Do You Know The Difference between Saving and Investing?
Before you learn about investment type, it is better to understand the differences between saving and investing.
Saving is to spare your money without expecting any increase on the value of the money you saved. By saving your money in the bank, at least you know that your money would be more secure rather than just leaving it under the pillow. It can be seen that different types of saving offer interest rate of 1-3% per annum. However, if you closely observe the condition, you will find that the price of goods and service will increase every year with the increasing rate higher than your normal interest rate. And you realize that actually the value of your money has decreased.
On the other hand, investing is expecting an increase in the value of your money in line with time, so that it may bring benefits for you. The money expected to bring extra values is saved in the form of wealth called the asset.
Types of Asset
In investing, there are 2 types of asset, the real asset and financial asset, both of them can be considered as investment tools to reach your financial goal. You need to remember, in investing, there are risks of loosing your capital. Therefore, you need to fully understand the assets you choose for investment.
Real Asset
Real asset is the assets which has a form/ appearance/ shape. The examples are land and property, gold, and other precious metal. Investment on real asset is very common in the society. For example: you bought a house and leased it to get monthly income. The value of the house has increased even before the lease term ends; you can sell the house and reap profits from it. You will have many benefits by investing on these real assets; although the price may go up and down (fluctuate), but the value tends to increase in the long-term.
Financial Assets
Financial asset is the asset whose appearance can not be physically seen, but has a high value. Generally, financial asset can be found in banking industry and in the capital market known as Bursa Efek Indonesia. Money market instruments, bonds, shares, and mutual fund are the examples of financial assets.
Money Market Instrument is a short term debt note/instrument less than 1 year issued by a company or government. In return, as the creditor you will receive interest amount from your initial investment. Generally, the interest will be paid at the end of the investment period. Deposit, Bank Indonesia Certificate and promissory notes are the examples of money market instrument. Money market instrument normally has higher investment risks in the form of failure to pay the initial investment and paying at a very low rate.
Bond is a debt instrument issued by a corporation or government. The debt period of the bond is more than 1 year. Bond is traded in a capital market. You as the bond buyer will receive return in the form of interest from your initial investment amount, and later on it is called a coupon. Normally, these coupons will be paid out once in every 3 or 6 months in 1 year. Bond has a relatively low investment risks, however the risk is higher than the money market instruments. The biggest risk faced by the bond holder is the possibility of the issuer not able to pay back its debt. Hence, rating companies exists to give rating to every bond issued to find out how big the default risk is.
Shares is an instrument showing a unit of ownership interest in a corporation. Being a shareholder does entitle the possessor to an equal distribution of corporation’s assets and earnings (called dividend) in proportion with the number of shares they own. Furthermore, the price of the shares in a company will move in respect to the company’s performance. If the company has a good performance, then the share price will increase and the shareholder can realize the benefits by selling their shares. Shares are also traded in the capital market and have relatively high risks, due to the risk of bankruptcy which cause investors to lost their money. When you invest in shares, you must understand whether the company has a good performance. You should perform an analysis based on the financial report published by the company, country’s economic condition, and other factors which can be very time-consuming. However, the potential return worth these extra works.
Mutual fund is a medium used to gather the funds from general public where the fund is managed by the legal institution called Investment Manager where the funds will be invested on other financial assets. The funds are kept in the bank called Custodian Bank. Mutual Fund is the solution for the investors who want to invest on many different assets with limited fund. This is possible because the funds collected from many parties are in large amount to be invested on stocks, bonds and money market instrument according to the investment manager investment style. Mutual Fund is also the solution for you who have limited knowledge and information in doing investment analysis, and for those who do not have enough time to observe daily stocks and bonds movements. You can go to Mutual Fund & You section to get more detailed information about Mutual Fund.
Choosing Investment Type That Suits Your Needs
After understanding different investment types above, the next step is to know the purpose of all investment type. Every investment type has several unique characters, such as potential return, investment risk, ideal investment period, investment liquidity and convenience, and the amount of capital needed.
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