A beginner's guide to learn what exactly an investment is and what are its different types.
This article has been made possible by Funds India.
Investments and finance-related terms can be very complicated. Where to invest hard-earned money and where not to invest – such questions can be extremely intimidating.
However, investing is not as difficult as it appears to be once you understand its terminology and gain basic financial literacy.
What is an investment?
An investment is all about making more money with your money. The source of your income need not only remain limited to your salary. Instead, investments can act as an alternative source of income.
There are different ways in which you can invest your money. These include putting your money in mutual funds, stocks, bonds, real estate, insurance, or even gold.
Many people think that investing is like gambling. Nothing could be farther from the truth when it comes to this statement. Investments are mostly a safe, money-making vehicle, while gambling involves risks; not to mention, gambling is also illegal.
Here are some types of investments you can opt for:
1.Mutual Funds: In the last 25 years, mutual funds have emerged as a very important and popular investment vehicle. Simply speaking, a mutual fund brings together a group of people and invests their money in bonds or stocks.
Mutual funds can be the most viable investment option for many people as they offer an opportunity to invest in different asset classes, and that too at a low cost. Fundamentally, there are two types of mutual funds.
- Equity funds
- Debt funds
Equity funds invest in the stock market and require a long-term investment horizon. Within equity funds, there are several categories such as large-cap funds, mid-cap funds, multi-cap funds, tax-saving funds, and index funds (which track a particular index) which have different risk-return payoffs. Debt funds invest in fixed-income instruments such as government bonds, corporate bonds, commercial papers, treasury bills and so on. Depending on the average tenure of the instruments a debt fund holds, there are different kinds of debt funds that suit different purposes. Liquid funds, for example, are useful alternatives for money idling away in a savings bank account. Ultra-short term funds are good parking grounds for money needed in a year’s time. Then there are short-term and long-term debt funds too.
Apart from this, there are also gold funds that seek to deliver returns in line with international gold prices. They do this by investing in gold ETFs.
2.Equities: When you buy a share in a company, you become a shareholder in that company. Shares are also known as equities .
They have the potential to increase in value over time. But this doesn’t mean that equities always guarantee high returns. High risk also means that investors stand to lose some, or all of their investments. Hence, before investing in equities, one should diligently study the equity markets and stocks.
3.Insurance: Most life insurance policies provide guaranteed income on maturity, and the coverage of the policy increases with time. Also, life insurance can provide a better life cover to you and your family.
4.Real Estate: Real estate is not only limited to buying a new home where you can live with your family. The definition of real estate has changed over the years.
In addition, the real estate market is booming, and this can help you make huge gains. But with better gains also come more complications.
Investing in real estate is not an easy task when compared to investing in stocks or bonds. With constant fluctuations in the real estate market, there is potential for gain but not for assured gain.
Now that you understand some basic finance terms, you are all set to explore the rewarding world of investing. Do reach out to a certified financial advisor in case you need any assistance with your investments.