The Indian financial market has evolved greatly over the last couple of decades allowing financially savvy investors to explore a wide range of investment options, both long-term and short-term. By investing, investors can fetch gains in three primary ways, by lending money to someone on interest, by becoming a part-owner of a business through stake, or by purchasing assets that rise in terms of value over time, like real estate. The entire investment universe, therefore, focuses on these three components.
Investments can be broadly classified as growth-oriented and fixed-income. The former helps in increasing the capital value over time, whereas the latter aims to provide a steady income stream that can be redeemed or re-invested.
In this article, we will list down different types of investment avenues available for investors in India under these two investment styles:
1. Mutual funds
Mutual funds pool money from investors to further invest in different securities, including stocks, bonds, etc. Mutual fund investment returns are influenced by market performance of the underlying assets selected. Investors have an option to invest in mutual funds through SIP (Systematic Investment Plan) or lump sum mode.
Mutual funds are broadly categorized into following types:
- Tax-saving funds
- Growth or equity funds,
- Liquid or money market funds,
- Hybrid funds,
- Fixed-income funds,
- Index funds,
An investor can opt for a mutual fund as per his/her:
- Risk profile,
- Ivestment horizon, and
- Investment goals
These funds can help investors meet either short-term or long-term goals. These are regulated by SEBI (Securities and Exchange Board of India) which ensures investor protection at all times.
2. Exchange-Traded Funds (ETFs)
Exchange-traded funds, or ETFs, involve a collection of securities like shares, bonds, money-market instruments, etc. These funds are passively managed and essentially track an underlying index. They offer the best features of two assets, namely mutual funds and stocks. ETFs are highly liquid and can be traded on stock exchanges. Just like mutual funds, these are regulated by SEBI.
What differentiates ETFs from mutual funds is that the former can be easily traded on the bourses during trading hours, thereby allowing investors to make the most of real-time pricing differences. Mutual funds, however, can only be bought or sold at the close of the trading day.
Stocks or shares or equities are one of the most popular growth-oriented investment options available in India. By investing in a stock, an investor becomes a part-owner of a publicly traded company. Therefore, he/she can stake a claim on the company’s profits as per the investment proportion. Equity investments generally offer a high risk-reward ratio since the higher the risk, the higher the returns. However, this may not always be true and investors should carefully assess the company fundamentals before making a stock investment.
Bonds come under the fixed-income securities category. It is a type of debt instrument that represents a loan lent by an investor to a company or government. By buying a bond, an investor allows the bond issuer to give him/her a fixed interest rate in return for using the investor’s capital. Some of the commonly available bonds in India include corporate bonds, treasury bills, municipal bonds, government securities, etc.
5. Cash and cash equivalents
Cash equivalents aim to protect the original capital investment of investors while allowing high liquidity through the investment tenure. However, investors can expect low returns from these avenues as compared to other investment types.
While there is no capital growth to be achieved from cash equivalents, investors can expect to earn regular returns. By protecting an investor’s capital, this avenue reduces the overall portfolio risk to a great extent. Examples include:
- Savings accounts offering high interest rate,
- Liquid funds,
- Tme deposits,
- Overnight funds,
- Bank accounts, etc.
6. Real estate
The Indian real estate sector offers a huge growth prospect with several industries, including commercial housing, hospitality, retail, manufacturing, eyeing to expand their real estate presence. To earn substantial returns, investors can invest either in:
- commercial properties
- residential properties
- real estate mutual funds
With real estate investments, timing plays a crucial role, especially the time of entry and exit. Investors should also be careful about the lower liquidity levels of this investment form since it can be challenging to sell a property in case of a financial emergency.
7. Fixed deposits
Bank fixed deposits (FDs) are considered to be one of the safest investment avenues in the country. This traditional investment format is offered by banks, post offices, and other NBFCs. FDs allow investors to invest their idle cash for a predetermined duration to earn a fixed interest rate.
The FD interest rates are generally unaffected by market fluctuations, thereby ensuring higher safety levels for investors. These are flexible and offer many options to investors, thereby making for one of the most preferred options by risk-averse investors.
Investors often include insurance products within their financial plans. Insurance products can come in different forms, like:
- Term insurance,
- Life insurance,
- Health insurance,
- Endowment plans,
- Child plans, etc.
Each insurance product is designed to meet specific objectives. For example, life insurance helps to meet an individual’s expenses as he/she ages, while term insurance aids the beneficiaries in the event of the insured’s death.
Although insurance is considered to be an investment, it cannot be called as an investment in the strict sense. Insurance should be considered as a payment for protection and products be chosen accordingly.
9. Retirement planning products
Most Indian investors save some portion of their earnings for retirement. While investing for retirement planning, one has to not just save money for retirement purposes but also manage the income after retirement. There are many retirement-specific investment options available for Indian investors. Some of the common options are:
- National Pension System (NPS),
- Senior Citizens Savings Scheme (SCSS),
- Public Provident Fund (PPF),
- Bank fixed deposits, etc.
Since these avenues are considered risk-free, investors prefer to use these to save for retirement.
10. Provident funds
Provident funds, which can be in the form of:
- Employees Provident Fund or
- Public Provident Fund)
Are an important part of the retirement corpus of most salaried investors in India. While EPF is mandatory for certain employees, a government-sponsored retirement scheme that aims to provide salaried employees with a lump sum corpus at the time of retirement or resignation, PPF is a voluntary investment scheme that is also backed by the government.
Each of the above-mentioned investment avenues offers different risk-reward benefits. However, investors should consider factors beyond just risk and returns to determine the right investment products for their portfolio. Factors like charges, asset allocation, historical performance, liquidity, etc. can also impact an investment’s potential returns. An individual’s investment planning should focus on aligning the portfolio with personal risk tolerance, financial goals, and investment time horizon.
Real estate investment trusts or REITs are companies that invest in real estate by pooling money from investors and distributing profits to investors from investments made. These are used as alternatives to purchasing real estate.
To invest in stock markets, an investor can either opt for the direct equity route or invest in equity mutual funds. The former requires investors to have a trading and Demat account, while equity mutual fund investments can be made without having these accounts.
To invest in stocks, an investor must have a trading and Demat account with a registered broker. Investors can download the Finity app on their smartphone to begin investing in stocks after completing a seamless KYC process.