Key Takeaways
Investing is the act of allocating funds to different securities to generate profits over time.
Common types of investments include stocks, bonds, real estate, ETFs, mutual funds, and cryptocurrencies.
You can choose different types of investments depending on your investment goals, time horizon, and risk appetite.
Investing is an effective way to build long-term wealth and achieve your financial goals. While holding cash in savings accounts allows for capital protection, investing your savings in different types of investments allows it to grow over time through the power of compounding. In this article, we assess the different types of investments you can undertake to build a financially secure future.
Investing is the act of allocating funds to assets for a certain period with an aim to generate profits or income. In simple words, investing is putting your money to work today to earn returns in the future. Unlike savings, investing carries a certain degree of risk. In other words, if the asset you have invested in does not perform as expected, you may incur losses. Investing is also different from speculation, which bets on short-term price fluctuations.
You can invest through different types of endeavours, like buying a property to generate rental income/reselling it for a profit or starting a business with capital investment. Depending on your financial goals and risk tolerance, you can choose from the different types of investment instruments available on the market. Investment returns also vary depending on the different types of investments selected. For instance, real estate investments can produce both rental income and profit, while stocks may produce quarterly dividends, capital appreciation, and gains, and bonds offer periodic interest earnings. Let’s have a look at the seven types of investments below:
Investing in stocks is a direct equity investment where you buy the stocks of a listed company, gaining fractional ownership of the business. Equity investments offer a higher return potential but also come with a higher risk exposure since market volatility can impact stock prices and affect returns. Dividend-paying stocks offer regular dividend payouts to shareholders from the company’s profits. Apart from dividend income, shareholders also enjoy capital appreciation with this type of investment. If the shareholder is able to sell the stock at a price higher than what he paid for, he can register a capital gain. However, building an equity portfolio requires diligent stock selection that’s based on thorough market knowledge and expertise.
Bonds, on the other hand, are debt securities issued by corporations and governments to raise funds. The investor offers money to the bond issuer in exchange for periodic interest payments and principal repayment on the bond’s maturity date. Most bonds in India have a fixed interest rate (coupon rate). However, there are also floating interest rate bonds that pay a variable interest to the investor and zero-coupon rate bonds that allow redemption at face value upon maturity. While bonds are considered a type of low-risk investment instrument, they are still susceptible to interest rate risks and credit risks. Bond prices fall when interest rates rise and vice versa, impacting the value of your investment. Similarly, credit risk is associated with the issuer defaulting on the bond’s interest and/or principal payments.
You can invest in real estate by directly buying a piece of land, a commercial property, or a residential property. If you require regular income, you can rent out the property for a steady cash flow or wait for capital appreciation and sell your investment for a profit. However, buying properties also means additional repair and maintenance costs, tax payments, utility bills, and management hassles.
Alternatively, you can invest in real estate through REITs (Real Estate Investment Trusts). This type of investment is quickly gaining popularity in India. REITs in India typically invest in high-value commercial properties and distribute the rental income gained from these properties among investors. Since REITs trade on stock exchanges like the BSE and NSE, you can easily invest and liquidate your investment when needed. Investing in real estate through REITs helps you bypass the need to buy or manage any property on your own.
Funds are another common type of investment in India. Managed by professional investment managers, funds are pooled investments that invest in various securities like stocks, bonds, and gold. Under funds, there are two different types of investments:
Mutual funds: Mutual funds are investment instruments that pool money from different investors to invest in a diversified portfolio of stocks, bonds, and other securities. The professional fund manager decides how the pooled funds are to be invested in tune with the scheme’s investment objective. The value of a mutual fund depends on its NAV or net asset value. There are various kinds of mutual fund categories available on the market, including equity, debt, and hybrid funds.
Equity funds invest at least 65% of their corpus in equity assets, while debt funds invest in fixed-income securities like bonds. Hybrid funds invest in both equity and debt assets, but the asset allocation percentage varies from fund to fund. Each fund type has various subcategories and carries differing risk and return potentials. Therefore, you should carefully assess your risk appetite and investment objectives before picking a mutual fund.
