The difference between Direct and Indirect Investment – Investment is one way to get big profits while protecting assets in the long term. However, many people are still confused about choosing between direct and indirect investment.
Before knowing the difference between the two, Sinaumed’s must first determine goals, prepare funds, and understand investment risks. To make it easier for Sinaumed’s to choose, see the complete discussion regarding direct and indirect investment in the following article.
What is Direct Investment?
The government is trying to make investments that are conducive to increasing capital flows which have an impact on resources and increasing economic growth, the exchange rate of the rupiah against the dollar and interest rates.
Investment in Indonesia can be carried out through direct investment or called Foreign Direct Investment (FDI). According to Krugman in Sarwedi’s journal entitled “Foreign Direct Investment in Indonesia and the Factors Affecting It”, the notion of foreign direct investment is international capital flows where companies from one country establish or expand their companies in other countries. So that there is not only a transfer of resources, but also a transfer of control over companies abroad.
Direct investment is investment in factors of production or assets to do business. For example investment in fisheries, plantations, factories, shops, and other types of businesses. In general, in everyday conversation this type of investment is also referred to as investing in real assets or investments that are easy to see and clearly visible.
This direct investment provides a large multiplier effect for the wider community. This direct investment will have a backward impact, in the form of business input, or in the future, in the form of business output which is input for other businesses.
According to Noor in his book entitled “Managerial Economics”, the notion of foreign direct investment is investment in assets or factors of production to conduct business or business abroad. Investments like this, in general, have a medium or long term nature and have the only goal of gaining profit or profit.
In Article 7 paragraph (2) Presidential Regulation Number 10 of 2021 Concerning Investment Business Fields, foreign investment is required to be in the form of a PT:
- The flow of foreign direct investment has several advantages, namely:
- Capital flows are able to reduce the risk of capital ownership by diversifying through investments;
- Global integration of capital markets can provide the best spread in the formation of corporate governance, accounting rules, and legality, and
- The global mobility of capital limits the ability of governments to create wrong policies.
Direct Investment Advantages
- Investments made directly can be made in the long term. This means that it can be up to several years in the future and can even be passed on to posterity if it is still possible.
- Someone who invests directly can fully control the portfolio they have. This control can be carried out in order to carry out the buying and or selling process according to his wishes.
- More attractive to many people, despite having a varied risk profile. Usually this big risk can be overcome by only buying several investment instruments or products that are stable or recognized.
- The ability of an investor to invest can make achievements run well. You can even get bigger profits in a fairly short period of time.
Disadvantages of Direct Investment
- Doing analysis on investment instruments such as stocks can be said to be quite a difficult job. If you make a mistake, it can cause your capital to disappear quickly.
- Not everyone has the free time to do analysis and know which stocks can be purchased and have the potential to provide benefits.
- Wrong decisions taken in investing, both sales and purchases, can cause losses in large numbers.
- Managing a portfolio of various types of investment instruments will not be easy so some people often make mistakes because not all of them can be checked one by one.
Types of Direct Investment
To start direct investment, there are 2 types of investment to choose from.
1. Investments to be traded
- This type of investment can be traded to other people at a certain time which has a fairly increased value. The types of investments that can be traded are:
- Gold and diamonds
- Stocks or products in the capital market
- Land, shop houses and various types of property
- Products on the money market
2. Investments are not for sale
Types of investment that cannot be traded are bank deposits and savings.
Then, What Is Indirect Investment?
Indirect investment is a type of investment where investors can invest but are not directly involved in the buying and selling process and also its management.
In indirect investment activities, Sinaumed’s simply gives trust to business entities or companies to manage the various assets that Sinaumed’s has. This type of investment is generally a short-term investment and has the goal of getting the maximum profit in a short period of time.
It is called a short-term investment because generally investors will only buy and sell assets they own in a relatively short period of time, so it is very dependent on fluctuations in the value of the assets they want to trade.
Indirect Investment Advantages
- Investment decisions will be implemented by the investment management team or investment manager. This decision has been done so well that the chances of making a mistake are very low.
- An investor can enjoy his free time because he doesn’t need to learn about various things related to stocks. Everything will be managed professionally by the investment manager.
- The risk of making a mistake in choosing or deciding on an investment is very small and the opportunity to make a profit is very large for all investors.
- Most are safe so the risk of getting a loss is very small. Once for those who are beginners and don’t have time to do portfolio management properly.
Disadvantages of Indirect Investment
- Investors will not have any involvement at all in the investment activities they carry out. So, investors will only deposit funds that will later be managed by investment management.
