By Editorial Staff | Updated on, October 16, 2018 – 11:28 AM IST
On entering the world of investing you will come face to face with the different type of investment options to invest and grow your money in. But you can’t select the right investment type until you are aware of all the different types of investment options. To make a correct investment decision, you must be aware of the different kinds of investment options available.
Here we will discuss some common types of investments and risk involved in investing in those asset classes.
Stocks are the most popular investment vehicle to invest your money in. The stocks ( or shares or equities ) represent the part ownership of stockholders in a company. If you own share of a company, you own small part of ownership in that company.
Stockholders get voting rights in the company’s some important decision making.
The company distributes parts of its profit as dividend to the investors.
Also if the company grows in its value, the price of its shares will also increase this will benefit shareholders as an appreciation in value of the shares.
Stocks can be of different types based on various parameters. One can classify the stocks by nature of stocks as common stocks and preferred stocks, or by the company’s business strategy as the growth stock, value stock, income stocks etc., and several other parameters are used to classify stocks.
Stocks or shares are one of the most popular investment options worldwide. The reason for their popularity is because they have outperformed several other investment classes in the long run.
The return in stocks is quite impressive, but this return also comes with the risk. Some companies do not provide dividends, and some lose their entire value due to different factors, some others go bankrupt.
Mutual funds are professionally managed investment vehicle which invests pooled money in different asset classes.
A mutual fund pools money from the number of investors and invests this money in the different type of securities such as stocks, bonds, indexes etc. Mutual funds are managed by fund managers who charge a fee for their services.
The fees charged by these fund manager and other expenses involved in mutual funds can affect the return on investor’s investment.
Mutual funds can be of different types based on securities that they invest in, some common types of mutual funds are equity funds, balanced funds, money market funds, index funds, income funds etc.
A mutual fund is a good investment option for investors who want to invest in different securities but lack the time and technical knowledge to take their investment decisions.
Mutual funds provide access to the diversified portfolio to retail investors on comparatively lower cost. For example, an equity mutual fund can have hundreds of stocks in its portfolio. An investor can buy the units of this mutual fund on much lower cost as compared to buying shares of all those companies.
Mutual funds also provide a chance to invest in foreign markets by investing in foreign-focused mutual funds.
Mutual funds can focus on almost any kind of securities. They can focus on big stocks, small stocks, specific industries, specific country, government bonds, corporate bonds or any other asset class.
Some mutual funds focus on different indexes they are called index funds these mutual funds do not need to be managed actively hence they are cheaper in comparison to actively managed funds.
Index funds are passively managed funds, so they mirror the return of the underlying index.
Return on mutual funds depends on the skills of the fund manager, fund size other than general market conditions. Mutual funds distribute interest, dividend and capital gain to its investors.
Bonds are debt instrument securities. Buying a bond is lending money to the bond issuer, it means when you buy a bond you lend money to the bond issuer.
The issuer pays you regular interest in a return with a promise of returning your principle on a pre-specified date called the date of maturity.
The interest rate on bonds is fixed at the time of issuance of bond hence they are also called fixed income securities as they provide you income that Is predetermined.
Bond can be issued by companies, governments or by other government agencies.
Bonds are the relatively safer investment than other securities because return in bonds remains fixed. However, bonds are not 100% risk-free sometimes government also can default on their loans, but those are the rarest cases.
Bonds issued by struggling companies may contain greater risk than government bonds or bonds of stable corporations.
Low risk in bond investment comes with its own price, return in bonds are also low as compared to other riskier asset classes such as stocks, mutual funds, real estate etc. Inflation is another factor that affects return in bonds.
ETF or exchange-traded funds are securities similar to the mutual fund, ETF invests pooled money in the market just like mutual funds do. But there is a difference between them, ETFs trade live on exchange during market hours same as stocks do. On the other hand, mutual funds are bought and sold based on their net asset value ( NAV) which is calculated daily at the end of the day.
ETFs are created and managed by companies or financial institutions called fund sponsor. Investors can buy and sell ETF using their brokerage account, unlike mutual funds that are traded directly with fund company.
Because ETFs are exchange-traded, they provide all short of opportunities to investors. Investors can apply all investing strategies which they can employ on stocks. They can buy ETF on margin, can short sell, use stop loss order or sell orders etc.
Some ETFs track different benchmark indexes they are called index ETF.
Most ETFs are the passively managed investment vehicle which mimics the return of their underlying security. There are also actively managed ETFs exist who try to outperform passive ETFs.
ETFs are more cost effective and efficient than mutual funds, but they also carry some risks like trading spreads, shutdown risks etc.
With the increasing population and urbanization, the demand for real estate is also increasing this has made real estate an attractive investment option for investors. Real estate is now one of the most popular asset class among the investors worldwide.
You can make an investment in real estate for long-term or can make money by flipping property in the shorter term. Investors get profit from real estate by buying, selling or leasing property.
Long-term investment in real estate needs a significant amount of money while short-term flipping can be done with the smaller investment if you can find the right seller and right buyer for the property at the right time.
Real estate investment provides risk-adjusted return and proper capital appreciation to investors.
However, you need to do a careful analysis before investing in real estate. Cities, where real estate prices are already on the peak, cannot provide good capital appreciation over time.
Location of property, the nature of property etc. are other factors that can affect your return in real estate investment.
Another risk in real estate investment is its liquidity. Real estate is one of the most illiquid assets. Sometimes it may take several months to years to find the right buyer for your property.
Precious and Industrial Metals
Gold and silver are one of the oldest investment vehicle used by humans. From time immemorial human was attracted towards gold and silver.
Modern-day investors too like precious metals as a safe investment. Not only gold, silver, and platinum you can also invest in industrial metals like rare earth metals, palladium, copper, iron, tin etc.
There are several ways to invest in metals you can buy gold and silver coins, buy in bullion form or invest in jewelry.
Different forms may cost you different charges. You can also choose the modern approach to investing in metals by buying gold stocks, gold ETF or stocks of mining companies.
If you are buying gold in physical form you need to secure and insure it, the cost of insurance and security may affect your return in precious metals.
There are several products provided by banks to invest. They are relatively safe and liquid options to invest. Saving account, fixed deposits (FD) and recurring deposits (RD) are some of the most famous investment options provided by banks.
The return on these safer options is relatively low as compared to other riskier investment options.
Investing in arts and antiques could be an excellent alternative investment option if you have a good knowledge of the subject.
The market of collectibles is increasing, commonly the price of these items increases with an increase in inflation. But return in these items is always subjective.
There is no hard and fast rule to predict the return on these items. Also, artworks need to be stored carefully for a longer time.
Derivatives are the securities that track some underlying securities. Underlying security may be stocks, commodities, interest rate etc.
The price of derivatives directly derives from their underlying security. Future and option are the most popular derivatives worldwide.
Derivatives are used more to protect against potential losses (hedging) rather than investing.
Derivatives are very destructive and should be used by experts only.
Unit-linked insurance plan (ULIP) is a plan provided by insurance companies. ULIPs provide insurance and investment opportunity in a single plan.
Unit Trust of India in 2001 launched the first ULIP. Since then, several insurance companies have started many ULIP plans for investors.
In ULIPs investor need to pay a regular premium as in insurance plans, but the premium paid by the policyholder is divided into two parts by ULIP provider. One part is paid as insurance coverage, and another part is invested in different securities like equities, debt securities etc.