Investment

What is Investment?

Investment means ‘keeping money engaged in purchase of assets with the future hope to get profit on their sale.’ Before putting money into investment, an investor should think about safety of their capital and their appreciation in prevailing scenario. Investment must be goal-oriented, whether it is of short-term investment or of long-term investment. Generally in India, Investors follow the traditional path of investment like fixed deposits and recurring deposits irrespective of their interest rates and current inflation. Warren Buffett, the most famous and successful investor, advised in his several articles and interviews that ‘long term investment’ and ‘choosing the right assets to invest’ is a good investment strategy. He emphasized the without a proper money management strategy, the full potential of the assets cannot be obtained.

Types of Investment

Depending on several factors like time frame of investment, the amount of money we have and the amount of risk we can take, we have the various types of investment options available today. Many of them are stocks, bonds, mutual funds, Insurance and Non-traded financial assets like Bank Deposits, Post Office Savings, Provident Funds, Chit Funds, Company Deposits etc.

Stocks

A stock usually refers to ‘an equity capital raised by the company through sale of its shares’. It is also known as an ownership share because when we buy a stock of any company we become one of the owners of the company. Purchasing stocks makes us eligible to vote at the company’s shareholders meeting where company announces its balance sheet and further announces any profit or loss etc.

A stock is traded on Stock Market Exchanges all over the world. Unlike bonds, stocks are very volatile and their values fluctuate on daily basis. Before investing in stock, we must know that the returns are not guaranteed. Many companies even do not pay any dividend to stockholders. Therefore, returns on stocks will depend only when their prices will go up and which may not happen.

Types of stocks

1. Blue Chip Stocks
2. Growth Stocks
3. Value Stocks
4. Penny Stocks
5. Income Stocks
6. Defensive Stocks
7. Cyclical Stocks
8. Seasonal Stocks
   

Bonds

A bond usually refers to ‘a debt investment where an investor lends money to a company or government for a defined period at a fixed interest rate.’ Generally, the rate at which bonds are issued is called its ‘par value’ and the interest rate is called its ‘coupon rate.’ Bonds are issued by various organisations like the government as well as private institutions, central and state governments and other financial institutions to raise huge money from the market that cannot be provided by a single bank.

The bonds are relatively safer than the stocks or almost risk free when issued by the stable government. Before investment in bonds, we must check their ratings published by rating agencies like CRISL and ICRA. We should always invest in bonds which have AAA ratings and avoid bonds below BBB ratings.

Types of bonds

1. Government bonds
2. Corporate bonds
3. Zero coupon bonds
4. Junk bonds
5. Tax saving bonds

Mutual Funds

A mutual fund usually refers to ‘a financial instrument that collects money from various investors and invests this amount in different instruments like equities, bonds etc. In other words, we can say a mutual fund is a collection of stocks and bond which is managed by fund manager or a company that we hire, and for that we pay a certain amount of money to them.

The main advantage of mutual fund investment is saving time to study the market trends and also comparatively lower riskier than the investment in the stock market. The price at which mutual fund units are allotted is called Net Assets Value (NAV). A mutual fund investment provides more stability to our portfolio as its NAV changes just once a day unlike the stocks.

Types of mutual funds

1. Equity funds
2. Debt funds
3. Hybrid funds
4. Exchange traded funds (ETF)
5. Fund of funds (FOF)
6. Tax saving funds
7. Balanced funds

Insurance

Insurance usually refers to ‘a long term avenue of investment which not only provides life covers but also yields attractive returns in futures.’ It is a key to good financial planning as it provides the safest platform of investment. Life Insurance is an agreement between the Insurer and the policy owner, where insurers are paid by the policy owners and in turn, the policy owners get a sum of money upon the occurrences such as individual’s death or illness or maturity or the policy.

Types of insurance

1. Endowment Policy
2. Money back Policy
3. Permanent Life Insurance Policy
4. Term Life Assurance Policy
5. Annuity/Pension policies
6. Unit Linked Insurance Policies (ULIPs)

Non traded financial assets

Apart from the above mentioned investment scheme, there are so many financial assets that cannot be traded with a third party and such types of investment schemes are listed below:

1. Bank Deposits
2. Post Office Savings
3. Company Deposits
4. Provident Funds

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