“Make your money work so you don’t have to work all your life” – you probably hear this a lot. Everybody knows the importance of investing, but do you really know where all can you invest?
Here are your investment options:
As one of the popular investment options, equity or stocks is the probably the first investment product you can think of. Issuing shares to the public is one way companies raise money to grow their business. Known to be one of the best investment options, you can either buy shares directly from a stock exchange or indirectly by investing in an equity mutual fund.
Every share you buy gives you a tiny stake in the business. Share prices track company performance – they increase when the company does well and decrease when it performs poorly. Invest in companies that you expect to do well and you can profit by selling their shares in later.
Who should invest in stocks?
Stock prices are sensitive to market developments and don’t guarantee a minimum return or a periodic income. This makes them risky investments. They are an important investment product because they can jack up your portfolio returns. But only invest big sums if you are willing to take the extra risk.
Bonds issued by companies and the government are called debt instruments. They are issued for a fixed term and generally pay a periodic interest, called coupon. Unlike shares, bonds do not give you an ownership stake in the issuer. Instead, they make the issuer liable to repay your money and the coupon, as per the promised schedule. This is why bonds are called debt instruments.
Who should invest in bonds?
Bond returns are more stable and predictable than stocks because bonds are issued for a fixed term and they pay a regular coupon. However, a fixed coupon means that bonds don’t have the growth potential of stocks. Invest in bonds if you are looking for average but stable returns, without taking much risk.
These are pools of funds created by fund houses by raising money from investors like you. They are managed by professional fund managers and invested in shares, bonds, and other financial assets.
A fund house floats several funds at a time and each of these has a well-defined mandate and objective. For example, a fund may have the mandate of investing only in stocks. Some funds have even narrower mandates, such as investing only in bank or IT stocks. Mutual funds also have specific maturities, payment schedules, and risk levels. This helps you pick a fund that best suits your requirements.
Who should invest in mutual funds?
Mutual funds are an excellent investment option if you are new to the market or can’t devote enough time to picking stocks. Since they are managed by investment professionals, they increase your chances of earning good returns.
Property is the most favored asset for Indians. Owning land or an additional house gives more satisfaction than other assets because these are tangible. You can quickly sell the property or use it yourself in adversity. In addition, it generates stable and predictable income when you put it on rent.
Who should invest in real estate?
Real estate investments are ideal for those who are looking for stable, passive returns over the long term. It is also a great option if your investment objective is to secure your children’s future. The only catch is that investing in a house is not as easy as buying a stock. You’ll have to spend much more to buy a house than to buy a stock or a bond. You may even have to take a loan.
ETFs, derivatives, commodities, structured products, private equity, and hedge funds are some of the other products you can invest in. These are jointly called alternative assets. They are built on top of assets we discussed earlier and can, therefore, be complex to understand and invest in. Some of these also have a high minimum investment threshold. For these reasons, you need to be careful while investing in these. However, you can generate big returns by investing in these. We will discuss each of these in the detail in later chapters.
Who should invest in alternative assets?
Alternative assets are a good option if you are looking to diversify your portfolio. Retail investors actively invest in ETFs, commodities, and derivates. Structured products, private equity, and hedge funds are high-risk investments that are popular only among high net worth individuals. You can consider them if you are looking to invest some idle cash and don’t mind losing it if things don’t work out.
There are so many good investment options including short term investment options and long term investment options that you probably have a favorite by now. But investing is not only about picking the asset you like the most. To make investing work, you need a well-defined strategy. Build a portfolio that has several assets, in a proportion that is attuned to your unique circumstances and investment objectives.
Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
What is real estate investment? Real estate is an alternative investment instrument, like the ones we discussed in the previous section. But it merits a separate mention because it is tangible. You can physically own a property and decide to use, rent, sell, or modify it. Other alternative investments are purely financial instruments. They pay returns in a predefined manner during their life and cannot be put to any other use.This piece will tell you all need to know about real estate investing and property investment in India.Types of real estate There are five major types of real estate investing in India:1. Residential – This is the most straightforward real estate investment in India. It includes houses and individual apartments that can be occupied by an individual or a family. It also includes apartment buildings where each unit is occupied by a separate tenant. Tenants pay you a pre-decided rent, usually each month. the duration of their stay depends on the lease agreement. These are generally made for eleven months and renewed on you and your tenant’s mutual consent.2. Commercial – This includes individual office locations, office buildings, and business parks. They usually require a significantly larger investment than residential real estate. But they also attract higher rents. Commercial properties frequently have multi-year leases, which stabilizes your cash flows and increases their predictability. The only challenge is that their rents are highly volatile. They fall more than residential real estate during downturns as businesses downsize or shut down. They increase considerably during upswings as companies hire more people. So, multi-year contracts keep you from taking in new tenants and earning more rent during upswings.3. Industrial – This includes any property that the tenant can use to produce, manufacture, assemble, store, or distribute tangible goods. Common examples are factory locations, industrial warehouses, garages, service stations, and cold storage facilities. Industrial real estate generally generates a large fee and creates opportunities to earn incremental revenue from additional services. For example, if you have rented out a car service station, you may set up a café or a convenience store on it for waiting customers. You may even offer the property on a revenue sharing basis and earn a share of the occupant’s revenues.4. Retail – This includes shopping malls and retail stores. These properties too can be let out on rent basis as wells as revenue sharing basis. In many cases, the landlord asks for a share in the tenant’s revenue, over and above a base rent.5. Mixed-use – This combines many of the above categories on a single piece of land. It is fit for investors who can invest in a large piece of land and develop its separate sections for different uses. it offers built-in diversification because your revenues are not tied to fundamentals that affect one type of real estate. This reduces risk.Income from real estate investments Most real estate investments generate income in two forms:1. Price appreciation: This refers to an increase in a property’s value when it becomes more desirable. This mostly happens because of developments in its surroundings. For example, when a new source of employment comes up in its neighbourhood or when its metro connectivity improves. Its price may also increase because of the upgrades and improvements you make to it. Price appreciation allows you to sell the property for more than you bought it, generating a profit in the process.2. Periodic cash flows: This is the rent you generate when you lease your property. To generate this, you must hold the property for some length of time after buying it.Benefits of investing in real estate 1. Convenience – real estate is not as technical as stocks, bonds, and other financial assets. Many aspects of real estate investing are intuitive.2. Tangibility – Property provides psychological comfort because it stays with you even when its price collapse. You can use it yourself or generate some bare minimum revenue by leasing it.3. Stability – Real estate does not always generate supernormal returns like stocks. But it pays stable rent that can be increased when you renew the lease.4. Insurance – Unlike financial instruments, property can be insured against damage and loss.5. Inflation hedge – Property prices and rents increase with the price level. So, inflation has a limited effect on your financial position when you invest in real estate.In conclusion Real estate is regarded as the simplest investment instrument because investing in a property is less complicated than financial assets. Knowing how to invest in real estate involves a straightforward exchange between the property owner and the tenant. However, properties are of different kinds and each kind has its unique characteristics. This makes real estate investment a skill that needs to be done with expertise in order to get the benefits of investing in real estate. Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
The risk return tradeoff is a principle of investment, which means that higher the risk in the portfolio, higher is the potential return possibility. However, high returns from a risk return trade off is not always guaranteed.To clarify the risk and return trade off and understand what is risk return trade off with an example, any investment with high risk may have a chance of high return, say, equity stocks. So, if the risk in an investment is high, then the possibility of return is also high, around 20-25% annually and may not be limited to just 6-8%. It basically means that the investment return is volatile and may fluctuate depending on market movements. However, the average return of equity would typically be 12-15% annually.On the other hand, if the risk in any particular investment is low, for instance in a fixed bank deposit, the chances of getting 20-25% annually may never happen. The returns will be more in the 6-8% bracket. However, it also means that the return can never become lower than 6%, especially negative. This is the trade off between risk and return. Hence, you need to take greater risks if you need a higher return on your investments. The concept of risk return trade off in finance is a widely accepted fact, but the associated risks with the portfolio are often neglected. Risk-return trade off in financeAs far as investing is concerned, each and every investment has an associated risk with it. When you are looking to choose an investment, you need to look into its risk too so that the overall risk of the portfolio is managed accordingly. There are multiple risks associated with an investment product. Some of these include:1. Inflation risk reduces the purchasing power of cash reduces over time.2. There is credit risk because credit rating of bonds/papers, etc. determine the value of the productLiquidity risk arises when selling an investment product at the right time can be a hassle. 3. There is tax risk as governments usually make taxation changes every year. 4. Concentration risk occurs when you buy too many of a particular investment product.5. There is market risk because equity market is volatile. Risk levels of asset classesTo sum up You need to find the right blend of risk and return. This is quite an important task because the return needs to be in line with your long-term financial goal. However, it is equally important that you don’t ignore the risk factor. The investment option you choose should match your risk appetite. Disclaimer: Investments in the securities market are subject to market risks. Read all the related documents carefully before investing.
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