Different Types of Investments

Santri Alat - Different Types of Investments - Overall, there are three different kinds of investments. These include stocks, bonds, and cash. Sounds simple, right? Well, unfortunately, it gets very complicated from there. You see, each type of investment has numerous types of investments that fall under it.

There is quite a bit to learn about each different investment type. The stock market can be a big scary place for those who know little or nothing about investing. Fortunately, the amount of information that you need to learn has a direct relation to the type of investor that you are. There are also three types of investors: conservative, moderate, and aggressive. The different types of investments also cater to the two levels of risk tolerance: high risk and low risk. 

Conservative investors often invest in cash. This means that they put their money in interest bearing savings accounts, money market accounts, mutual funds, US Treasury bills, and Certificates of Deposit. These are very safe investments that grow over a long period of time. These are also low risk investments.

Moderate investors often invest in cash and bonds, and may dabble in the stock market. Moderate investing may be low or moderate risks. Moderate investors often also invest in real estate, providing that it is low risk real estate.

Aggressive investors commonly do most of their investing in the stock market, which is higher risk. They also tend to invest in business ventures as well as higher risk real estate. For instance, if an aggressive investor puts his or her money into an older apartment building, then invests more money renovating the property, they are running a risk. They expect to be able to rent the apartments out for more money than the apartments are currently worth – or to sell the entire property for a profit on their initial investments. In some cases, this works out just fine, and in other cases, it doesn’t. It’s a risk.

Before you start investing, it is very important that you learn about the different types of investments, and what those investments can do for you. Understand the risks involved, and pay attention to past trends as well. History does indeed repeat itself, and investors know this first hand!

Different Types of Investments

Investments generally fall under two broad umbrellas – growth-oriented investments and fixed-income investments. A growth-oriented investment option aims at increasing the value of the capital over time, whereas a fixed-income investment option aims at providing a steady (and sometimes rising) stream of income that can either be paid to the investors or re-invested while seeking to maintain the original value of the investment.

Let’s understand the different types of investments under these two investment styles:

1. Mutual fund Investment

As an investor, you have a variety of options to choose from when it comes to parking your funds to generate returns. While a fund's performance is based on its underlying assets, you can utilise an SIP calculator to estimate the potential returns your investment could earn.

According to the risk profile, investment horizon, and financial goals, an investor can choose from different types of mutual funds available to them. Largely there are six types of mutual funds, namely growth or equity funds, liquid or money market funds, fixed-income or debt funds, hybrid or balanced funds, index funds, and tax-saving funds. Mutual funds help investors in achieving their financial goals, be it short-term or long-term. 

The Indian markets’ watchdog SEBI (Securities and Exchange Board of India) has clearly defined each of these mutual fund categories to enable investors to make informed decisions.

Stocks

Also known as shares or equities, stocks are among the most popular growth-oriented investments. When you purchase a share, you become part-owner of a publicly-traded company and stand to gain a part of the profits. The risk-reward ratio with equity investments is often higher than most other forms of investment.

Bonds

Also known as fixed-income securities, a bond is a debt instrument that represents a loan given by an investor to a company or the government. When you buy a bond, you allow the bond issuer to issue you a fixed interest rate in exchange for using your capital. Examples of bonds include Treasury bills, municipal bonds, corporate bonds, government securities, etc.

Exchange Traded Funds (ETFs)

Exchange-traded funds, or ETFs, are a collection of investments such as shares, bonds, money-market instruments, etc., that track an underlying index. They are a mash-up of different investment avenues that offer the best attributes of the two assets – mutual funds and stocks. ETFs are traded on the stock exchanges and are quite like mutual funds in terms of their regulation, structure, and management. However, one of the main differences between ETFs and mutual funds is that the former can be actively traded on the bourses at any given time during the day, which allows investors to take advantage of real-time price differentials. On the contrary, mutual funds, whether active or passive, can only be bought/sold at the close of the trading day. 

Fixed deposits

Bank fixed deposits (FDs) are among the safest investment options available to investors. They are offered by banks and other NBFCs and allow investors to park their idle cash for a specific duration and for a fixed rate of interest. The interest rate is predecided and unaffected by market fluctuations, which ensures greater safety of the investments. From the ease of flexibility to various options offered to an investor, fixed deposits are a boon to risk-averse investors.

Retirement planning

Saving for retirement as well as managing that income once you retire are two of the most critical aspects of financial planning. There are several types of retirement plans available to investors. Some of the most common investment options for retirement planning are Senior Citizens Savings Scheme (SCSS), National Pension System (NPS), Public Provident Fund (PPF), bank fixed deposits, etc. An investor looking to save for retirement might consider opting for safer investment avenues if they are nearing their retirement.

Cash and cash equivalents

Cash equivalents strive to protect an investor’s original investment while also offering high liquidity. However, they tend to offer the lowest potential returns than other investment types. While they do not generally offer capital growth, they have the potential to deliver regular returns. They can also play an important role in protecting your capital and reducing the risk of your investment portfolio to a great extent. Examples of cash equivalents include time deposits, overnight funds, liquid funds, high-interest savings accounts, bank accounts, etc.

Real estate Investment 

The real estate sector holds huge prospects for several industries such as hospitality, retail, commercial housing, manufacturing, and much more. Investors have the option to invest in commercial or residential properties or even real estate mutual funds to earn significant returns on their investments. Timing is a crucial aspect when one considers investing in real estate. One should be mindful that real estate investments can be highly illiquid, i.e. it might get challenging to sell the property quickly in case of an urgent monetary requirement.

Provident funds

Provident funds (including Employee Provident Fund and Public Provident Fund) constitute a significant part of your retirement corpus. Provident fund is a mandatory, government-sponsored retirement scheme that aims at providing employees with a lumpsum payment when the employee resigns or during retirement.

Insurance

Insurance products are often a part of a financial plan. They come in various forms like term insurance, life insurance, endowment plans, child plans, etc. Insurance products are developed to meet particular objectives, for instance, life insurance is designed to meet your expenses as you age whereas term insurance is designed to aid your beneficiaries in the unfortunate event of your death.

Each type of investment offers a varying level of risk-reward ratio. However, risk and returns shouldn’t be the only considerations that determine what types of investment products you choose. An investor should also consider factors like asset allocation, fees, past performance, liquidity, etc. Your investment planning should ensure that your portfolio aligns with your risk tolerance, investment goals, and time horizon. Happy Investing!