Types of Investments: Various Investment Avenues in India

Learn about the various types of investments and investment avenues in India.

Introduction

An investment is a sacrifice of current money or other resources for future benefits. In any investment, risk and time elements play a major role.

A successful investor undertakes all possible measures to earn good returns from their Investments. Today, investment avenues range from risk‐free simple asset such as bank deposits to complex and risky assets such as stocks and bonds.

Investors also generally have different motives to invest in an investment avenue. Understanding the motives of investors is crucial to make rational investments in shares, mutual funds, debt instruments and life insurance.

Investment motives can be categorized based on Nature of investment (i.e., periodical return, expert advice, convenience, tax benefits, return growth, and riskiness), Future financial needs (i.e., uncertain events, retirement planning, house purchase, child future, and healthcare), Investor personal characteristics (i.e., knowledge, confidence, ability, responsibility, and belief), Safety and stability of investments (i.e., time frame, safety, stability, and liquidity), Investor behavioral aspects (i.e., previous experience, prior loss, following majority decision).

Events such as wars and pandemics impacts financial markets dramatically, which leads to investors to reallocate their portfolios. In recent years, investment in shares, mutual funds, and life insurance are witnessing a growing trend in India. More than any other business, financial services like banking and investments have seen an increase in digitization after the breakout of the pandemic.

Traditionally, only the high‐income group preferred investing in securities market, specifically in shares. Recently, the middle income and salaried class investors have begun to invest in stocks due to increased awareness and better services provided by brokerage agencies.

New investments in shares, mutual funds, and life insurance have seen a significant increase with digital facilitation. To support the investment trend, regulators like SEBI have eased the offering of mutual funds and initial public offerings through unified payment interfaces (UPI), intending to give easy access to the above-mentioned investment avenues and increase investor participation.

Types of Investment avenues

Investment avenues are classified as:

• Non-Marketable Equity Shares
• Financial Assets
• Bonds
• Money Market Instruments
• Mutual Funds
• Life Insurance Policies
• Real Estates
• Precious Objects
• Financial Derivatives.

Risks Involved With Investing

The most important relationship to know is that the risk-return trade-off. Higher risk greater the rewards and lower risk lesser the rewards. Hence, investor has to make a choice and should be aware of the risks before making an investment.

MARKET RISK:

Sometimes prices & yields of all securities rise and fall. Broad outside influences affecting the market normally cause this. This can be true, may or not it’s big corporations or smaller mid-sized companies. This can be referred to as Market Risk.

A scientific Investment Plan-SIP that works on the concept of Rupee Cost Averaging might help mitigates this risk.

CREDIT RISK:

The debt servicing ability (may it’s interest payments or repayment of principal) of a corporation through its cash flows determines the Credit Risk faced by you. This credit risk is measured by independent rating agencies like CRISIL who rate companies and their paper. A ‘AAA’ rating is taken into account the safest whereas a ‘D’ rating is taken into account poor credit quality.

A well- diversified portfolio may help to mitigate this risk.

INFLATION RISK:

Inflation is the loss of buying power over time. One needs to make investments that protects their capital and provides returns that beats inflation. When inflation grows faster than the return on investment, capital actually erodes. This is inflation risk.

A well-diversified portfolio with some investment in equities might help mitigate this risk.

INTEREST RATE RISK:

In a free enterprise interest rates are difficult, if not impossible, to predict. Changes in interest rates affect the costs of bonds and affects equities. If interest rates rise, the costs of bonds fall, and vice versa. Equity could be negatively affected likewise in an exceedingly rising rate of interest environment.

A well-diversified portfolio might help mitigate this risk.

POLITICAL/GOVERNMENT POLICY RISK:

Changes in government policy and political decision can change the investment environment. These could create a good environment for investment or otherwise.

Is Insurance an Investment Avenue?

Is insurance be an investment avenue?

Life is uncertain but the perils faced by human life are certain. The scientific principles upon which insurance is predicated upon are as follows: Shared Risk, Predictable Mortality, Invested Assets, Fair and accurate Risk selection.

