Money is both a means of exchange and a means of preservation. Sadly, not all of us make a considerable amount each month to deal with unforeseen events. So, what should you do? Investment is your way out! This guide will take you through the popular types of investment instruments and which one you should choose.
What is Investment?
Types of investment can be described as tools used to allocate funds to generate revenue. Precisely, it is the method of generating profit from ideal laying resources by deploying them into certain financial assets.
But choosing the right type of investment instrument can be overwhelming for most people, especially if you are a beginner investor. Don’t worry! This blog talks about different types of investment options in detail. So, keep reading!
Investments can be defined as assets bought or invested in to increase wealth and set aside funds from salary or capital gains. The main goal of an investment is to generate additional revenue or to make money on the investment over a certain amount of time.
How Does The Investment Work?
One of the smartest investors of the 20th century, Warren Buffet, once said – “never depend on a single income. Invest to create a second source”.
Some people prefer to save instead of investing. But savings may not be enough to ensure constant financial stability in a dynamic society. Money sitting in lockers or a bank account may not be sufficient.
Through capital appreciation, investments may be able to help you overcome inflation. Compounding also aids in the accumulation of wealth. In fact, investing your money in the best investment options can also help you achieve future goals like buying a house, taking a foreign vacation, or planning your retirement.
The simplest way to understand how investing works is to acquire an asset for a low price and then sell it for a higher price. There are other types of investment returns, but this type is referred to as capital gain. One strategy to make money investing is to generate returns by achieving capital gains or selling assets for a profit.
Types of Investments in India
Investing is a smart way to expand your wealth. Instead of keeping your money idle in a bank account, you can put it to work and generate heavy returns.
And the sooner you start investing your money, the better it is. Choose the types of investment that suits your profile and goals and is best suited for your age.
There is many different types of investment options for each individual. Below are the most popular types of investment to choose from.
Direct equity means investing in stocks. It is the most potent investment vehicle.
When you acquire stock in a company, you purchase a portion of the company’s ownership. This way, you directly invest in the company’s expansion and development. However, to get the most of your investment, you need a lot of time and market knowledge. If you don’t have that, direct equity investing is no better than speculating.
If you plan to invest in stocks, please know that you need a Demat account and KYC authentication to purchase them.
Mutual funds have been around for years. And in recent years, they have become increasingly popular among millennials. A mutual fund is an investment vehicle that collects money from several individuals and institutional participants who share a common investment goal.
A financial professional, commonly known as a fund manager, invest in securities and assets to provide investors with the best possible returns.
Fixed deposits are a type of investment instrument offered by banks and financial institutions in which you deposit a sum for a specific period of time and earn a set rate of interest. Fixed deposits, unlike mutual funds and stocks, provide comprehensive capital protection and guaranteed returns.
But when you invest in fixed deposits, you compromise on the returns as they remain unchanged. All in all, this investment option is ideal for conservative investors.
Public Provident Fund
Public Provident Fund (PPF) is a long-term investment instrument having a 15-year lock-in period. It is provided by the Indian government, and the sovereign backs your investments. The Government of India adjusts the PPF interest rate every quarter.
The corpus removed at the end of the 15-year period is completely tax-free. After certain conditions are met, the PPF authorizes loans and partial withdrawals. Premature withdrawals are allowed if specific circumstances are met, and you can extend your investment for up to five years after it matures.
Employee Provident Fund
Another investment vehicle for retirement is the Employee Provident Fund (EPF). It allows salaried employees to benefit from Section 80C of the Income Tax Act of 1961. EPF deductions are usually a percentage of an employee’s monthly pay, with the employer matching the amount.
The withdrawn corpus from the EPF is tax-free when it matures. EPF rates are set by the Government of India every quarter, and your EPF investments are backed by the sovereign.
National Pension System
The National Pension System (NPS) is an investment that helps you save 3xtax. People who join the NPS system must continue investing in it until they retire. With NPS, you can receive better returns than those who invest in PPF or EPF. This is because NPS offers equity-based alternatives.
You must have come across this term a million times when researching the best types of investment options. But do you really understand what it means?
A stock, usually referred to as equity, is a type of investment that denotes ownership in a portion of the issuing company. Shares, also known as units of stock, entitle their owners to a share of the company’s assets and income in proportion to the number of shares they possess.
Most individual investors’ portfolios are built on stocks, which are mostly bought and sold on stock exchanges. Government standards designed to shield investors from dishonest tactics must be followed during stock trades.
Bonds are fixed-income securities that reflect loans from investors to borrowers (typically corporate or governmental). A bond can be compared to an agreement outlining the terms of the loan and the associated payments between the lender and borrower. Companies, municipalities, states, and sovereign governments utilise bonds to finance operations and initiatives. Bondholders are the issuer’s debtors or creditors.
Bond specifications typically include the terms for variable or fixed interest payments made by the borrower, as well as the end date by which the principle of the loan is expected to be paid to the bond owner.
