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10 Types of Investments in India and How they work

When we say types of investment most people are aware of stocks and bonds but are unaware of other available options. Investments are classified into three categories. These include owned investments, lending instruments, and cash equivalents.

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Investment plans

10 Best types of Investments:

10 Types of Investments In India and How they work
July 22, 2024

Table of Content

 

10 Best types of Investments:

Here are the best types of investments available in India:

  1. Investing in stocks
  2. Certificate of deposit
  3. Bonds
  4. Investing in real estate
  5. Fixed Deposits
  6. Mutual Funds
  7. PPF (Public Provident Fund)
  8. (NPS) National Pension System
  9. ULIPs (Unit Linked Insurance Plans)
  10. Scheme for Senior Citizens' Savings

Let’s discuss in detail the types of investments available:

1. Investing in stocks:

Investing in the stock market or equities can be a great way to grow wealth over time. It takes careful analysis to be able to determine the best stocks to invest in, as well as when to enter and exit the market.
Market volatility can have an effect on the capital growth of investments, and the returns on these investments depend on the types of investors in India and their risk tolerance. Fortunately, many stocks have been shown to deliver returns that outperform inflation over the long run.

2. Certificate of Deposit:

Investing in a Certificate of Deposit (CD) is a money market instrument regulated by the Reserve Bank of India (RBI) and issued by the Federal Deposit Insurance Corporation (FDIC).
The minimum amount that can be invested in a CD is Rs.1 lakh and its multiples. Commercial banks typically issue CDs with a maturity period ranging from 7 days to 1 year, while financial institutions offer CDs with a maturity period from 1 year to 3 years.

3. Bonds:

Bonds are a form of debt investment that has become popular in India. Bond investors provide money to the issuer of the instrument, and in exchange, the bond issuer pays interest to the investor at a pre-defined coupon rate until the bond matures. Upon maturity, the investor gets their original investment back. Although most bonds in India come with a fixed coupon rate, other types of bonds such as floating rate bonds and zero-coupon bonds are increasingly gaining favour.

To invest in bonds in India, one can either do so directly or through Debt Mutual Funds. Investors should be aware that the bond issuer is obligated to return the principal amount to them at the time of maturity.

4. Investing in real estate:

To invest in real estate, one can buy residential or commercial properties and benefit from capital appreciation or regular rental income. An alternative is to invest in units of Real Estate Investment Trusts (REITs). REITs in India typically invest in commercial properties, and investors gain returns based on the income from rentals.

Tips:

  • If you are aiming to achieve a higher rate of return, make basic renovations and improvements to your real estate investment. This can go a long way in raising the market price of your property.
  • Be aware of the extra costs you may need to pay for your real estate purchase. These may include yearly maintenance and repairs, taxes, utility bills and more.

5. Fixed Deposits (FD):

When you choose to invest in a fixed deposit offered by banks or non-banking financial organisations (NBFCs), you can put aside a lump sum of cash for a pre-determined period of time and gain interest at the agreed rate. This type of investment is quite popular in India as it offers a secure way to grow your funds. Upon completion of the tenure in this saving scheme, your deposit gets you interest at the rate that was set.

6. Mutual Funds (MFs):

Investing in Mutual Fund (MF) can involve stocks, bonds, or a combination of the two. Depending on your financial goals and risk appetite, different types of investors in India can choose between equity funds, debt funds, and balanced funds. Additionally, you can also use Systematic Investment Plan (SIP) to invest smaller amounts periodically. Before investing, review your risk preferences and be aware of the taxation system. Moreover, you may opt for tax-saving mutual funds such as the ELSS (Equity Linked Savings Scheme) to help maximise your returns.

7. Public Provident Fund (PPF):

Public Provident Fund (PPF) is viewed as one of the safest forms of investment in India, since it is backed by the government. Opening an account with any bank or post office is the first step to investing in PPF and can be done with a minimal amount of Rs.100 in some banks (can vary for different banks). Yearly deposits range from a minimum of Rs.500 to a maximum of Rs.1.5 lakh, and these investments are locked in for 15 years, as well as qualifying for tax deductions under section 80C of the Income Tax Act, 1961.

To get the most out of PPF, it is advisable to invest before the 5th of every month, taking advantage of online transfers for convenience and efficiency.

8. National Pension System (NPS):

The National Pension System (NPS) is an investment plan sponsored by the government of India, which is suitable for long-term savings, particularly for retirement. NPS investments can be diversified across 4 asset classes – Equities, Government Bonds, Corporate Bonds and Alternative Investment Funds (AIFs).

Currently, NPS investments are eligible to be annuitized after the investor reaches the age of 60, though they can continue to be invested in up to the age of 75 without annuitization. To maximise the benefit of your NPS investment, you can take advantage of the tax deductions available under sections 80CCD (1), 80CCD (1B), and 80CCD (2).

