What is Investment and Types of Investment?
Unlike saving, investing is all about parking excess funds in expectation of a future gain or capital appreciation. It can also be an asset or an item that you acquire today with an objective of earning capital appreciation or generating income tomorrow. Typically, you invest in various types of investments with a view to earning enough returns to meet a number of financial goals like buying a car, acquiring a home, or saving for your sunset years.
Based on the characteristic features, risks, and returns, every investment is different from the other. You can only achieve your desired goals by making informed investment decisions. So, before choosing a particular type of investment, it is essential to ask yourself the following questions.
What is the investment’s return?
You invest with a primary motive of earning returns. While some investments offer dividend or interest, others also offer capital appreciation. The rate of return differs across the types of investments and is based on various factors like the nature of the investment, maturity period, and associated risks.
What is the investment’s risk?
Any type of investment you choose usually comes with some degree of risk. This can occur in the form of capital loss, delay in principal repayment, interest default, or return anomalies or fluctuations. Like returns, risk also differs across investments and will depend on the nature of your chosen options.
What is the investment’s liquidity?
An investment is said to be liquid when you can sell or realize it to access cash without allowing for wastage of time or money. Liquidity matters as it can affect how easily you can meet financial emergencies. For example, when you have investments like shares, you will benefit from better liquidity as compared to ae types of investments an investment with a lengthy lock-in like PPF.
What are Available?
Investments are broadly classified into two categories as follows, and it is best for you to invest in a variety of options to balance your portfolio.
These types of investments are known as high-risk and high-return options, as they are closely linked to the market. When you invest in them for the long term, growth investments have a great potential for high earnings by averaging out the expenses and minimizing risks. Here are the most common types of growth investments.
- Equities: Also known as shares or stocks, equities help you grow your investment (principal or capital) through the medium to long-term horizon. These are traded on stock exchanges and so are highly liquid. If the market is down, you stand a chance to lose your initial capital. Shares give you ownership rights in a particular company and may also offer dividends.
- Real estate: These are investments in land, residential or commercial property and require substantial investments. While real estate can yield great capital appreciation om the long term, they are considered illiquid as they cannot be easily resold in the short term. They also are quite risky as they are impacted by economic conditions and demand. Remember that sometimes their value may decrease due to deterioration.
These investment types offer guaranteed and regular income rather than capital appreciation or growth. As the name goes, defensive investments are less risky than their growth counterparts, and hence offer lower gains in comparison. Here are the two main types of defensive investments.
- Cash: Cash is highly liquid and you can earn interest on your cash savings using regular savings or a post office savings account. The only problem is that savings accounts don’t offer too much scope for growth, with interest usually capped at 6%. It is best for you to maintain cash savings as your emergency reserve and for your daily use.
- Fixed interest: As the name suggests, these investments offer fixed returns and include government and company bonds and deposits as well as government-sponsored schemes. They are not linked to the market and offer stability and security by growing your savings. However, ensure that these returns beat inflation in order to benefit from them. While some offer liquidity, others don’t, as they have a longer lock-in.
Irrespective of your risk appetite and expectation of returns, your investment portfolio may be balanced with fixed deposits. Not only do they offer regular returns at low risk, but they also make for an excellent hedging technique to minimize the risk of growth investments.
When looking to invest in Fixed Deposits, consider investing with NBFCs like Bajaj Finance to enjoy safety and earn higher interest returns. These FDs have an FAAA and MAAA ratings by CRISIL and ICRA, indicating high safety. As a regular investor, you can earn up to 8.75% when you invest for at least 36 months; the interest rate is up to 9.10% for senior citizens. What’s more, Bajaj Finance also offers an additional interest of 0.25% on FD renewal. So, start today to secure your portfolio by investing in an FD with an amount as low as Rs.25,000.