Investment in terms of financial context means any money that is spent today in the hope of financial benefits that may be reaped in a future time frame. Every individual needs to put some part of his income into something which would benefit him in the long run. Investment is essential as unavoidable circumstances can arise anytime and anywhere. One needs to invest money into something which would guarantee maximum returns with minimum risks in future. Money saved now will help you overcome tough times in the best possible way.
Most of us have very little knowledge about investments. And because of this, we all invest only in the traditional investments giving rigid returns and ignoring the ones giving great returns. Those low returns cannot beat the increasing inflation in the economy. Of a population of over a billion, only 18 million is invested in equities. This is not a good number for a developing economy. There are various sources of investment and most of us have no idea of some of the investments and even if we know then either we are unable to understand them or find them too risky to invest in.
SOURCES OF INVESTMENTS
There are several sources of investment and can be divided into two broad categories: Financial assets and physical assets.
Financial assets refer to those assets which are in paper form, in simple words they are not tangible as they cannot be seen or touched rather they are in the form of documents specifying the ownership of the holder of such document. The risk and return varies from asset to asset. Financial assets can be further divided on the basis of the following:
Classification of financial assets on the basis of risk-return means classifying the financial assets on the ground of their risk-return tradeoff. Low risks are associated with low potential returns. High risks are associated with high potential returns
Equities are a type of security that represents the ownership of a company. Equities are traded (bought and sold) in stock markets. Alternatively, they can be purchased via the Initial Public Offering (IPO) route, i.e. directly from the company. Investing in equities is a good long-term investment option as the returns on equities over a long time horizon are generally higher than most other investment avenues. Even in short-term equities are capable of generating good returns but one should be thoroughly versed in the stock markets. However, along with the possibility of greater returns comes greater risk. Equities have a high risk-reward ratio.
- Mutual funds
Mutual funds allow people to pool their savings in order to get higher returns. In keeping with a predetermined investment objective. This investment avenue is popular because of its cost-efficiency, risk-diversification, professional management and sound regulation. You can invest as little as Rs. 1,000 per month in a mutual fund. Mutual funds are suitable for those who do not have the adequate knowledge to manage the funds. There are various general and thematic mutual funds to choose from and the risk and return possibilities vary accordingly.
Risk: Medium to high
Bonds are fixed income instruments which are issued for the purpose of raising capital. Both private entities, such as companies, financial institutions, and the central or state government and other government institutions use this instrument as a means of garnering funds. Bonds issued by the Government carry the lowest level of risk but could deliver fair returns.
There are the debt instruments which are issued by the company giving the debenture holder the right to have monthly or quarterly interest payment at a fixed date and also principal repayment on maturity. Payment of interest on debenture is compulsory even if the company makes loss and debenture holders also get the preference over equity and preference shareholders in case of winding up of the company. Debenture holders are the creditors of the company.
Risk: Medium to low
A commodity market facilitates trading in various commodities. It may be a spot or a derivatives market. In the spot market, commodities are bought and sold for immediate delivery, whereas in the derivatives market, various financial instruments based on commodities are traded. Commodities include gold, crude oil silver etc.
Investing in the currency market means buying and selling of the foreign currencies from the currency market. A great variety of currencies are traded in the currency market such as USD-Dollar, EUR-Euro, GBP-British Pound, JPY-Japanese Yen etc. The currency market has a high-risk high reward ratio.
- Initial Public Offerings
IPOs is once in a lifetime opportunity as it happens only once in every company. It is very attractive if launched by a good and reputed company. There are some unique risks associated with them like of proper and correct information about the company. But nowadays even this problem is sorted out to a large extent as a no. of people are reviewing the IPOs and publishing their findings on the websites. It’s a long-term investment option with low risk.
- Unit Linked Insurance Plans(ULIPs)
Unit-linked insurance plans (ULIPs), being the most popular insurance products available in the market, are life insurance products, which provide risk cover for the policyholder along with investment options to invest in any number of qualified investments such as stocks, bonds or mutual funds. This plan helps customers to avail the benefits of both insurances, as well as wealth creation over a long term. Return on ULIPs is dependent upon the risk you are willing to take i.e. it depends on the securities you chose to invest in.
Risk: medium to high
It includes that financial asset whose return is dependent on the performance of the company in which the investment is made. Venture capital is one such financial asset whose return is dependent on the performance of the company or the companies in which the venture capitalists have invested in.
Venture capital refers to financing the start-up companies. It is the most popular investment strategy. Venture Capital is money invested in businesses that are small; or exist only as an initiative but have huge potential to grow. The idea behind this investment strategy is to invest substantial capital in a budding company in return for stocks of the same. This is done with companies who are either in their initiation phase or in their growth phase.
Return on the following financial assets depends on the time the funds are invested for. Higher the investment tenure, higher will be the return.
Bank or post office deposits are the most secured financial instrument available to date. But with this low risk, the return is also low. There are various types of deposits offered by the banks such as fixed deposits, term deposits, savings bank account etc.
- Fixed deposits
Fixed deposit is that financial instrument that allows a person to park his/her surplus funds for a pre-decided period of time ranging from a period of 7 days to 10 years. Fixed deposit accounts offer a higher interest rate than savings accounts. They are regarded as safe instruments.
- Recurring deposits
A fixed amount is deposited at regular intervals for a fixed term and the repayment of principal and accumulated interest is made at the end of the term. These deposits are usually targeted at persons who are salaried or receive other regular income. A Recurring Deposit can usually be opened for any period from 6 months to 120 months
- Savings bank account
A savings account is an interest-bearing deposit account held at a bank or another financial institution that provides a modest interest rate. Banks or financial institutions may limit the number of withdrawals you can make from your savings account each month, and they may charge fees unless you maintain a certain average monthly balance in the account.
- Flexi fixed deposits
Flexi fixed deposits are a combination of fixed deposits and recurring/savings account. Customers get the benefit of high-interest rates offered by Fixed Deposits plus liquidity offered by saving accounts.
Physical assets are tangible assets and can be seen and touched. They are opposite to financial assets with only one similarity is that they both represent an economic resource that can be converted into value Examples of such physical assets include real estate, machinery, plant, tools, equipment, vehicles, gold, silver, or any other form of tangible economic resource. The liquidity is low in comparison to the financial assets.
- Real estate
Real estate is one of the fastest growing sectors in India, holding the huge prospects in major sectors like housing, commercial, hospitality, manufacturing, retail and more. Buying a flat or plot is the best decision amongst the investment options.
Gold is one of the most traditional forms of investment in which most of the Indians are comfortable with. It is the safest form of investment. Gold is suitable for long-term investment. India is the world’s biggest market for gold.
- Precious metals
Gold is a popular metal for investment but it does not mean that there are no other metals available for investment. There are other precious metals also, such as platinum, palladium, and silver. All have risen in price over the past several years as demand has increased around the globe.
- Arts, paintings, and sculpture
Many people, most collectors, invest in paintings and sculpture. Some do it for their passion and others for their business. In times of high and rising inflation, art has performed historically well across all market sectors. Typically when there is an uncertain market, people look to purchase art as a form of an investment and not just a beautiful object.