Understanding Different Investment Instruments for a Better Future
Amid current economic uncertainty, investing is no longer merely an option but a necessity. In simple terms, investing means allocating funds today in the hope of achieving added value or a return in the future.
Its main purpose is to protect investors’ wealth from the loss of purchasing power caused by inflation. Before investing, understanding the basic principles and the range of available instruments is a crucial first step.
Before choosing a specific instrument, it is important to know that investment in Indonesia broadly follows two main management principles: conventional and sharia-compliant.
Having understood these two principles, here are five of the most common investment instruments on the market, most of which are available in both conventional and sharia-compliant forms.
1. Deposits
A deposit is a banking product in which an investor’s funds are held and cannot be withdrawn for a specified period, such as one, three, six or 12 months.
In return for placing the funds, the bank pays interest at a rate higher than that offered on an ordinary savings account. Sharia-compliant deposits based on the mudharabah profit-sharing principle are also available for investors who avoid interest-based systems.
Characteristics and suitability: Risk is very low, and deposits are considered very safe, particularly because they are guaranteed by the Indonesia Deposit Insurance Corporation (LPS) up to a certain limit. They are well suited to beginners who prioritise protecting their capital and do not need access to their funds in the near future.
2. Gold
Gold has historically been regarded as a safe-haven asset.
The process is simple: investors buy physical gold, store it securely and anticipate that its price will rise in the future. Digital gold is now also available, making it easier to buy without having to store the physical metal.
Gold has proved resilient in preserving its value, particularly during economic crises or periods of surging inflation.
Characteristics and suitability: Risk ranges from low to moderate. Prices may fluctuate in the short term but tend to rise over longer periods. Gold is suitable for wealth preservation.
3. Bonds
A bond is a debt instrument issued by a government or corporation seeking funding.
When investors buy bonds, they are essentially lending money to the issuer. In return, they receive coupon payments periodically and the principal is repaid at maturity.
Sukuk are the sharia-compliant alternative. It should be stressed that sukuk are not debt instruments, but certificates representing proportional ownership of a tangible asset.
As evidence of asset ownership, returns paid to sukuk investors are not interest on a loan. Instead, they take the form of rent (ujrah) or a share of the proceeds from the asset’s use, avoiding the element of riba, or usury.
Characteristics and suitability: Risk is moderate. The risk of default on government bonds is close to zero, while corporate bonds carry a higher default risk because companies have greater credit risk than the state. Bonds are appropriate for investors seeking predictable, regular cash flow akin to passive income.
4. Shares
Shares represent ownership of a company. On the capital market, this means ownership in a publicly listed company.
Returns from shares come in two forms: dividends, representing a share of the company’s profits, and capital gains from an increase in the share price on the market.
For sharia-compliant shares, eligibility involves more than inclusion in a dedicated index; companies must also meet strict criteria set by the National Sharia Council of the Indonesian Ulema Council (DSN-MUI).
These criteria include:
The company’s main business must not conflict with sharia principles. It must not be involved in gambling, interest-based financial institutions or the production of prohibited goods.
Interest-based debt must not exceed 45% of the company’s total assets.
Non-halal income, such as interest earned on deposits at conventional banks, must not exceed 10% of the company’s total operating income.
5. Crypto-assets
Crypto-assets are digital assets that operate on decentralised blockchain technology. They have no physical form, and their prices are highly speculative.
Characteristics and suitability: Risk is very high. Crypto prices are extremely volatile and can surge or plunge within hours. They are recommended only for highly experienced investors with strict risk-management practices, and who use funds they can afford to lose.
As noted at the outset, strengthening education through financial literacy is essential. It helps investors avoid fraudulent investment schemes and financial scams that promise implausibly high returns.
To support a healthy and secure investment ecosystem for the public, the government provides various official educational resources.
One such initiative is the Financial Services Authority (OJK)’s PINTAR programme.
PINTAR OJK aims to improve public financial literacy and inclusion through learning resources including a Learning Management System (LMS), educational books and the Sikapi Uangmu application.
By accessing this information, investors can build an objective and rational understanding of investing, regardless of which instrument or management principle they ultimately choose.