How an Investment Works
Investing involves strategically using your money to purchase assets like stocks, bonds, or real estate with the expectation of future gains. These assets can potentially grow in value over time (appreciation) or generate regular income payments (dividends or interest). The goal of investing is to increase your wealth and achieve your long-term financial objectives.
Types of investment options in India
Types of investment options include:
1. Low-Risk Investments
Investments with low risk involve minimal or zero levels of risk, providing stable and often guaranteed returns. These options are well-suited for risk-averse investors seeking a secure avenue for earning returns. Low-risk investments include Fixed Deposits, Public Provident Fund (PPF), and Sukanya Samriddhi Yojana, offering a reliable and stable returns.
2. Medium-Risk Investments
Medium-risk investments carry a slightly higher level of risk than low-risk options. They are suitable for investors looking for a balanced portfolio. Medium-risk investments includes Debt Funds, Corporate Bonds, and Government Bonds, offering a balance between risk and reward.
3. High-Risk Investments
High-risk investments are typically market-linked and come with higher levels of risk. Despite the potential for higher returns in the future, these investments involve significant volatility and uncertainty. Suited for investors who can take more risk to earn good return, high-risk investments include Stocks, Mutual Funds, and Unit Linked Insurance Plans (ULIPs).
With many investment plans available, choosing the right one could be challenging. Listed below are a few investment plans that can help grow savings.
Popular investment plans in India
If you are wondering where to invest money, here are a few types of investment that you can choose from:
1. Stocks
Stocks represent a share of ownership in a company or an entity. Stocks are one of the best investment avenues for long-term investors to earn generous returns. However, since these are market-linked instruments, there is always the risk of capital loss.
2. Fixed deposit
Fixed deposit is an ideal investment tool for risk-averse investors. An FD bears no effect of the market movements while offering secured returns on your deposit. Even investors with high-risk appetites choose to invest in FD to stabilise their portfolios.
Bajaj Finance, a leading NBFC, offers one of the highest interest rates, up to 8.65% p.a., on its Fixed Deposit. You can also calculate the interest returns with the help of Bajaj Finance Fixed Deposit Calculator.
3. Mutual funds
Mutual funds are investment tools managed by fund managers, which pool people's money and invest in stocks and bonds of different companies to yield returns. You can earn generous returns even when starting with a smaller initial deposit amount.
4. Senior citizen Savings Scheme
Senior citizen Savings Scheme is a long-term saving option for retirees. This option is ideal for those who aim to create a steady and secure income stream post-retirement.
5. Public Provident Fund
PPF is a trusted investment plan in India. Investments start at just Rs. 500 per annum and the principal invested, interest earned, and maturity amount are all exempt from tax. It has a lock-in period of 15 years, with partial withdrawals allowed at various points.
6. National Pension Scheme (NPS)
NPS is one of the profitable government-backed investment options that provide pension alternatives. Your funds are invested in bonds, government securities, stocks, and other investment options. The age of the investor determines the length of the lock-in period, as the scheme does not mature until the investor reaches the age of 60.
7. Real estate
Real estate is one of the fastest-growing sectors in India, which holds excellent prospects. Buying a flat or plot is one of the best tools among India's many investment options. As the property rate is likely to increase every six months, the risk is low and real estate works as an asset that offers high returns over a long-term period.
8. Gold Bonds
Sovereign Gold Bonds are government securities denominated in grams of gold. Reserve Bank issues the bond on behalf of the Government of India as a substitute for holding physical gold. Investors have to pay the issue price, and one can redeem the bonds on maturity.
9. REITS
Depending on your risk appetite, you can choose to invest in either market-linked instruments or those that remains unaffected by the market movements. Market-linked investments yield higher returns, but these are not always the best investment plans as they risk losing your capital. In comparison, investment tools like fixed deposits offer more security of funds. Bajaj Finance is one such financier that provides the dual benefit of high FD rates and safety of funds.
