As Peter Lynch says, know what you own and know why you own it–you need to understand the instruments in which you invest your money. There was a time when bank FDs and savings accounts used to be the top priority of investors. However, nowadays, with so many types of investment options available, investors have started to shift their focus to equity as well as new-age options like cryptocurrency.
The key lies in being proactive about your investments. Before you make a choice, it is essential for you to analyze your goals and risk appetite. After all, investing money is easier said than done.
To help you make the right decision, here is everything you need to know about different types of financial investment.
Why Should You Invest?
This is a question that should come to everyone’s mind before investing. Given the various types of investment present, it is imperative to determine your goals and know the motive behind why you should invest. Two of the biggest reasons why you should invest are as follows.
1. To achieve long-term goals
Investing not only gives you control over your money but also lets you have a good sleep knowing that you are prepared for any uncertainty. The primary purpose of saving and investing money is to achieve long-term goals such as retirement or buying a house.
While your regular income is sufficient to look after your expenses, you need to save and invest the same to secure your future financially. Thus, it is imperative to invest money. It also helps you save for a time of emergency. Life is full of uncertainties, so keeping an emergency corpus is a must.
2. To earn returns at par with the inflation rate
Inflation is the hidden tax you pay on your money. With soaring inflation, lifestyle costs increase. What you can buy today for Rs. 1000 would be more expensive in 5 years. To tackle such a situation, growing money at an inflation-beating rate is essential.
The most viable solution for that is to invest your money. Investing helps you beat inflation over the long term. Not to mention, it also helps you achieve long and short-term financial goals, which helps you to avoid unwanted leverage.
What are Different types of Financial Investments You Can Grow Your Money?
This guide walks you through different types of investment, from stocks to bonds to crypto, and explains why you may want to consider any particular investment. Ultimately, you must understand your objectives, time horizon, and risk capability to include any asset in your investment portfolio.
1. Cryptocurrency
Cryptocurrencies are a fairly new investment type. Cryptos are digital currencies that can be bought and sold on cryptocurrency exchanges or via crypto platforms. Cryptocurrencies like Bitcoin and Ethereum have gained a lot of traction in recent years due to their quick acceptance by the investing universe and their popularity.
This digital asset acts as a great hedge to diversify your portfolio as it functions differently from other investment options and has a negative correlation. One thing to note about this investment option is that it is highly volatile, with wide swings in prices. Thus, you need to conduct your own research to understand how cryptocurrencies work and how they fit your portfolio. If you are looking to diversify your portfolio with crypto, check out Mudrex’s Coin Sets. These are crypto baskets based on themes, curated and rebalanced by experts regularly.
While cryptocurrencies provide good returns and varied utilities such as peer-to-peer payment options, their widespread acceptance by global governments may take some time.
2. Initial coin offerings (ICOs)
An initial coin offering (ICO) is the cryptocurrency equivalent of an Initial Public Offering (IPO). Just like in an IPO for stock, a company looks to raise fresh funds from the market for its cryptocurrency ventures with an ICO. It can be for a new application, coin, or another service in the same space.
Just like participating in an IPO allows you to buy new shares of the company, you can get new cryptocurrency tokens by participating in an ICO. This token might be related to some product or service the company is offering or represent a stake in the company.
Investors exploring this avenue must do their homework, such as ensuring the company’s management putting up the ICO is genuine and accountable. This can be found in a white paper that the crypto company issues. As an investor, you must go through the white paper to understand the reason behind the offering and how management plans to utilize the capital.
3. Stocks
Stocks are the most common form of investment with their own set of risks and rewards. Over the long term, stock performance is directly correlated with how the company is performing. Buying a stock allows you to be a partial owner of the company based on your investment amount. This instills that you participate in all the upsides and downsides of the company.
Stock investors make money when the value of the stock they own goes up and are able to sell. Some stocks also pay dividends, which are a part of the company’s earnings.
Due diligence must be done before investing in any company’s stock. Given that it is one of the most renowned types of financial investment, you can get almost any information for their research, so do not miss out on that.
4. Mutual funds
Mutual funds are one of the most popular and known asset classes. These funds are issued by Asset Management Companies (AMCs), who collect funds from investors and invest in various asset classes, keeping in line with the fund’s objective The investments range from equity, debt, a combination of both, and so on. For retail investors, mutual funds are the most suitable types of investment.
For example, any Flexi cap fund will allow the fund managers to invest in large, mid, or small cap based on the market conditions and to keep those investments in a particular range. The fund manager employs a team and is responsible for selecting the best investments and maximizing returns for the investors.
As an investor, your job is to select the appropriate fund that suits you based on your goals and risk appetite.
5. Real estate
This investment vehicle is referred to as the oldest because that would be the ‘one’ investment that has been prevalent for ages. For example, a house or an office space can be called a real estate investment.
Over the years, real estate investments have evolved and advanced. This allows even a retail investor to participate in investing in this asset class. You no longer have to buy property worth a crore to invest in real estate because you have the option of investing in the same via Real Estate Investment Trusts (REITs). REITs are traded in the stock market and allow bite-size investments. REITs are pretty new in Indian markets. So far, there are only 3 listed REITs in India, and they are in commercial real estate investment space only.
Another investment vehicle is Infrastructure Investment Trusts(INVITs). INVITs is a trust that pools money from investors to invest in income-generating assets like roadways, transmission, power, etc.
6. Bonds
Bonds are one of the traditional investment choices alongside equity for investors. When you buy a bond, you are essentially lending money to the issuing entity. Issuing entity can be any corporate or government entity.
