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Types of Investment in India

What is an Investment?

An investment is any mechanism or product designed to help you generate wealth and income over time. There are different types of investment instruments and investing is the process of acquiring different types of assets. It is the most important step in the journey of wealth creation.

 

With inflation on the rise, it’s no longer advisable to just make money and keep it in your bank accounts. Investing allows you to beat inflation and grow your wealth. Considering risk appetite, investment horizon, financial goals and other relevant factors when browsing various types of investment is crucial.

How Does an Investment Work?

Simply put, investments are instruments that enable you to dedicate funds towards the goal of wealth generation. Whether you invest in bonds, stocks or even land, the sole aim is always to generate wealth. Profits earned are generally realised in the form of dividends, capital appreciation or interest earnings.

 

For instance, when you buy a piece of land today, its value can increase over a period of time, fetching you good returns. Similarly, investing in a fixed deposit also helps you accumulate funds over a chosen tenor.

 

On the contrary, savings may not generate enough earnings to beat the rising inflation. When browsing through types of investment, make an informed choice so that you can enjoy returns higher than the inflation rate.

 

Investing is not a mere drill of purchasing a commodity. The action you take decides the amount of revenue you generate in the future. For instance, consider that you invest in shares of a company. As long as the organisation performs well, you will turn a profit, while downturns will affect your earnings.

 

Before choosing various types of investment, understanding this working principle is crucial. As the market is flooded with various investment options, selecting the right one can be daunting.

 

For a simplified route, visit Bajaj Markets and find different types of investment options, based on your risk appetite.

Different Types of Investments

There are different types of investment available in the Indian market. Creating an ideal investment portfolio with various types of investments based on the risk tolerance, liquidity levels and investment objectives is a good option.

 

To that end, here is a snapshot of the different types of investment and their key features.

Fixed Deposits (FDs)

Banks and NBFCs provide FDs which assure returns and capital protection. Simply, lock in your corpus for a chosen tenor at a predetermined rate of interest and grow your funds.

 

Since returns on an FD remain unaffected by market fluctuations, they have a prominent standing in the Indian market. FDs offer fixed interest payouts at regular intervals or at maturity, depending on the type of FD you choose.

You may choose to withdraw your interest payouts or reinvest them to maximise your earnings. Amongst various types of investment, fixed deposits are a popular choice owing to the interest rates on offer.

Bonds

Bonds are among the types of investment instruments offering a fixed income. This simply means you get a fixed rate of interest for the amount you invest. The principle of this financial instrument is that you lend money to corporations and the government.

 

For the amount invested, you get income regularly in the form of interest. The ones issuing bonds are organisations raising funds to meet many of their financial project requirements. Depending on the contract, you are eligible to receive fixed or variable interest payouts from the borrower.

Bonds are preferred by those who like a fixed source of income. Despite being low-risk instruments, bond issuers may default on capital and interest repayment. To avoid this, you can check the credit rating of the bond before investing in one. A higher credit rating of AAA is considered the most reliable bond.

Public Provident Fund (PPF)

The PPF is a long-term investment offering backed by the government. These investment schemes are much like fixed deposit investments as they are extremely safe and offer fixed returns.

 

Such schemes come with a lock-in period of 15 years, which can be extended by 5 years. Any PPF investment up to ₹1.5 Lakhs qualifies for tax exemption under Section 80C of the Income Tax Act.

Stocks

Investing in such types of investment is also referred to as equity instruments. When you buy stocks of a particular company, you get a part of the ownership of the firm. Simply put, this refers to investing in tradable shares of a company through the stock market

 

You may choose to invest in existing large-cap, mid-cap or small-cap stocks or you may invest in IPOs. Either way, it’s crucial that you exercise due diligence before investing in the stock market as it can be quite risky and highly volatile.

 

One of the goals of investing in stocks is to generate a regular income with dividends and earn profits on capital appreciation. As stock rates increase, you can sell your stocks to gain maximum benefits.

 

However, amongst different types of investment, this is considered one of the riskiest routes to go. The reason being returns from stocks are linked to market fluctuations. So, a thorough market knowledge can help you fetch higher profits.

 

It is ideal to consider stocks as a long-term investment option rather than a short-term one to avoid unexpected losses.

Mutual funds

Mutual funds are one of the types of investment that refers to a corpus professionally managed by a fund manager. Simply put, these investment vehicles pool money from various investors and invest them in different assets classes.

 

The fund manager invests the corpus into equities, gold, bond and other securities on behalf of the investors. There is a wide range of mutual fund investment options available in the market depending on your financial goals.

 

As with any other types of investment, the return on your mutual fund investment is heavily dependent on the type you choose. For instance, mutual funds with higher risk yield higher rates of return, while low-risk funds offer comparatively low returns.

Exchange-Traded Funds (ETF)

Amongst various types of investment, this is a passive investing option replicating the underlying index. In simple words, these funds mimic and track how an index performs. These index funds are traded on exchanges similar to stocks.

 

The trading value of exchange-traded funds is dependent on the net value of the underlying stocks it represents. Simply put, ETFs are baskets containing stocks reflecting the composition of an Index such as Nifty 50 and so on.

 

Here are a few different types of ETFs:

 

  • Commodity ETFs

  • Equity ETFs

  • Bond ETFs

  • Currency ETFs

National Pension Scheme (NPS)

An investment option perfectly suited for retirement, NPS offers regular income after you retire. Considered a low-risk investment, the National Pension Scheme requires you to invest regularly during the employment period.

 

While you can enjoy tax benefits with this scheme, you are allowed to withdraw a specific percentage of the accumulated amount after you retire. The remaining amount is available as a monthly pension to meet your regular expenses.

