Every investor desires to make investments in a way that they get high returns without risking the principal money. Thus they always look for investment plans where they can multiply their money in a few years with little or no risk at all. But this ideal combination of high-return and low-risk rarely exists in the present world. As a matter of fact, there is a direct relationship, that is, the higher the risk you take, the more returns you expect.
While investing, you should match how much risk you desire to take with the associated risks of the product before investing. The investment products fall into two categories and they are 1)financial and 2)non-financial assets.
**Financial assets can be split into market-linked products (like stocks and mutual fund) and fixed income products (like Public Provident Fund, bank fixed deposits).
**Indians also invest in non-financial assets by investing in gold and real estate.
Let’s have a look at the different investment horizons that we invest in to attain our financial goals.
Buying gold is an investment in a physical commodity that acts as a protective shield against difficult financial circumstances.
2. Public Provident Fund
Public Provident Fund (PPF) is one of the most secured long-term investment plans backed by the sovereign guarantee. Under PPF, the invested money is locked for 15 years. Though, it allows to partially withdraw money from the PPF account only after 6 years. However, in case of emergency, one may take a loan on the balance of the PPF account. Since the PPF has a long tenure, the power of compounding of tax-free interest yields huge benefits, especially in the later years. Every quarter, the interest rate on a PPF account is reviewed and funded by the Government.
3. Fixed Deposit
Fixed Deposit is an investment option provided by banks or Non-Banking Financial Companies (NBFCs) which provides investors with a higher rate of interest, more than a regular savings account, until the given maturity date. A drawback of this financial instrument is that the money can be withdrawn from the FD before maturity but at penalty charges.
4. Savings Accounts
The least risky investment avenue is putting money in a savings account and enables it to collect interest. However, low risk means low gains. The risk of putting money into a savings account is insignificant, thus, it leads to little or no returns.
Nonetheless, savings accounts help in storing a risk-free sum of cash that can be used to make investments in other avenues or use in contingencies.
5. Direct equity
Investing in stocks requires an understanding of the stock market. You must have good knowledge about where to invest, the timing of your entry and when is the right time to exit. There is no guarantee of returns. The bright side of investing in stocks is that over long periods, equity has been able to deliver very high returns compared to all other investment avenues.
Investing in stocks might not be everyone’s cup of tea as it’s a volatile asset class and there is no guarantee of returns. Further, not only is it difficult to pick the right stock, timing your entry and exit is also not easy. The only silver lining is that over long periods, equity has been able to deliver higher than inflation-adjusted returns compared to all other asset classes.
The risk of losing capital partially or entirely also stands in the way of the investor. To curtail the risk to a certain extent, you can invest in diverse sectors and market capitalizations. You require opening a Demat account, to directly invest in equity.
6. Investment Bonds
Purchasing a bond implies that you are loaning money to either a company or the government. The company or government that sold their bond to you, will then pay you interest on the loan over the duration of the bond’s maturation. Bonds are deemed less risky than stocks; nevertheless, their potential for returns is lower as well.
7. Mutual Fund
A Mutual fund is an investment instrument, which enables you to buy several stocks in one purchase/transaction, which are principally chosen and managed by professional fund managers who use their expertise in this particular field. A great number of investors invest in a variety of financial securities such as stocks, bonds, etc.
Mutual Funds support investors build their wealth. Despite this, they can be risky because they are market-linked, hence higher returns are also assured. If you do not possess adequate experience and knowledge, you can choose to invest in Mutual Funds and get higher returns than other investment options.
There are three kinds of Mutual Funds with interest rates and risks varying in each- Equity Funds, Debt Funds and Hybrid Funds.
You must evaluate your risk taking capacity and expectation of returns to make a choice among the basket of investment avenues available to you.
Be well informed and make decisions intelligently!