For millennials, gold has been a sign of riches and prosperity. It has maintained its value over time, and unlike paper cash, coins, or any other assets, it has shown to be a reliable means of passing on and preserving wealth from one generation to the next.
There are several gold investment options available today, and you can choose what best suits your requirement.
You can invest in the physical form of gold and buy jewellery, coins, bar, etc. But there are a few limitations to investing in the physical form of gold.
- The final charges also include making charges.
- Due to security and insurance regulations, storage costs must be paid.
- Selling gold might be inconvenient due to the requirement of purity and origination certificates.
To overcome the limits of the physical form of gold, you can go the digital route.
- Digital Gold – You can buy digital gold from various apps starting from 1 gram.
- Gold ETFs – Just like shares, Gold Exchange Trade Funds are traded on stock exchanges. Investors need a demat account to invest money in gold ETFs.
- Gold Mutual Funds – Gold Mutual Funds are managed by asset management companies that primarily invest in Gold ETFs.
- Sovereign Gold Bonds – The Reserve Bank of India (RBI) issues these bonds on a regular basis and makes them accessible for purchase through top public and private sector institutions.
When it comes to the different types of investment options, cryptocurrency is a newcomer. But that doesn’t make it a poor choice. In fact, cryptocurrencies have a bright future ahead.
A cryptocurrency is a type of digital or virtual currency that uses encryption to protect it from counterfeiting or duplicate spending. Blockchain technology, a distributed ledger enforced by a dispersed network of computers, is the foundation of many cryptocurrency decentralised networks.
The fact that cryptocurrencies are often not issued by any central authority makes them potentially impervious to intervention from or manipulation by governments.
Exchange-Traded Funds (ETFs)
A portfolio of investments, such as stocks or bonds, makes up an exchange-traded fund, or ETF. Exchange-traded funds (ETFs) enable you to make many simultaneous investments in assets, and they frequently have cheaper costs than other types of funds. Additionally, trading ETFs is simpler.
But ETFs aren’t a one-size-fits-all answer, just like any other financial instrument. Consider them on their own merits, taking into account administration charges, commission fees (if applicable), ease of purchase or sale, fit into your current portfolio, and investment quality.
Index Funds are types of investments which invest in a certain index. Their main objective when it comes to portfolios is to imitate an index of the stock market. When investing, an index fund uses the same stocks and weighting as the underlying index.
Real estate investing is the practice of purchasing real estate as an investment rather than as a primary residence. It can be defined as any piece of land, structure, infrastructure, or another tangible asset that is often immobile but transferrable.
A house, an office building, a piece of agricultural land, a piece of commercial property, etc. are some examples of real estate. It is regarded as a safe form of investment.
Did You Know?
The mutual fund industry gained 37.5 lakh crore worth of investor assets by the end of the financial year 2021-22.
Inflation and Investment: Is There a Connection?
The term inflation means a rise in the cost of goods and services. It devalues your currency and lowers your purchasing power. As a result, you can purchase fewer products with the same amount of money when the inflation rate rises.
Unfortunately, the inflation rate is not in your control. If you wish to remain ahead of inflation, you require more money than you have currently to buy the same number of things in the future. Money, on the other hand, does not increase in value by itself. If you want your money to increase, it must generate returns.
And how do you generate returns? By investing.
For instance, if you have 1 lakh rupees, here’s how an inflation rate of 7% will reduce the worth of the money in upcoming years.
|Amount in Hand||1,00,000|
|After 1 year||93,000|
|After 2 years||86,490|
|After 3 years||78,635|
|After 4 years||73,130|
It is for this reason that you need to earn inflation-beating returns. Otherwise, you may not be able to afford the services and products in the future.
Investing Tips / How to Start Investing
It is important to have a basic understanding of stocks and shares if you want to start trading in the stock market. Over time, regular investments and avoiding financial risk can enable you to save a sizable sum of money. The following advice can assist beginners in setting up money for the future.
- Specify Your Goals
Setting long-term goals can be quite advantageous when making stock and share investments. Setting long-term objectives will help you better grasp the value of saving, whether your goal is to prepare for your own retirement, your child’s college costs, to purchase a home, or any other purpose.
- Amount of Risk
Before investing your money, you should carefully consider the level of risk involved with the different types of investment options available. A thorough analysis of the various plans is the best approach to determine the risks connected with various goods and to determine the best solution.
- Investment Diversification
After conducting all necessary research to categorise and determine the risk attached to their investment, skilled investors are primarily responsible for stock diversification. Before diversifying their investments, novice investors must first obtain some experience in the stock market.
- Handling Emotions
Investors become anxious and uneasy as stock prices fluctuate, raising dilemmas like whether or not they should sell their equities to protect against losses or hold onto them in the hopes that prices would rise again. Since emotions are largely what drive actions, it is crucial to make sure that all relevant elements are properly considered before coming to a conclusion.