Gold

Amongst various types of investment, investing in gold has always been a popular option. Undoubtedly, this has been a go-to investment option for Indians. Purchasing gold in various forms like biscuits, bars or jewellery is an age-old practice.

 

While investing in gold may not fetch you interest, this is a liquid asset that can offer good returns. Recently, gold bonds and gold ETFs are becoming increasingly popular in the Indian market.

Real Estate

When you purchase a physical property, this option is called the real estate investment. This also involves management of any investment in property, land or building.

 

The prime goal of a real estate investment is capital appreciation wherein you earn a higher income on selling the property in future. You can also generate income by renting out your property.

 

This option is best suited for long-term investors as land rates appreciate only after a specific period and not during the short-term period. A thorough market research can help you invest in the right property.

Unit Linked Insurance Plans (ULIP)

Unit Linked Insurance Plan, commonly referred to as ULIP, comes with dual benefits. It is both an insurance plan and an investment plan. When you invest in a ULIP, a part of your investment goes towards insurance premium payment. This offers coverage to your family in case of your unfortunate demise.

 

The remainder of your investment is directed towards investment into a fund of your choice. You may choose between an equity fund, a debt fund or a combination of both, depending on your investment objectives, financial goals and risk appetite.

Senior Citizen Savings Scheme (SCSS)

This is one of the types of investment backed by the Government of India. The SCSS is suitable for individuals above 60 years of age and has a maximum tenor of 5 years. However, you may also extend the maturity date by another 3 years if required.

 

While investing in SCSS can help you avail tax benefits, note that you can deposit only a maximum amount of up to ₹15 Lakhs. Ensure you deposit the amount in multiples of ₹1,000.

Certificates of Deposit (CDs)

CDs are one of the low-risk financial instruments among various investment options in the Indian market. All you have to do is invest your money in the bank for a specific tenor at a fixed rate of interest.

 

When your CD matures, you get the principal along with the interest earned on it. Opting for a higher tenor can fetch you better returns as the interest rate increases. While the features of a CD may look similar to a fixed deposit, there are a few differences.

 

While FDs come with varying investment tenors, the duration of CDs are comparatively shorter. The main difference between them is the minimum value of the amount you can invest.

 

You can open an FD with just ₹1,000 but you have to invest a minimum of at least ₹1,00,000 in a CD.

Retirement Plans

A retirement plan is an investment scheme that comes with tax benefits. Here, you need to invest a specific amount regularly to the retirement account that can be utilised after you retire.

 

While most employers initiate workplace retirement plans, you can also opt for individual schemes if you do not have access to such plans in your workplace.

Options

An advanced way to purchase stocks, options are available in two types such as call and put options. Call options are applicable when you want to buy an asset, while the put option is used for selling the asset.

 

Buying an option gives you the authority to buy or sell an asset at any given time at a specific rate.

Cryptocurrencies

A decentralised digitised money you can use on the Internet is called cryptocurrency. Cryptocurrencies have emerged successfully over the years as digital alternatives to actual cash.

 

While this investment option allows you to have complete control on your assets, it's easy transferability facility ensures seamless transactions. Secured using blockchain technology, cryptocurrencies are available throughout as they are not tied to any financial institution or government.

Commodities

These are simply physical products divided into four main types such as:

 

  • Metals

  • Livestock

  • Energy

  • Agricultural

You can trade commodities in the futures market, where a particular product is sold or bought on a specific date at a certain rate. However, it is advisable to understand the working of the futures market before planning to invest in commodities.

Things to Keep in Mind While Investing

Before making wise investment decisions to secure your financial future, it’s crucial to analyse various investment options. Then, choose a financial instrument or a combination of financial instruments that perfectly aligns with your financial goals.

 

Understand that investing your money is not a mere drill of parking funds. Consider the following tips before you make the right investment choice.

 

  • Identify your investment goals

  • Check out the investment horizon to help you plan your finances better

  • Gauge the risk factors involved before investing in assets

  • Calculate the returns to understand the profit margin better

  • Assess the expenses and cost involved when making an investment

  • Choose assets offering better liquidity as they can help you tackle financial emergencies

  • Understand the lock-in period before you invest in any scheme

  • Check if you are eligible for tax benefits before making any investment

How to diversify your investment portfolio

Now that you are familiar with different types of investment, here are a few pointers to expand your financial portfolio. Diversification is a crucial management strategy that combines various investments under a single portfolio.

 

Here are a few simple tips to consider for easy diversification of your portfolio.

 

  • Add bond or Index funds to your investment portfolio that can help you tackle market fluctuations

  • Add to your portfolio regularly

  • Assess the market conditions and understand when to get out of a particular investment

  • Monitor the commissions payable to agents

Investment decisions are highly personal and are often dictated by a number of factors such as personal circumstances, market conditions and financial goals. Knowing where to invest your money can be a great dilemma for most of us as the choices are aplenty.

 

So, it is crucial to understand the pros and cons of various investment options before you select any investment plan. Act smart today for a better future tomorrow!

FAQs on Different Types of Investment

  • ✔️How to purchase various investments?

    When you are unclear about the right type of investment, you can seek advice from a financial advisor. Alternatively, you can also start an online brokerage account if you want to manage investments alone.

  • ✔️Why is it important to calculate risk factors before investing?

    It is crucial to understand the market conditions and assess the profits you can gain from the investment. Taking a calculated risk can help you manage finances better and tackle losses with ease.

  • ✔️What are the crucial pointers to consider before investing in India?

    • Choose the right investment type based on your long-term or short-term financial goals

    • Compute the possible returns using an online investment calculator

    • Plan well for your post-retirement life

    • Monitor your investments regularly

  • ✔️What is the difference between a fixed deposit and a Certificate of Deposit?

    While both work on the same principle, the maximum tenor of a CD varies from days to 1 year. However, you can choose a tenor of up to 10 years in an FD.