to pay tax in that amount.
This above picture clearly shows the five reasons for investment.