When people hear of investments, they immediately think of stocks or bonds. But, many are unaware of the various types of investment options that are available today.
Investments are basically divided into three categories: Ownership or owned investments, lending investments / instruments and cash equivalents. There are different products available under each category.
Investors must research the different types of investment options properly before choosing to invest in a particular product. Each one has different needs and goals and it is imperative to choose the right plan to achieve the goals. Some of the basic types of investments are listed below:
- Stocks: This is the most well known product. It is also known as shares or equities. This product allows the investor to gain a part ownership in the company and obtain a part of their profits. Ownership depends upon the number of shares the investor owns in the company. Stocks are traded in the equity market. This product is known for high returns thus it is recommended to have stocks in your investment portfolio.
- Life Insurance: It is considered one of the safest types of investments. In the case of the demise of the ensured, the beneficiaries receive the benefits of the policy. An advantage of life insurance is that it is eligible for tax deductions making it an ideal choice for risk-averse investors.
- Real Estate: Real estate is considered a good form of investment as property prices are always on the rise. Many investors acquire property to either lease or to resell in a few years when the price increases. However, it is advised that one does not use one’s own home for investment as self-occupied homes are not purchased with the aim of earning profits.
- Business: This again is a very common type of investment. People choose to start their own business of manufacturing, distribution or services. The business starts reaping profits a few months or years after commencement of operations.
- Precious Objects: Precious metals like gold and silver is India’s most preferred method of investment. Indian households are said to have more gold than anywhere else in the world. Art pieces and artifacts are also considered a type of investment owing to their value and rarity. But the disadvantage that comes with this product requires regular maintenance and secure storing which can cause a hindrance. And resale value is not known for sure, as there is a chance of the price depreciating as well.
2) LENDING INVESTMENTS
Buying these products incurs a debt for the investors, which has to be repaid at a later date. They are low risk as well have low returns.
- Bonds: This type of investment is a debt investment. The investor acquires bond by loaning money to the issuer. The issuer then repays this amount over a fixed period of time at a fixed interest rate. Bonds are usually purchased as a part of a portfolio rather than just a standalone investment.
- Treasury inflation-protection securities: TIPS was introduced in 2013 and was linked to Wholesale Price Index. This product is meant to protect the capital of investors against inflation and guarantee real returns.
- Certificate of Deposit: When an investor purchases a CD, they are not allowed to liquidate the money prior to the maturity date. In this investment, the rate of interest is also higher than that of a savings account. CDs are issued by banks.
3) CASH AND CASH EQUIVALENTS
Investors also include money in their investment portfolio, in form of cash. Money market funds or time deposits with 3 month maturity are also available as cash equivalent investments. These products can be easily converted to cash. They are low on risk as well have low returns.
4) ALTERNATIVE PRODUCTS
- Mutual Funds: Mutual funds are managed by professionals. A pool of money is collected from several investors and the funds are launched with basic investment criteria such as debt funds, equity funds, or balance funds. In mutual funds, your investments are spread across low risk to high risk investments to maximize returns.
- Commodities: Commodities trading involves investing in resources that affect the country’s economy. They are commodities such as gold, silver, food grains, oil and other such resources.
- Real-estate Investment trust: This type of investment is an alternative to actually buying real estate. REITs are essentially companies that invest in real estate. Investors in turn can earn profits through the company’s investments.
- Index Fund: This is quite similar to a mutual fund. But here the investments are only in index stocks linked to the indices like the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE).
- Venture Capital: This is a fund offered to start-ups or small businesses. The venture capitalists or investors expect the small companies to grow and provide good return in the coming years. In some cases, the investors become partners in the business and even acquire equity stake in the business.
- Public Provident Fund: It is the safest long-term investment plan available in India and is tax free. Money is deducted every month from salary and kept in a fund for the period of 15 years and then compounded. That period can be extended a further 5 years. The only disadvantage is that the money can’t be withdrawn till the end f the 6th year but loans can be obtained against it.
- Post office Savings Scheme: It is said to be the top 10 best investments. This fund ensures high returns. This scheme is suited both for retired people as well as regular income individuals. This scheme has low risk and low interest rate as well.