Types of Investments in India
17th February 2017
Most people are aware of stocks and bonds but are unaware of other available options. Investments are classified into three categories. These include owned investments, lending instruments, and cash equivalents.
Here are different products available within these categories:
With so many investment types, making the right choice may seem confusing. Investors must conduct extensive research on investment options and review their investment goals.
These investment types allow investors to own assets and earn profits through their holdings. These include the following:
- Known as shares or equities, this investment product allows investors to gain ownership of companies and a part of their profits. Investors acquire ownership based on the number of shares they hold in public companies. Stocks are traded on the equity markets and it is recommended that investors include such investments in their overall portfolio to earn high profits
- Some investors acquire properties to lease or resell them at a profit later. However, individuals are advised to not consider their personal homes as a type of investment. This is because self-occupied homes are not purchased with the objective of earning profits.
- Precious things like gold, silver, art and artifacts are also considered as investments. However, this may not always be a prudent investment decision. These objects face the risk of physical damage and require regular maintenance and safe storage, which may reduce the actual profits made at the time of sales.
- Several individuals invest time and money to commence personal businesses. These may either be manufacturing or services. Such investments may be profitable in the longer duration.
- This is one of the safest types of investments in the long-term. In the case of the demise of the insured during the tenure of the policy, the beneficiaries receive the policy benefits. Furthermore, the life insurance premium amount is eligible for tax deductions under section 80C of the Income Tax Act, 1961. This may be a good choice for risk-averse investors.
2. Lending investments
With these instruments, investors acquire debt that is repaid at a later date. Such products have lower risks but offer lower returns on the investments. Here are some products classified under this category.
- This kind of investment is a commonly used term for several types of debt investments. Investors loan money to the issuer when they acquire bonds. The issuer repays this amount over a period of time along with a fixed rate of interest. Most investors include bonds in their overall portfolio.
Certificate of deposits (CDs)
- CDs are issued by banks and are promissory notes. When investors acquire CDs, they are unable to withdraw their money prior to the maturity date and earn a higher interest when compared to their savings account.
Treasury inflation-protection securities (TIPS)
- TIPS were first launched in June 2013 and were linked to the Wholesale Price Index (WPI). These instruments are expected to protect investors’ capital against inflation and guarantee real returns on their investments.
3. Cash and cash equivalents
Most investors include some money in the form of cash within their investment portfolio. Certain cash equivalent investment products like money market funds or time deposits with maturity less than 3 months are also available for investors. These instruments are easily convertible to cash. These kinds of investments have low risks and yield lower returns.
4. Alternative products
This asset class includes all other investment alternatives. Some of these instruments are not categorized as ownership or lending. Here are some examples of such products.
Real-estate investment trusts (REITs)
- This is an alternative to purchasing investment properties. REITs are companies that invest in real estate and investors are able to earn profits through their investments.
- This fund is offered to start-up ventures or small businesses. Investors, known as venture capitalists, expect these companies to grow in the future and earn returns. Sometimes, the investors may even become partners and acquire equity stake, which allows them to be a part of managing the business.
- Commodity investment includes investing in certain resources that affect the overall economy. These comprise oil, food grains, and other resources.
- Professional managers invest the pool of money collected from several investors in mutual funds. Most funds are launched with basic investment criteria, such as debt funds, equity funds, or balanced funds.
- These are similar to mutual funds but are linked to indices like the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). These are often passively managed because the money is invested only in the index stocks.
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