The concept of life assurance has evolved over a period of your time to fulfill the various needs of the customers. The two basic needs that are common for individual are (a) Risk Coverage and (b) Future savings. Risk here means Death.

Types of Policies

Term Insurance:

This type of policy covers risk i.e., death. The person gets the Sum Assured given that death occurs and also the money is paid to his nominee. Generally the amount of coverage varies from 1,5,10,15 or 20 years. The advantage during this style of insurance is that the low cost involved. The insured can renew the policy after expiry if such a n option is out there within the policy. The policy may also be converted into a savings policy if that option is additionally available. Generally the businesses don’t implement a medical test for renewal.

ENDOWMENT INSURANCE:

In this type of insurance the insured can enjoy the sum assured whether or not he survives the policy term. It covers the family on the death of the insured. it’s a sound plan for all form of customers. It may be utilized to accumulate a fund in order to managed the future events . The endowment plans have the selection of participating within the profits of the corporate that the next premium is charged. Another endowment plan variation is ‘Money Back Policy’ which is additionally popular among parents who have children, as they get the cash at regular intervals. Another version of this policy is ‘Joint Life policy’ where both the husband and wife’s life is covered. Another version is ‘Unit Linked Insurance Plan’ where the premium paid consists of two parts (a) Risk premium and (b) Investment premium. risk premium takes care of providing security to the family and also the second part is invested in three different modes supported the selection of the insured as follows:

• Secured Fund: Not less than 10% in EQUITY, Not less than 80% in DEBT, LIQUID – Not less than 20%
• Balanced Fund: Not less than 30% in EQUITY, Not less than 80% in DEBT, LIQUID – Not less than 20%
• Risk Fund: Not less than 50% in EQUITY, Not less than 75% in DEBT, LIQUID – Not less than 25%

Another sort of insurance product is that the ‘Whole Life Insurance’. There are two variations to the present policy. the primary one is Pure whole Life where the premiums are continuously payable under the throughout the lifetime of the insured till death. The other is that the Limited Payment Whole insurance where premiums are payable for a limited and shorter period at the choice of the insured or till death, whichever is earlier. The advantage of this policy is that the danger coverage is there till the tip of the policy.

Concept of Investment Company

Mutual fund could be a mechanism for pooling the resources by issuing units to the investors and investing funds in securities in accordance with objectives as disclosed in offer document. Investments in securities are spread across a large cross-section of industries and sectors and thus risk is reduced. Diversification reduces risk because all stocks might not move within the same direction within the same proportion at the identical time.

investment firm issues units to the investors in accordance with quantum of cash invested by them. Investors of mutual funds are referred to as unit holders.

The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally set out with variety of schemes with different investment objectives, which are launched from time to time. A fund is required to be registered with Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the general public.

DIFFERENT Types of open-end fund – SCHEMES SCHEMES in line with MATURITY PERIOD.

A investment company scheme are often classified into open-ended scheme or close-ended scheme betting on its maturity period.

OPEN-ENDED FUND/ SCHEME :

An open-ended fund or scheme is one that’s available for subscription and repurchase on an eternal basis. These schemes don’t have a set maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a commonplace. The key feature of open-end schemes is liquidity.

CLOSE-ENDED FUND/ SCHEME:

A close-ended fund or scheme incorporates a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest within the scheme at the time of the initial public issue and thereafter they will buy or sell the units of the scheme on the stock exchanges where the units are listed. so as to produce an exit route to the investors, some close-ended funds give an option of selling back the units to the investment company through periodic repurchase at NAV related prices. SEBI Regulations stipulate that a minimum of one among the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.

SCHEMES in step with INVESTMENT OBJECTIVE:

A scheme may be classified as growth scheme, income scheme, or balanced scheme considering its investment objective. Such schemes could also be open-ended or close-ended schemes as described earlier. Such schemes could also be classified mainly as follows:

GROWTH/EQUITYORIENTEDSCHEME:

The aim of growth funds is to supply capital appreciation over the medium to longterm. Such schemes normally invest a serious a part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and also the investors may choose an option counting on their preferences. The investors must indicate the option within the form. The mutual funds also allow the investors to vary the choices at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of your time.

