Different Types of Investment

The year 2020 is no less than a lesson. It has 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 made the right decisions early.

Investments are not only important to accomplish one’s financial goals but also to accomplish financial security. Besides if you make 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 the electronic format.

The mantra is that one should invest early, regularly and for a longer period of time.

What are various options available for investment?

There are physical as well as financial assets that you can invest in. The physical asset includes Real Estate, Gold, Jewellery and Commodities and the financial assets such as Bank Deposits, Post Office Savings, Insurance, PPF, EPF, Equity, Derivative, Bonds, Debentures, and currencies.

Physical assets can be accessed in several ways including traditional physical holdings, futures contracts, D-mat forms, ETFs etc., whereas financial assets can be held with financial institutions such as banks, insurance companies and post-offices. Each mode of holding has its own advantages and disadvantages. Physical holdings usually fetch a good price during a downtrend.

Futures Contracts offers the benefits of leverage and a lot of the same advantages of physical holdings. Buying Option Contracts is a less risky way to access the market, but also more complex and requires more study 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.

Cash:

A cash bank deposit is the simplest. Not only does it give investors precise knowledge of the interest they'll earn but is risk free. However, the interest earned from cash socked away in a savings account seldom beats inflation.

Bond:

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 the interest rates.

Mutual Funds:

A type of investment where more than one investor pools their money together in order 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 is ETFs which are similar to mutual funds, but they trade throughout the day, on a stock exchange.

Stocks:

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.

Alternative Investments

Real estate:

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:

Commodities refer to tangible resources such as gold, silver, crude oil, as well as agricultural products.

Conclusion

With many stockbrokers and DPs offering the option to open a demat account online, it has become quite easy to apply for one. However, Investment 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 and consult professionals and above all, diversify your holdings across a wide swath of assets.