10. Government bond
A government bond is a type of debt security issued by a government to raise capital for various purposes. Some of the purposes are financing infrastructure projects, paying off existing debt, or funding social programs.
When an investor buys a government bond, they are essentially loaning money to the government. In exchange for this loan, the government promises to pay the investor interest at a specified rate for a fixed period of time, usually ranging from a few months to several years.
At the end of the bond's term, the government repays the principal amount (the amount originally borrowed) to the investor. Government bonds are considered a low-risk investment because they are backed by the full faith and credit of the government. This means that the chances of the government defaulting on its debt obligations are considered extremely low.
11. Direct equity
Also known as owning stocks or shares, it refers to the ownership of a company's assets by purchasing its shares directly from the stock market. When you buy direct equity, you own a portion of the company and have a claim on its assets and earnings.
As a direct equity holder, you have the potential to earn profits through capital appreciation. This signifies an increase in the value of the company's shares over time, and higher dividends. Dividends are a portion of the company's earnings distributed to shareholders.
12. Unit Linked Insurance Plans (ULIPs)
A Unit Linked Insurance Plan (ULIP) is a type of life insurance policy that allows the policyholder to benefit from potential returns on investment, while also providing a life insurance cover. ULIPs are designed to provide the policyholder with the benefits of both investment and insurance in a single plan. The policyholder has the option to choose the investment funds based on their risk appetite and financial goals. ULIPs offer flexibility in terms of investment as the policyholder can switch between different funds based on their financial goals and market conditions. They also provide tax benefits on both the premium paid and the benefits received, subject to certain conditions.
13. National Savings Certificates (NSC)
National Savings Certificates (NSC) is a Savings Scheme offered by the Government of India through the Department of Post. It is a fixed-income investment that allows individuals to invest a lump sum amount and earn interest on it. The scheme comes with a maturity period of five years, and the interest rate is fixed at the time of investment. Currently, the interest rate is 7.7% per annum (as of January 2024).
The investment made in NSC qualifies for a tax deduction up to Rs. 1.5 lakh per financial year, under Section 80C of the Income Tax Act. The interest earned on NSC is also taxable as per the individual's tax slab rate, but no TDS (tax deducted at source) on the interest. The minimum investment amount in NSC is Rs. 100, and there is no upper limit for investment.
14. Sukanya Samriddhi Account
Sukanya Samriddhi Account is a government-backed Savings Scheme for the girl child, launched under the Beti Bachao Beti Padhao campaign. The scheme is aimed at promoting the welfare of the girl child in India and encouraging parents to save for their daughters' education and marriage expenses. The account can be opened in the name of a girl child who is below the age of 10 years, by her parents or legal guardian. The account can be opened in any post office or authorised bank branch in India. The minimum deposit amount for Sukanya Samriddhi Account is Rs. 250, and the maximum deposit limit is Rs. 1.5 lakh per year.
The account offers an attractive rate of interest, which is currently set at 8.2% per annum (as of January 2024), compounded annually. The interest earned on the account is tax-free and the contributions made to the account are eligible for tax deductions under Section 80C of the Income Tax Act.
15. Kisan Vikas Patra (KVP)
Introduced in 1988 as a small saving certificate scheme, the Kisan Vikas Patra aimed to instill long-term financial discipline. Initially designed for farmers, the scheme has since expanded its eligibility criteria, allowing anyone who qualifies to invest. Kisan Vikas Patra post office scheme guarantees returns. Investors can obtain certificates from any India Post Office branch or select public sector banks.
16. Post Office Time Deposit
Post Office Time Deposit is a fixed-term deposit offered by India Post. It allows individuals to deposit a lump sum amount for a fixed period, ranging from 1 year to 5 years, at a predetermined interest rate. This investment option provides capital protection and a fixed return, making it suitable for risk-averse investors. The flexibility in choosing the deposit tenure caters to investors with different financial goals and time horizons.