GROWTH /EQUITY ORIENTED SCHEME:

The aim of growth funds is to supply capital appreciation over the medium to long- term. Such schemes normally invest a serious a part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and also the investors may choose an option counting on their preferences. The investors must indicate the option within the form. The mutual funds also allow the investors to vary the choices at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of your time.

INCOME / DEBT ORIENTED SCHEME:

The aim of income funds is to supply regular and steady income to investors. Such schemes generally invest in fixed income securities like bonds, corporate debentures, Government securities and securities industry instruments. Such funds are less risky compared to equity schemes. These funds don’t seem to be affected due to fluctuations in equity markets. However, opportunities of capital appreciation also are limited in such funds. The NAVs of such funds are affected thanks to change in interest rates within the country. If the interest rates fall, NAVs of such funds are likely to extend within the short run and the other way around. However, long run investors might not bother about these fluctuations.

Balance Fund

The aim of balanced funds is to supply both growth and regular income per schemes invest both in equities and fixed income securities within the proportion indicated in their offer documents. These are appropriate for investors trying to find moderate growth. they typically invest 40-60% in equity and debt instruments. These funds also are affected due to fluctuations in share prices within the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.

MONEY MARKET OR LIQUID FUND:

These funds also are income funds and their aim is to supply easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments like treasury bills, certificates of deposit, cash equivalent and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a way to park their surplus funds for brief periods.

GILT FUND:

These funds invest exclusively in government securities. Government securities haven’t any default risk. NAVs of those schemes also fluctuate because of change in interest rates and other economic factors as is that the case with income or debt oriented schemes.

Index Funds:

Index Funds replicate the portfolio of a specific index like the BSE Sensitive index, S&P NSE 50 index (Nifty), etc these schemes invest within the securities within the same weight age comprising of an index. NAVs of such schemes would rise or fall in accordance with the increase or fall within the index, though not exactly by the identical percentage because of some factors called “tracking error” in technical terms. Necessary disclosures during this regard are made within the offer document of the fund scheme.

There are exchange traded index funds launched by the mutual funds, which are traded on the stock exchanges.

Investment Company: FEATURES/ROLE/BENEFITS

MOBILISING SMALL SAVINGS:

Mutual funds mobilize funds by selling their own shares, referred to as units to an investor a unit in investment company means ownership of a proportional share of securities within the portfolio of a fund. this offers benefit of convenience and also the satisfaction of owning shares in many industries. thus, mutual funds are primarily investment intermediaries to accumulate individual investments and pass away the returns to small fund investors.

INVESTMENT AVENUE

One of the fundamental characteristics of a investment firm is that it provides as Ideal Avenue for investment for persons of small means, and enables them to earn reasonable returns.

An investment may be a sacrifice of current money or other resources for future benefits. Numerous avenue of investments are available today. The two key aspects of any investment are time and risk. Mutual funds also offer good investment opportunities to the investors. Like all investments, they also carry certain risks. The investors should compare the risks and expected yields after adjustment of tax on various instruments while taking investment decisions. The investors may seek advice from experts and consultants including agents and distributors of mutual funds schemes while making investment decisions.

PROFESSIONAL MANAGEMENT:

It is possible for the small investors to possess the good thing about professional and expert management of their funds. Mutual funds employ professional experts who manage the investment portfolios efficiently and profitably. Investors are relieved of the emotional stress involved in buying or selling securities since mutual be sure of this function. With their professional knowledge and experience, they act scientifically with the correct timing to purchase for and sell for his or her clients. Moreover, automatic reinvestment of dividends and capital gains provides relief to the members of mutual funds. Expertise available selection and timing is created available to investors in order that the invested funds generate returns.