ETFs: ETFs or exchange-traded funds are also pooled investments that invest in a varied basket of securities like equities, bonds, currencies, and commodities. However, unlike mutual funds, ETFs trade on stock exchanges and the process of buying and selling them is similar to the process of buying individual stocks. ETFs are passive investment instruments that track the performance of a stock market, bond, or commodity index. Since they are passively managed, ETFs tend to be more cost-effective than actively managed mutual funds.
Among the different types of investments available to the modern investor, cryptocurrencies are quickly gaining popularity. Cryptocurrencies are digital or virtual currencies protected by cryptography. Cryptocurrencies are traded through decentralised networks by leveraging blockchain technology. Some of the most well-known cryptocurrencies include:
Bitcoin
Ethereum
Binance Coin
Solana
Investing in cryptocurrencies is highly risky. Prices of even the most established cryptocurrencies experience intense volatility that outpaces the price volatility of other assets like equities. Additionally, there is also the possibility that regulatory measures may deem a cryptocurrency illegal, wiping out your entire investment. Due to the high volatility involved, this type of investment may be best suited only for high-risk investors with adequate market knowledge.
Alternative investments are a broad category that includes different types of investments that do not fall into the traditional moulds. Most alternative investments share one common feature: they generally offer higher-than-average returns but also carry higher-than-average risks. Let’s review some of the most common types of alternative investments:
Hedge funds: Open to high net-worth individuals, hedge funds are pooled funds that invest in different assets and use various hedging strategies like leveraging and short selling to maximise returns and minimise portfolio volatility.
Private equity: Private equity is a type of investment that allows you to buy equity in a private company that is not publicly traded on the stock exchange. Typically, private equity investments are only open to affluent and accredited investors and not general retail investors.
Options contracts: A call option gives the holder the right to buy the asset at a specific price within a specific time window, while a put option gives the holder the right to sell the security at a fixed price within a specific date. The underlying asset, in this case, may be a stock, bond, or commodity.
Now that you know all about the seven types of investment instruments, you must be wondering how you can buy them. Let’s review the process of buying different types of investments in India:
Stocks and bonds: You can invest in stocks and bonds through a brokerage account online.
Real estate: For real estate, you can purchase properties directly or invest in REITs listed on the stock exchanges through your trading account.
Mutual funds and ETFs: You can invest in mutual funds directly through an AMC or brokers and distributors. ETFs are traded directly on the stock exchange, so you can invest in them through your trading account.
Cryptocurrencies: You can invest and trade in cryptocurrencies through crypto exchanges where the token is listed.
Alternative investments: You can invest in alternative investments like options contracts through your trading account.
When understanding how to invest in different types of investments, you can follow one of the following options:
DIY: If you have a good understanding of the market, you can simply open an online Demat and trading account to get started. Discount online brokerage firms offer cost-saving benefits along with ease of trade execution.
Seek an investment advisor: If you lack market knowledge and prefer to defer to the expertise of a professional, you can partner with an investment advisor. Wealth managers and investment advisors conduct research and manage your investments in exchange for a fee, which is generally calculated as a certain percentage of your assets under management.
Partner with a robo-advisor: Robo-advisors use AI algorithms to gather information about your risk profile and investment goals to offer suitable recommendations.
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The three main types of investment categories include ownership, lending, and cash equivalents. Ownership refers to buying stocks, real estate, and gold, while lending refers to bond investments. Cash equivalents are savings accounts and FDs that can be easily liquidated.
Choosing the right type of investment depends on an assessment of your investment goals, time horizon, budget, liquidity needs, and risk tolerance levels.
Tax implications for different investments vary greatly. For instance, investing in stocks and mutual funds attracts a long and short-term capital gains tax depending on the holding period of the asset. Investing in property attracts a property tax, while rental income is taxed as per the individual’s income tax slab.
Effectively diversifying your investment portfolio involves spreading your investment across different asset classes, sectors, and industries. Choosing assets that have a low or negative correlation helps optimally diversify your portfolio and minimise risk exposure.
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