There are two types of investment options for NPS - active and auto choice. An active choice allows you to choose the asset allocation as per your preference, while an auto choice has a predetermined asset allocation. If you have good financial knowledge, you can opt for an active choice. Otherwise, auto choice would be the better option.

9. ULIPs (Unit Linked Insurance Plans):

ULIP is a form of investment in India that comes with tax benefits. This instrument combines investment and insurance, with part of the premium going towards providing a life cover and the other part being invested in market-linked instruments or funds. Additionally, deductions are allowed according to the Income Tax Act, 1961, with premiums paid being deductible and maturity benefits and long-term capital gains being tax-free.

It is important to note the charges associated with investing in ULIPs, such as premium allocation charges, administrative charges, fund management charges, mortality charges, etc.

To get the optimum benefit from ULIPs, one should opt for an insurer provider who levies a minimum charge and provides flexibility in terms of premium payments and customizable plans with different fund options.

Additionally, ULIPs offer the ability to switch funds depending on market movements and changing risk appetite. Policyholders can also opt for a fixed proportion to be maintained in equity and debt throughout the policy term.

10. National Savings Certificate (NSC):

National Savings Certificate (NSC) is a government-backed fixed-income investment scheme offered by India Post. This scheme attracts conservative investors making medium to small-scale investments for five years. The interest rates for NSC are pre-determined and reviewed/revised by the Ministry of Finances under the Government of India on a quarterly basis.

What is Investing?

Putting money to work is referred to as an investment, which involves allocating resources to generate profits, income, or gains over a period of time. Investing can be done through various endeavours, such as starting a business or buying a property with the intention of either renting it out or reselling it later. Unlike saving, investing carries the risk of potential losses if the project does not turn out as expected. It is also different from speculation, which is based on betting on short-term price movements.

Why is investing better than saving?

A person's future is determined by the investments he or she makes. By doing so, they can bridge the gap between their dreams and reality. Investing is better than savings in the following ways:

1. Achieving your financial goals:

You can invest to meet your financial goals, whether it is to buy a houseor a car, pay for your child's education or marriage, or even plan for your retirement. The best way to reach your long-term goals is by investing your capital.

2. To overcome inflation:

One of the best money saving tips is to invest your money. Inflation can reduce the value of your money over time if you leave it in a regular savings account. To protect your money's worth, consider investing in financial options that offer returns higher than inflation.

3. For significant returns:

Investing in stocks or mutual funds, or a good investment or pension plan has the potential to yield higher returns than keeping money in a savings account or bank fixed deposits.

Benefits of Investing

The following are some of the key benefits of investing:

1. The growth of money

You can achieve your financial goals by investing money in the right plan. By investing, you not only grow your money but also remain financially prepared for the future.

2. The impact of inflation

Inflation is a rise in prices over time. Due to this, you will have to pay more for goods and services. To buy the same amount of goods or services in the future, you would need more money. By investing money, you can factor inflation into your lifestyle and achieve your goals without having to worry about future inflation.

3. Income from other sources

You can earn an additional income by investing in the right plan. You can use this money to cover your financial needs, pursue a hobby, or fulfil your aspirations.

4. A disciplined approach to finances

Regularly investing in a plan helps you develop a habit of setting aside money for the future. Additionally, this discipline will help you stay on top of your finances and reduce unnecessary expenses.

How to Invest?

  • The Do-It-Yourself Investor

    • Deciding how to invest money can be a difficult choice. DIY investors often take advantage of the low commissions and easy trading offered by discount and online brokerages. This type of investing requires a good understanding of the stock market, emotional intelligence, and a commitment of time. Additionally, those who feel they do not possess these skills may wish to employ a professional to manage their investments.

  • Investments managed by professionals

    • Individuals who prefer to have their investments managed by a professional can seek the services of a wealth manager. Wealth managers typically charge their clients a percentage of their Assets Under Management (AUM) as a fee for their services. Although professional money management can be more expensive than managing one's investments alone, many investors are willing to pay for the convenience of having an experienced expert make the research, investment decisions, and trades on their behalf. The SEC's Office of Investor Education and Advocacy recommends that investors confirm that their investment professional is licensed and registered.

  • A Roboadvisor for Investing

    • Some investors choose to invest based on the advice of automated financial advisors. Roboadvisors, which use algorithms and AI, collect information about the investor and their risk profile to make recommendations. This process is cost-effective and offers services similar to that of a human investment advisor. As technology advances, roboadvisors can do more than just select investments; they can assist in creating retirement plans, as well as managing trusts and other retirement accounts.

Things to Keep in Mind While Investing

Investing in India can be challenging for beginners who have little to no experience with money management. To help you identify suitable investment plans, you might benefit from sound financial advice.

Listed below are a few investment tips you may find useful:

  • Identifying your tolerance for risk is crucial because there are many types of investors in India. You will need to consider your risk tolerance when choosing investments.