- It is difficult to collect desires or replace any investment instruments that have been made. Usually this method will be time bound for several months or even years before finally the funds can be returned or disbursed.
- There is still the possibility of losses due to wrong investments by investment managers. If you experience a loss, the capital that will return later will also be reduced.
Benefits of Direct and Indirect Investment
Given that the main objective of investment is to gain profit from the investment, there is not much difference between the benefits of direct and indirect investment. Both of them have something in common, namely to provide benefits because they can increase the value of the assets that Sinaumed’s has. In fact, the profit from the investment can be a passive income.
To be clearer, here are the benefits of investing:
- Avoid inflation.
- Increase value for money.
- Adding sources of income and maximizing profits from investments.
- Future savings and preparing for retirement.
- With the investment advantage, Sinaumed’s doesn’t have to work too hard.
- Financially independent.
- Investment can add insight and broaden relationships.
- The investment trains Sinaumed’s to make decisions and be more responsible.
Types of Investment Risk
Investment risk is the level of potential in terms of losses in investment activities, which arise and are caused by investment results that are not in accordance with the targets and expectations of the profit. Every investor must realize that investment not only provides benefits, but also losses.
In the investment world, there are about 7 types of risks that investors should be aware of, including:
1. Interest Rates
The first risk that arises in investing is interest rate risk. This one risk is the type of risk that will be caused by the relative value of an asset that has interest. For example, like bonds or loans that will go bad, due to an increase in interest rates. Another definition of this risk is the type of risk caused by the emergence of changes in interest rates in the market.
This will affect the income from the investment itself. In general, if the interest rate increases, the price of bonds that have interest will continue to decrease. This interest rate risk will generally be measured using the term of the bonds.
Market risk is a type of fluctuation risk or rise and fall of a net asset, which originates from changes in sentiment in the financial market. An example is bonds or stocks which are also called types of systematic risk.
Changes that occur are generally caused by recession, economic issues, riots, speculation, and changes in politics. For example, regarding the health issue of a head of state which causes fluctuations in the value of the rupiah to the dollar to increase.
However, if this happens, there is no need to rush to panic. Sinaumed’s can immediately disburse investment funds when there are fluctuations in the market. Increases or decreases in actual assets will not occur repeatedly or continuously.
Investment risk in terms of inflation is also known as purchasing power risk. This risk is an opportunity for cash flows originating from investments that are not as valuable as in the future, due to changes in the purchasing power of inflation itself.
This risk has the potential to harm people’s purchasing power in an investment. The average increase in consumption prices is the cause of this risk.
Inflation risk is also a type of risk that can be experienced by investors, when they hold money in cash or when they invest in assets that have nothing to do with inflation.
Liquidity risk is a type of investment risk that exists due to the difficulty of providing cash at a certain time. For example, when a person is unable to pay obligations in cash when they are due.
Even though the person already has assets with sufficient value to pay their obligations, if the assets cannot be converted to cash then the assets will be called illiquid.
This can happen if the debtor cannot sell the property he owns. Besides that, no one else buys it in the market. However, this is not the same as asset prices dropping drastically.
In the event of a decrease in price, the market has the opinion that the asset has no value. None of the parties wish to buy or exchange their assets, perhaps because it is difficult for the two parties to meet each other.
So this risk is likely to occur in markets that have small volumes or are just growing. This risk also has a relationship with the speed of securities that have been issued by the company and can be traded in the secondary market.
Tips for Choosing the Right Investment
Investments, whether direct or indirect, are actually quite difficult if done haphazardly. That is the reason a person must be able to choose the right investment for himself. Check out how to choose the right investment below.
1. Adjust to Purpose
Before making an investment, you must first pay attention to the purpose of making the investment. Everyone has different investment goals, some are used for short term needs and some are used for long term needs.
So when making an investment, you have to think about what capital or money you will use. Generally, investments are used for long-term purposes so that someone will become more relaxed in choosing the easiest investment instrument with the least risk.
2. Use the Right Funds
Use the funds to make investments with the right and appropriate amount. This means that the funds that will be given later cannot be too small or too large. Because each investment has its own risk, investors must think about the right amount of funds to be allocated to the investment.
It is better to diversify before choosing the type of investment. Don’t stick to one thing, for example, just invest in stocks, but also use it for other types of investment such as precious metals such as gold.
4. Learn Everything Well
The last thing to do if you want to invest is to study everything related to that theme. This means that everything related to investment must be well studied and then practiced so that mistakes occur.
If an investor is directly involved in terms of buying to selling, it can be said to be a direct investment. However, if the investment is handed over to the management or investment manager it can be said to be an indirect investment.