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What are my investment options?

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What are my investment options?

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If I had to ask my parents or someone elder, what are the various avenues to invest in, they would have three answers from my experience. The first will be in a house, which definitely requires a huge financial commitment. The second will be gold because that has been more of a generational investment than practical. The third will be the stock market but will be in a very hesitant tone, indicating their disinterest.

While all three are plausible, there are several more avenues, many of which have always been around but not widely spoken of. And they don’t even require a huge investment amount to begin with. Let’s delve into the details then, shall we?

Investment options in India

Unlike what we might have heard some decades ago, there are multiple investment options in India. From mutual funds and stocks to older forms of investing like FD and RD there's a plethora of options to choose from. Read on to know more -

1. Stocks - The attention-seeking instrument

Think stocks, and the first thing that comes to mind is the stock market. Stocks are tradable documents that give you part-ownership of a company. You buy stocks of Zomato, and you’ll be considered part-owner of the company. You will be entitled to give your vote in important business matters of the company. You can buy or sell stocks every day on the stock exchanges.

There are mainly two ways of earning from stocks. One is through capital appreciation, where the price of the stock increases and you can sell them on the stock exchange, and the added value from the cost price will be your profit. Another method is through dividends. Companies that perform well give out dividends to their shareholders as a reward for investing and having faith in them.

Another benefit of investing in stocks is the liquidity factor. Stocks can be converted into cash very easily by selling them in the stock market, and the proceeds go into your bank account. They are a useful instrument to meet short-term goals, but buying and holding stocks for the long haul, say more than five years, has also proven beneficial with strong and positive returns.

However, do keep in mind that investing in stocks also curtails risks as the prices are subjected to market fluctuations. There is no guarantee that you will earn profits, and they require constant monitoring to maximise returns. Investing in a variety of stocks is one way to offset the risk.

2. Bonds - The IOU instrument

Heard of Harvey Specters' famous “IOU”? Bonds are the IOUs of the real world where borrowers issue bonds to raise money and pay a certain rate of interest for the duration of the bond and promise to pay back the initial principal amount borrowed after a period of time. India has several types of bonds:

  • Government securities bonds - are issued by the government when there is a liquid crisis. They are primarily for long-term investments from 5 years to 40 years. The interest offered is mostly fixed and disbursed on a bi-annual basis.
  • Corporate bonds - are issued when a company borrows money from investors at a predetermined interest rate. Some companies opt for this method instead of taking out a loan, and it is ideal for investors who wish to receive a fixed interest as income for the investment period.
  • Convertible bonds - are hybrid bonds that act as a debt and equity instrument but not simultaneously. The bond will convert into a predetermined number of stocks after maturity, and the holder will become a part-owner of the company enjoying the same benefits that other shareholders get.
  • Sovereign gold bonds - are bonds issued by the government for those who wish to invest in gold but do not want to keep physical stock. These bonds come with a maturity period of 8 years at a 2.5% interest rate disbursed periodically. Also, the interest earned is non-taxable.

Bonds are generally considered to be safe investments since the government issues a majority of them. The major risks pertaining to bonds are the rising inflation rates since the interest rates on bonds are usually fixed and cannot be traded on the stock market.

3. Mutual funds - Your friendly neighbourhood instrument

Arguably the most popular form of investment in India, mutual funds have been the go-to for all novice and experienced investors. A pool of money is collected from many investors, and the fund manager or AMC invest the money into various asset classes. The gains from these funds depend on these assets' performances and the market volatility. Hence, they are classified into several categories

a. Based on asset class

  • Equity funds
  • Large-cap
  • Mid-cap
  • Small-cap
  • Debt funds/fixed income funds
  • Balanced/hybrid funds
  • Equity oriented
  • Debt-oriented
  • Arbitrage
  • Solution-oriented

b. Based on the investment objective

  • Growth funds
  • Liquid funds
  • Tax-savings funds
  • Income funds
  • thematic/sectoral funds

c. Based on structure

  • Open-ended funds
  • Close-ended funds
  • Interval funds

d. Based on management style

  • Active funds
  • Passive funds

So many options tend to confuse investors about the type to invest in; hence, it is advisable to take the help of a financial advisor. A minor drawback is that they have associated charges like expenses, early withdrawal penalties etc., that can impact the gains you receive.