DIVERSIFIED INVESTMENT:

Mutual funds have the advantage of diversified investment of funds in various industry segments spread across the country. this can be advantageous to small investors who cannot afford having the shares of highly established corporate due to high market value. Thus, mutual funds allow uncountable investors to own investment during a sort of securities of the many different companies. Small investors therefore share the advantages of an efficiently managed portfolio and are freed from the matter of keeping track of share certificates etc of various companies, tax rules, etc.

BETTER LIQUIDITY:

Mutual funds have the distinct advantage of offering to its investors the advantage of better liquidity of investment. There is always a ready market available for the mutual funds units. In addition to this, there’s also an obligation imposed by SEBI guidelines. for example, in the case of open-ended fund units, it’s possible for the investor to divest holdings any time during the year at the net Asset Value.

REDUCED RISKS:

There is only a minimum risk attached to the principal amount and return for the investments made in investment firm schemes. this is often usually made possible by expert supervision, diversification and liquidity of units. Mutual funds provide small investors the access to a reduced investment risk resulting from diversification, economies of scale in transaction cost and professional finance management.

INVESTMENT PROTECTION:

Mutual funds in India are largely regulated by guidelines and legislative provisions put in place by regulatory agencies like the SEBI. The Securities Exchange Commission (SEC) within the USA allows for the availability of safety of investments. In order to protect the investor interest, it’s obligatory part of mutual funds to broadly follow the provisions laid down during this regard.

SWITCHING FACILITY:

Mutual funds provide investors with flexible investment opportunities, whereby it’s possible to modify from one scheme to a different. This flexibility enables investors to shift from income scheme to growth schemes, or the other way around, or from a close-ended scheme to an open-ended scheme, all at will.

EQUITY SHARES

Equity Share represents ownership capital. As a Equity share holder, you’ve got a ownership stake within the company. This significantly implies that you have a residual interest in income and wealth. The Share movements are reflected within the various index points: Bombay Stock Exchanges Sensitive Index, S&P Nifty Index

BOMBAY STOCK EXCHANGES SENSITIVE INDEX:

Perhaps most generally followed stock market exchange index in India, Bombay stock exchange Index, Popularly called Sensex reflects the movements of 30 sensitive share from specified and non-specified groups.

S&P Nifty Index:

Arguably the foremost rigorously constructed securities market index in India, the nifty index reflects the worth movements of fifty stocks selected on the bases of capitalization and liquidity.

Various Options for Investors

There are various types of investment options such as fixed deposit, government deposits, post office deposit, Debentures, Life Insurance, Bonds, Debts, Equities, Pension, Property, Metals, real estate etc., with varying risks and rate of return.

Debt which has a fixed amount of rate of interest on investment, Fixed deposits are only with the bank , insurance, public fund, with very less rate of return on investment, and safe.

Traditionally, Indians invested in insurance, in term or fixed deposits, in metals such as Gold, silver and in property.

Mutual funds collect money from investors and invest in shares, debentures, bonds, and other securities which are available in the capital market. Mutual Funds investment are safer compared to directly investing in equities.

Gold (E-gold) is believed to be a secure investment option in times of political and financial unpredictability. it’s considered a hedge against inflation and currency degradation. It tends to achieve from extensive stimulus procedures. Gold is an asset that seems to be able to grow in value even amid uncertain and difficult times.

Closing Thoughts

The risk and return expectations of investors have changed in India, leading them to reallocate their portfolios. People now invest their money in different financial market such as shares, mutual fund etc.

In Debt mutual funds the funds are collected from the public and major portion of this amount is invested in Government bonds, RBI Bonds and other fixed income securities. Whereas in Equity Mutual funds major portion is invested in the stock market. Investors shift to gold, debt fund or hybrid fund during bad times (geopolitical tensions, recession) to grow the wealth with little to no risk. Fixed deposits are ideal for investors with very low risk appetite and are looking for assured returns; usually the rate of interest is higher than what is offered for a savings bank account.

Investors are recommended to take a little risk and include equities in their portfolio so as to maximize their own returns over the long term. It is also recommended to diversify the risks through proper asset allocation.