  • Calculate the return of the instruments you are planning to invest in using an investment calculator. Online investment calculators are available for free.

  • Choose investments that align with your short-term and long-term financial goals.

  • You should diversify your investment portfolio so that it has a balance between high-risk and low-risk investments.

  • Plan ahead for your retirement by investing, because saving for your golden years is important.

  • Make sure that the investments in your portfolio continue to align with your personal objectives on a regular basis.

How Can I Start Investing?

Taking the DIY route, or opting for a professional investment advisor, are both viable options when it comes to investing. Consider your risk tolerance and develop a strategy that outlines how much you will invest, how often, and in what, based on your goals and preferences. Research the chosen investment to ensure it is in line with your strategy and has the potential to bring the desired results. It's important to remember that you don't need a lot of money to start, and you can adjust as your needs change.

How Can Investing Grow My Money?

Investing is not reserved for the wealthy. You can invest nominal amounts. Stocks can be purchased at low prices, small amounts can be deposited into an interest-bearing savings account, or you can save until you reach a target investment amount. Consider investing small amounts from your pay until you are able to increase your investment. A matching program offered by your employer may double your investment.

You can also invest in stocks, bonds, mutual funds, or even open an IRA. Getting started with Rs 1,000 is not a bad start. A Rs 1,000 investment in Amazon's IPO in 1997 would yield millions today. It was largely due to stock splits, but it doesn't matter, the results were monumental.

Most financial institutions offer savings accounts, which do not require a large investment. Savings accounts don't typically boast high interest rates; so, do your research to find one with the best features and most competitive rates. Believe it or not, you can invest in real estate with Rs 1,000. Investing in a company that produces income may be easier than buying an income-producing property. A Real Estate Investment Trust (REIT) invests in and manages real estate to generate income and profit. With Rs 1,000, you can invest in REIT stocks, mutual funds, or exchange-traded funds.

How to Buy the Right Investment Plan?

Given the multiple types of investment in India, finding the ideal investment plan can seem overwhelming. Let’s take a look at how you can buy the right investment plan for your needs:

  • Understand Time Constraints

    • Most people think about how long they need to invest for or when they’d like to enjoy the returns from their investment. Sadly, many forget that making investments and keeping track of them can take a lot of time. You need to think about how much time you have today to do your research and invest regularly. If you don’t have too much time, you can opt for a ULIP, where somebody else invests the money for you. If you have the time and capability, you can invest money by yourself.

  • Think About Your Budget

    • Many people think they need to save up a significant amount to start investing. The ideal way to build a significant corpus is by investing smaller amounts regularly. Putting away INR 1,000 per month works just as well as investing INR 20,000 once in five years. Depending on how you save, you should find a policy that either allows you to make lump-sum investments or systematic investments.

  • Decide on Your Risk Appetite

    • Before you pick an investment, you need to think about the risk. Some investments pose a higher risk than others. If you have the capacity to manage high risk investments, you can opt for them. If you prefer safe investments that offer lower but guaranteed returns, look for plans that fulfil your needs.

Identify Suitable Types of Investments for Your Goals

With this guide, you can get started creating your financial plan for different types of investments in India. Investing your money in various types of investments can ensure that your funds are placed in instruments that can help you achieve your short-term and long-term financial objectives. Financial planning is also an excellent way to prepare for retirement, so you can eventually step away from the daily grind and find time to pursue your dreams in your retirement years, whether it's something as simple as picking up a new hobby or something as grand as travelling the world. There are several forms of investment plans you can choose from as per your financial goals –

Is Investing the Same as Gambling?

There is a significant difference between gambling and investing. Investing involves putting your money to work in activities or projects that should produce a positive return over time. In gambling, bets are placed on the outcome of events or games. Money is not being put to work at all. The expected return on gambling is often negative. Even though an investment may lose money, it will do so due to the failure of the project. Gambling, on the other hand, is purely a matter of chance.

Conclusion

When it comes to investing, there are a variety of options available - ranging from low-risk, low-reward investments geared towards beginners, to high-risk, high-reward investments that require more experience and research. Be sure to assess each type of investment before deciding how to allocate your assets according to your overall financial goals.

FAQs on Types of Investment

1. What are the 7 types of investment?

Among the top 7 types of investments are stocks, bonds, mutual funds, property, money market funds, retirement plans, and insurance policies.

2. What are the four types of investing?

Bonds, stocks, Mutual Funds, and ULIPs are the four main types of investments.

3. What are the 6 classifications of investments?

Active versus passive management, growth versus value investing, and small or large companies are the 6 classifications of investments.

4. What is the meaning of Investment?

Assets or items acquired in the hope of generating income or appreciation are called investments.

5. What are the key points one should consider before investing in India?

  1. Your investment goal should be clear.
  2. Make sure you know how long you are planning to invest.
  3. Be aware of your risk tolerance.
  4. Allocation of assets is important.
  5. Make sure you know which product to invest in.

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