4. ETF or Exchange-traded funds - The dark horse instrument

They function as a combination of mutual funds and stocks. Mutual funds because they invest in a basket of assets, and stocks because you can trade them on the stock exchange. They are passive funds that look to provide similar returns to those of indices like Sensex, nifty etc. ETFs trade with the help of a Demat account, and you can buy and sell ETF shares as well. They also have popular schemes:

  • Index ETF - which replicates the returns similar to the stock market indices.
  • Bank ETFs - are those that invest in a basket of banks listed on the stock exchange
  • Gold ETFs - look to track the prices of gold and offer similar returns
  • International ETFs - these invest in foreign-based securities and may also track a country-specific benchmark index
  • Liquid ETFs - these invest in a basket of short-term government securities that look to reduce price risk.

ETFs have a lower expense ratio and are low investment costs as well compared to mutual funds. You also don't need to track past performance or the fund managers' style of investing, as in the case of mutual funds. Although ETFs seem simpler to invest in, they’re still not a very popular instrument in India, compared to the US, which is a more preferred instrument.

5. Gold - The ever-shining instrument

India’s long affair with gold has always been at the top of the mind regarding investment. Gold's high liquidity and inflation-beating capacity have always been a strong selling point that makes it an attractive investment. The prices often shoot up when there is turbulence and have also had phases where the prices were low but have not lasted long. Now, the golden question would be, “how to invest in gold?”

In the olden days, people would buy physical gold and store it with them or the bank and sell it whenever they wanted. This system has still not completely changed, but newer methods have been introduced, such as gold ETFs and gold mutual funds. These methods invest in companies that are associated with gold, and the return depends on the market conditions. The drawback with gold is that it is tough to store physically, and the fluctuations can also lead to losses.

6. Comparing all instruments


1) What are the 4 types of investments?

There are more than just 4 kinds of investments you can make, but here are the 4 most commonly used ones:

  • Stocks: Where you buy or sell stocks of a publicly-traded company
  • Bonds: Where you lend money to either governments, corporations, or trusts. The money is borrowed from you at a certain promised interest rate.
  • Mutual Funds: Where you, along with other investors, pool in some money and have it invested in stocks and bonds. This is usually professionally managed by a fund manager.
  • Banking products: This could mean deposits like Fixed Deposits, or Smart Deposits. These are offered by a bank or some other financial institution (NBFCs) to give you returns at a fixed rate.

2) Which investment is best and safe?

It’s hard to say which investment is best for you without knowing what your needs are, but here are some that would qualify as both good and safe investments, largely because they save you tax and also give you good returns.

  • ELSS Mutual Funds - This is a class or type of mutual fund that require you lock in an amount for 3 years at a stretch. Also known as tax-saver funds, these funds give you returns of up to 20% per year. ₹1,50,000 of your income is exempt from tax every year.
  • NPS or National Pension Scheme - this is a government initiative that lets citizens invest in it at regular intervals. A maximum of ₹50,000 per year is exempt from income tax.
  • PPF or Public Provident Fund - Another government scheme that lets you save money into this fund regularly, and at the same time, be exempt from tax for up to ₹1,50,000 per year.

3) How do beginners invest?

As a beginner, it’s generally better to go with investments that are low-risk and offer more than one benefit. For example, ELSS or tax-saver mutual funds are a good place to start, because they give you good returns and require you to lock your money into the fund for 3 years at a time. This helps you build the discipline required to invest regularly. You can also explore the PPF and NPS, both of which are equally safe and low-risk because they’re backed by the government. The above 3 investment options also give you tax benefits.

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