Mainly there are 2 kinds of bonds- government and corporate.
Government bonds are believed to be the safest bonds, as they are likely to return your principal and interest payments. Corporate bonds carry a higher risk than government bonds. Investors must do due diligence on the corporate entity issuing the bond before investing.
When an investor lends money, he/she gets the interest payments that are pre-decided (known as the coupon amount). After the bond matures, investors get the principal back as agreed upon.
Generally, the rate of return offered by bonds is lower than equity, but they also reduce the risk in your portfolio. However, bonds are not completely risk-free as they come with interest rate risk, liquidity risk, etc. Investors should do their due diligence before investing in bonds.
7. Exchange-traded funds (ETFs)
ETFs are very similar to mutual funds. However, they generally track an index. ETF sponsors collect funds from investors and invest in an Index. For example, a Nifty ETF tracks the Nifty 50 index.
Unlike mutual funds, which are purchased through a fund company or a broker, ETFs are tradeable in stock markets. You can buy or sell them like a stock. The price of the ETF fluctuates throughout the day, whereas mutual funds value is simply the Net Asset Value (NAV) calculated at the end of each trading day.
ETFs are an excellent tool for investors seeking control over their investments and who want to indulge in active investments.
8. Options
An option is a derivative contract to buy or sell an underlying asset at a set price and at a set date. An option finds its value from the underlying, i.e., stock, bonds, commodities, etc.
There are two types of options: call options and put options.
- Call Option: In simple words, a call option gives you the right to buy but not an obligation. So, if an investor has a positive view of the stock, he/she can buy the call option. If the stock price increases, the call option will gain in value.
- Put Option: A put option gives the investor the right to sell an underlying, but not an obligation. Investors having a view of stock price decline can purchase a put option.
Options are traded on the stock exchange, and the price they are quoted is the premium. There are many strategies for options trading based on the view and the direction of the market. However, these strategies are complex, and you need to develop skills to trade in this volatile investment avenue.
9. Security futures
This is another type of well-known derivative, just like options. The difference between options and futures is that options give you the right but not the obligation to buy or sell an asset at a particular price and time, whereas futures obligates the buyer to purchase a specific asset and the seller to deliver that asset at a future date.
There are other types of futures contracts besides security futures, like commodity futures, volatility futures, index futures, currency futures, interest rate futures, etc.
Future contracts are used to capitalize on one’s view or even hedge the portfolio. These contracts are quite common in commodities. For example, a farmer may want to lock in the price of his crop and may sell futures contracts to protect himself from future price declines.
Futures are very sophisticated instruments that require extensive knowledge regarding their functionality before making an investment decision. For retail investors, futures are more of trading than investing.
10. Commodities
Commodities are an alternative asset class that you can access in physical as well as electronic form. You can trade commodities on stock exchanges like MCX. Types of commodities include agriculture products, energy products, metals, etc. Commodities are more common in the futures market to hedge the physical risk of storing them.
You should know that these types of investments carry a significant risk of losing capital. Commodity prices move sharply and abruptly due to any sudden event; an example can be the volatility in commodities post-Russia’s invasion of Ukraine and post Covid-19 pandemic.
Commodities are known to be a hedge against inflation, but you need to evaluate the commodity types and take a prudent call before introducing them into your portfolio.
How Can You Choose the Right Investment Option?
With the onset of different trading platforms and investment vehicles, you must invest keeping in mind your goals and risk profile.
Your investment goals can be short or long-term. While for short-term investments, due to limited time, your options are constrained to safe investment options like bonds, bank FDs, etc., for the long term, you can plan for investing in cryptos, ICOs, equities, etc.
In the same manner, for the short term, low-risk investment options make sense, but in the long run, the risk can be adjusted, and you can decide on asset allocation having a little higher risk.
There is no universal answer to the right investment for everyone. It totally depends on your personal circumstances and the overall market conditions. What might work for you might not work for another individual. Hence, make sure to evaluate your goals and risk appetite and invest based on that.
Conclusion
There are numerous types of investments to choose from, with each asset having its own risk and return profile. Some investments are better for sophisticated investors, while others can be ventured by novice investors. Before investing your money, ensure to understand that investment option and invest based on your goals and risk-to-reward ratio.
FAQs
1. Is Bitcoin a good investment?
The answer is yes; however, it depends on what your investment goals, time frame, and risk tolerance level are. If you have a longer time frame, you can benefit from the price volatility of Bitcoin and can minimize the short-term market noise. However, we strongly suggest you do your own research before making an investment in any cryptocurrencies.
2. Which investment is best for beginners?
As a novice investor, you can start your investment journey by investing in options like mutual funds, stocks, bonds, etc.
Cryptocurrencies will also suit your portfolio, given you gain a basic understanding and skills to invest in the same. If you are looking to invest in crypto, download the Mudrex App and get started!
3. What can I invest in to make money monthly?
If you stay invested for a long term in any investment, you are likely to make money each month. Make sure your investments align with your goals and provide stable returns over a period of time.
4. How can I grow my money?
You can grow your money by investing in different types of investments. There are an array of options available for you to invest your money in, such as cryptos, ICOs, stocks, bonds, etc. By investing in them and having a long-term perspective, you can grow your money.
5. How can I start investing with little money?
You can start investing with little money by investing as per your goals and saving each month. Try to save around 5-10% of your income monthly and invest in them on a stable return providing investment options. Stay invested for a long time horizon to benefit from compounding and increase your small amount eventually.
