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Know your Investment Options
Your investment objectives change throughout your life. When you are young, your focus will be on growth or capital appreciation. As you approach your golden years, it may change towards safeguarding your investments as well as ensuring a steady income stream. Whatever your investment objectives, the key to achieving them is the knowledge of various investment options available, to be able to choose the right ones.
Let us understand and evaluate the various investment options or vehicles or instruments as they are often called, available today.
Bank Fixed Deposits or FDs: These are one of the traditional ways of investing money. They provide a fixed rate of interest to the investor on the invested amount at the end of a specified period.
Corporate or Company Fixed Deposits: These are like FDs used by companies to borrow money from investors. Company FDs are a bit riskier than bank FDs. Hence, returns offered by them are a bit higher.
Equity Shares: These are shares in the ownership and performance of a company. They are high in risk and liquidity and are traded on stock exchanges. An investor gets his return through dividends declared by the company or appreciation in the value of the shares or stock price over time, depending on the company’s performance.
Mutual Funds: Mutual funds work on the principle of pooled money invested and managed by experts. When you invest in a mutual fund, your money, along with that of other similar investors is used to buy stocks, bonds, gold or other permissible instruments by a fund manager.
Bonds and Debentures: These are another way for companies to raise capital. Often used for large investments or to get some capital gain tax rebate, they have a fixed term to maturity and fixed interest rates over a long term period like 10 years.
Money Market Funds: These are specialised mutual funds that invest in very short term money market instruments. They work on the principle of preserving the capital and then maximizing returns.
Public Provident Fund or PPF: PPF is one of the most popular low risk investments for investors. It gives a fixed rate of interest which is given by the government and is compounded annually over the long term.
Post Office Saving Schemes: These are saving schemes provided by the Post Office like the National Saving Scheme (NSS), Kisan Vikas Patra, National Saving Certificate (NSC), Monthly Income Scheme or recurring deposits. They carry low risk and give returns that are slightly higher than bank FDs.
National Pension Scheme: This is a systematic contribution-based pension scheme launched by the Government of India.
Life Insurance: This is often used as a combination to provide life risk cover and investment. It is not advisable to take this solely for investment purposes.
Gold: Gold is the most traditional form of investment. In addition to physical gold, it can be now bought via Exchange Traded Funds (ETFs) and Mutual Funds in electronic format.
Real Estate: Real estate is a popular investment option in India. Whether residential or commercial, it has given good returns over a long term period but is not a liquid investment option.
Alternate investment options like Wine or Art: Though common in developed nations, such options are mainly seen as passion investing in India. It is a high risk investment requiring high amount of entry capital and is non-liquid.
Let us now see how these investment vehicles compare with each other
Investment Option Risk Appetite category Advantage Limitation
Bank Fixed DepositsLowMany banks offer 8-9% returns on FDs between 6-15 months.Low interest rates, early withdrawal attracts penalty.
Company Fixed DepositsMediumOpen throughout the year.Due diligence of the company is required as it is not mandatory for non-finance companies to get a credit rating on their FDs. Not encashable prior to maturity.
Equity SharesHighPotential of high return.High risk and constant management as directly dependent on market volatility.
Mutual FundsLow/Medium/High, depending on the scheme chosenLess risky than direct equity investment. Professionally managed.Dependent on market performance and volatility.
Bonds and DebenturesMediumSuitable for large investments.Long term lock in.
Money Market FundsLowSuitable for short term investments.Returns slightly higher than bank savings account.
Public Provident Fund (PPF)LowGood option for long term planning. Tax exemption on maturity amount. Highly Illiquid.
Post Office Saving SchemesLowSafe, returns slightly higher than bank FDs.Same as bank FDs.
Life InsuranceMediumProvides combination of life cover and investment.Not ideal solely for the purpose of investment. Long term horizon.
GoldLowIdeal for safeguarding against volatility. Has historically provided steady returns with low risk.Often cumbersome to store in jewellery form, unless investments are via mutual funds or ETFs.
Real EstateMediumPossibility of high appreciation.Low liquidity. High entry value.
Alternate Investments (Art, wine, vintage cars, etc.)HighMostly seen as passion investing.High entry value. Unpredictable and unorganised market.
You may choose an investment vehicle based on your age, income, financial objective, the liquidity you desire, your financial situation and risk appetite.
It is advisable to take the above factors into account and create an investment plan to diversify your investments across various investment vehicles. When you diversify your investments across various options, you can spread your risk and create a balanced portfolio of investments.
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TIPS
#1
Always compare the options available before making an investment decision.
#2
Determine your risk profile and choose an investment vehicle accordingly.
#3
Spread your investments across various instruments to minimize the risks.
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