What does one do when he buys a shirt? He chooses a shirt color among many choices, choose a size, which is right for him, tries it on and buys the shirt if he likes it. There is no one size / shirt fits all, right? Same applies for investing too. There are several available investment options. It is important to know all available options, before choosing one which is in line with your goals and risks
As we are all aware, Governments rolls out various measures of improvements in infrastructure, real estate, industries etc. It needs more than our Tax money to complete the measures. Therefore, it borrows from open market through sale of treasury bonds and in return, Govt. pays the bondholders a periodic interest for predefined duration and give the capitals borrowed at the period end.
We become the lenders to governments when we buy these bonds. Yeah, you read that right. Our Govt. borrows from us, the investors. Since Government backs it, it is one of the safest mediums of investment. However, there is a catch. The returns promised by such bonds usually are not high.
Corporate Bonds (Debentures)
It is the same principle as discussed above. The only difference is that we will lend our money to a company instead of the Government. The level of risk and returns tends to be a little higher in comparison to the Government bonds. At the end of the day, likelihood of company going bankrupt is much higher than a Government going bankrupt.
Fixed and Recurring Deposits:
Before I get into the specific, I would like to give a quick insight on to how banks work in principle. They accumulate from various sources like Government, RBI, Foreign investors and general public. They then make this fund available to numerous players at a higher rate of interest. This difference in interest is their profits. Obviously, you may wonder why the middleman even? Simply because they can leverage on their credibility to accumulate money at a rate that 99% of us cannot. Now that you have a fair bit of idea, as to how a bank works.
The most common mode of investment made by us is to lend these banks or any financial institutions our funds via fixed / recurring deposit accounts for 5 or 6 years earning some interest (roughly about 6% p.a as I write). Although it may look promising, the returns earned usually doesn’t beat the inflation. There is a risk in such investment. If the bank goes bankrupt, the depositors will be entitled to a maximum amount of 1-lakh rupees irrespective of investment.
You invest onto public listed companies and you buy shares of a company with the expectation of getting dividend payments and capital appreciation (hoping that company’s value increase). Returns are high for this even though the risk associated with the investment remains high-. Well no pain, no gain right?
Here, a mutual fund house invites public to entrust them with their money. The fund manager pools the money and makes investments on their behalf. The advantageous factor in this mode of investment is that an expert in manages your funds. An investor can invest in – debt funds, equity funds, balanced funds, foreign funds and so on. The options available in this segment is mind boggling with various risk reward ration.
Physical commodities like cotton, petrol, zinc, turmeric are available for trade. Predominantly basic goods like rice, channa, grains, oil and gold are traded. Commodities are very volatile and they are highly unpredictable. It is not an advisable option to new investors as it has significantly high volatility.
A fair word of caution, these are just majorly opted in options, apart from that few more options like real estate, startup investment, derivatives, organic farming etc. are also available. But by large, these are all commonly invested asset options. It is very important that you have a fair understanding of all the asset options. This will come a long way in you journey of wealth creation. We have covered in detail about all the asset in our blog. Check it out in case you have any doubts that need clarification