Different Types of Investments
2020 and COVID the pandemic highlighted the importance of savings and investments. When salaried employees lost their jobs in India and across the world, savings and other investments proved crucial for those who had made the right decisions early in their careers.
Investments are important to accomplish financial goals and achieve financial security. Besides, by making the right investments early, you can harness the power of compounding and ensure further income. The advent of demat accounts has reduced paperwork and made investing simpler for the average investor. A demat account can help you hold the physical certificates of your shares, bonds, ETFs and other financial instruments in electronic format.
What are various options available for investment?
There are physical as well as financial assets that you can invest in. The physical assets include Real Estate, Gold, Jewellery and Commodities and the financial assets are Bank Deposits, Post Office Savings, Insurance, PPF, EPF, Equity, Derivatives, Bonds, Debentures, and currencies.
Physical assets can be accessed in several ways including traditional physical holdings, futures contracts, Demat forms, ETFs etc., whereas financial assets can be held with financial institutions such as banks, insurance companies and post-offices. Each mode has its own advantages and disadvantages. Physical holdings usually fetch a good price during a downtrend.
Futures Contracts offer the benefits of leverage and similar advantages as physical holdings. Buying Option Contracts is a less risky way to access the market, but it is also more complex and requires deeper research to understand elements of volatility. Exchange-Traded Funds are more or less similar to stocks which can be accessed by equity trading accounts.
Understanding the Investment Risk Ladder
Here are the major asset classes, in ascending order of risk, on the investment risk ladder.
A cash bank deposit is the simplest. Not only does it give investors precise knowledge of the interest they'll earn, but is also risk-free. However, the interest earned from cash stashed away in a savings account seldom beats inflation.
A debt instrument representing a loan made by an investor to a borrower. A typical bond will involve either a corporation or a government agency. Bond rates are essentially determined by interest rates.
A type of investment where multiple investors pool their money together to purchase securities. They are not passive as they are managed by portfolio managers. Mutual funds are sometimes designed to follow underlying indexes such as the Sensex and Nifty. Next on the list are ETFs which are similar to mutual funds, but they trade throughout the day, on a stock exchange.
Shares of stock let investors participate in the company’s success via increases in the stock’s price and through dividends. Shareholders have a claim on the company’s assets in the event of liquidation (that is, the company going bankrupt) but do not own the assets.
Investors can acquire real estate by directly buying commercial or residential properties. They can also purchase shares in real estate investment trusts (REITs). Such investments are good ways to build passive investment..
Commodities refer to tangible resources such as gold, silver, crude oil, as well as agricultural products.
With many stockbrokers and DPs offering the option to open a Demat account online, it has become quite easy to apply for one. However, Investments should be backed by proper research. You should rely on sound recommendations from experienced investors while dismissing "hot tips" from untrustworthy sources. You should be aware of the different assets that are available in the market, consult professionals and diversify your holdings across a wide range of assets.