Things to Keep in Mind While Investing
Putting money in an asset is only one aspect of investing. It is crucial to choose the best asset to shortlist. Before making an asset investment, one should take a variety of factors into account. Some crucial considerations to bear in mind when investing include the ones listed below:
Different types of investments have different objectives. Every asset has a different investment goal. As a result, it is crucial to match one’s investment goal with the goal of the assets they intend to invest in. Not all investment kinds satisfy the needs of all investors. What might be a wise choice for one investor may not always be the greatest for another. As a result, it’s crucial to properly match the investment target and financial strategy with the financial goal.
For various financial horizons, many sorts of investment possibilities are appropriate. For instance, a fixed deposit has a five-year lock-in period. The lock-in period for a PPF account is 15 years, Therefore it is important for investors first to define their investment horizon.
Volatility in an investing plan equates to risk. In other words, it is a measurement of how much an asset’s price changes in response to a shift in market conditions. For instance, investments in shares or stock are prone to high price volatility. While fixed deposits and other government-sponsored programmes provide returns that are guaranteed. Risk is a concept that not all investors are familiar with. As a result, it’s crucial to invest in assets whose volatility you can handle.
The returns on each investment are different. Few investments come with great rewards, but they also come with a lot of danger. While some provide returns that are assured. Every investor makes an investment with the hope of making a sizeable profit. Understanding the asset’s historical returns and performance is crucial.
Costs and Expense
Every investment entails some cost or expense. For instance, purchasing shares involves a transaction fee. Mutual funds impose exit loads, fund management fees, and other fees. Additionally, few investments impose a fee for early withdrawals.
It’s crucial to invest in assets with strong liquidity. To deal with any unanticipated circumstances, liquidity is crucial. Investments in stock markets and mutual funds, for instance, are quite liquid. Selling one’s assets and turning them into cash is simple. Real estate investments, however, are not very liquid. If an investor needs money right now, they might not be able to sell the item. It is crucial to keep liquid assets in one’s portfolio as a result.
There is a lock-in period for some investments. The minimal time frame for which the investor must keep the investment is known as the “lock-in period.” For instance, PPF has a 15-year lock-in duration, while FDs also have a 5-year lock-in period. Typically, investments with lock-in periods do not permit early or partial withdrawals. However, one may withdraw with a fee in case of an emergency.
Investment earnings are taxed. For instance, based on the holding time and fund type, the returns from investments in mutual funds are taxed. Therefore, it is crucial to understand the tax liability associated with investment returns.
Which Investment Option is Best for You?
Now that you know about the different types of investment options, it is normal to get stuck while selecting one for you.
It’s best to base your investment on the following factors:
Young investors typically have fewer responsibilities. They also have a longer investment horizon than older investors. When you are looking forward to a long career ahead of you, you can invest in vehicles with a long-term perspective and gradually raise your investment as your income rises.
For this reason, young investors can invest in equity-oriented investments such as equity mutual funds rather than fixed deposits. On the contrary, older investors may prefer safer investments such as FDs. As you become older, you’ll need to change your investments.
You can invest your funds for short-term or long-term. For a short-term aim, it is best to go for a safer investment, but for long-term ambitions, you should consider the high return-generating potential of equities.
Guaranteed-return investments are a wonderful choice for non-negotiable goals like children’s education or a down payment on a house. Investing money in equity mutual funds or stocks can be useful if the goal is negotiable, meaning it can be postponed for a few months. Remember that if these assets perform well, you may be able to achieve your objectives much sooner than expected.
Another important factor to consider is your profile. Factors such as how many dependents you have and how much you make are critical. A young investor who does not earn much and has a family to look after may not be able to take equity-related risks.
On the contrary, an older person with a steady income and no dependants can invest money in equity to get a higher return.
- The returns generated on investment can help you deal with inflation
- Direct equity is one of the best investment instruments
- You can invest money in various gold investment options, such as bars, coins, gold sovereign bonds, etc
- It’s important to consider your profile before investing money
Word to Remember
A stock exchange is a marketplace where brokers and traders can buy and sell securities.
Investments are important tools that will increase your wealth while keeping it safe. However, choosing the right investment scheme is vital to avoid losing your money. Here are the best types of investment schemes that meet all the criteria that must be looking for. So what are you waiting for? Find out the best one and invest your money today!
If you want to remain invested for a period of 5 years or more, sovereign gold bonds are the best. This investment option provides a regular interest payout, and you also get the option to make tax-free redemptions after staying invested for 5 years.
Fixed deposits are great for people who are looking for stable returns without getting exposed to market risks.
It is important to consider your risk profile and investment goal before putting your hard-earned money into investment instruments.
The three main types of investment are stocks, bonds and mutual funds.
There are many types of investment to choose from. the best out of these depends on the investor’s goals, risk appetite and investment horizon.
To start investing, you must define your investment goals and risk appetite. These things can help you determine which types of investment is best for you.
Investing is a successful approach to use your money and possibly increase your fortune. Your money may grow in value and outpace inflation if you make wise investment decisions.
The intelligent investor knows why they are investing and what they are investing in. They can continually add to their portfolio over time and have control over their entire investing strategy.
ULIP, PPF, National savings certificate etc. are some of the best tax-saving investment options in India.