Different Types of Investments – Your Guide to the Ecosystem
From a young age, we have been taught the importance of saving money. Be it savings from the pocket money we received as children, or putting aside a part of the monthly income, savings are known as one of the best habits a person can have. However, did you know that there is one habit which is better and more important than saving? Yes, you guessed it right – investing is a habit which is exceptionally important, especially in today’s times. With inflation rising steadily, and the value of money dropping over time, investments are an imperative part of the game. When talking about investments, people wonder where and how they should invest. Let us consider the types of investments and understand the basics of each type to understand where you should invest your hard-earned money.
Types of Investments
One of the first types of investment you should know about is the traditional avenue. Most of you might already be aware of these types of investments. You must have heard your parents talk about opening bank fixed deposits, or recurring deposits as a way to invest your money. Well, these types of investments are called traditional investments as they have been followed by people since the beginning of the banking system. Under this type of investment, you can either park a lumpsum amount in a bank FD, for a fixed number of years, and earn an annual interest on the investment, or begin a recurring deposit based on a frequency of your preference. Alternatively, you can also keep your money aside, in your savings account, as the money in the account will earn you interest from the bank. However, these types of investments will only earn you a low return, with most FDs in India offering between 5% and 6.5% for five-year tenures. Considering the current rate of inflation, you will actually end up with a nominal loss, at the end of the tenure, since the value of your savings would have deteriorated over the next five years.
Low risk investments
Investors are of two primary types – risk averse and high risk. If you fall under the first category, and want to invest in low risk investments, you can consider assets such as government securities and debt mutual funds which invest in gilts or AAA rated corporate bonds. Such investments will help you earn a coupon, or a fixed yield, in return for the money you have invested. It is advisable to stay invested for the longer term as investments tend to offer better returns over medium or long durations. Investments of this kind are considered extremely safe as gilts are issued by the government, and called sovereign debt, meaning there is no possibility of default. Further, AAA rated corporate bonds are issued by top-class companies which have a long history of paying back their debtors, ensuring a safe haven for your savings. However, since these are low risk investments, they will offer you less returns than the equity market.
High risk investments
These types of investments are usually opted for by high risk investors who are willing to take on more risk in the pursuit of higher returns. In these types of investments, you can either park your funds in equities directly, through the help of stock brokerages or in equity mutual funds. Even in equities and equity mutual funds, you can consider options like large capitalisation companies, which have a valuation of over 20,000 crore rupees and are deemed safer, mid cap companies with a market capitalisation between 5000 crore and 20,000 crore rupees and small cap companies, which have a valuation below 5000 crore rupees, based on your risk appetite and return requirements. One basic thing you must remember here – higher the inherent risk, higher will be your potential for returns. Therefore, if you are keen on equity investments, you must build a portfolio aimed at maximising your returns and minimising your risks. This can be done through portfolio diversification and asset allocation. There are also many different types of equity mutual funds for you to consider, and you can invest either through the lumpsum route or via systematic investment plans based on a frequency of your choice.
These types of investments have been in vogue since time immemorial. You can invest your money in assets such as real estate and gold, based on your investment horizon. While gold is considered a safe haven asset which fares well during volatile scenarios, real estate investments should be made with a long-term duration in mind as such types of investments are largely illiquid and take years to offer strong returns. You can also consider Real Estate Investment Funds and Gold Exchange Traded Funds if you wish to invest in these assets without actually buying the underlying securities.
Now that you are aware of the different types of investments, you can take your pick, based on your investment profile and return requirements.
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