Before investing, it's very important to know what are different modes of investment and how they differ. There are number of options available today for a person to invest as per his knowledge and his potential of taking risk. Let me write down some of them for your understanding.
- Stocks
Stocks or equity are shares that are issued by companies and are bought by the general public. This offers an avenue to companies to raise funds. Stocks entitle a customer ownership of a company. Shares, stocks and equity all imply the same thing. Returns offered by stocks is generally higher than any other financial instrument. However, the risk associated with these products is also quite high. It demands knowledge about many fundamentals to make a decent return.
- Bonds
Bonds are debt securities or long term debt instruments. This is done by issuer to raise funds. Issuer of bond promises the person who holds the bond to pay interest periodically and to return the principal (face value) after a fixed period (at the time of maturity of the bond). Interest is paid at a predetermined rate and for a specific period of time. Bonds fall under the category of fixed income securities since the interest on these can be exactly calculated for the time for which the bond is held. Low risk attribute of bonds makes it a low return instrument as well.
- Mutual Funds (MF)
Instead of investing directly in stocks and bonds, investors buy Mutual Funds from MF houses which are professionally managed. MF house invests money on the behalf of investor. MFs are are very good for those who don't have time to understand stock market. Risk associated is much less than stocks and returns are decent over long term. You can start investing with as low as Rs 500. You can choose from variety of short term and long term MF. They can be classified as Equity MF, Debt MF, Hybrid MF and Sector MF.
- Insurance Policies
It offers to insure to your life, assets and money besides providing some amount on maturity. Some policies guarantee minimum returns on maturity. Some of popular insurance policies are Unit Linked Policy(ULIP), Endowment policy, Moneyback Policy, Life insurance policy. It's not a good option to get inflation beating returns as insurance component is there.
I personally don't prefer them. As an advice, please don't mix insurance with investment
- Fixed Deposits (FD) / Recurring Deposits (RD)
This is the oldest and safest financial instrument. Money is kept aside for a particular period of time and at a fixed rate of interest. There is no risk associated with it. Interest earned is taxable as per tax slab, which is major disadvantage of this instrument. This can be used to have emergency funds as it provides very high liquidity.
- Public Provident Fund (PPF)
PPF is a debt instrument and is supported by government. Rate of interest is decided every quarter by govt. Term of PPF is 15 years and can be extended in multiple of 5 years. Partial withdrawals are allowed only after completion of 6 years. It's a very good financial instrument to save tax under section 80C of IT act, interest earned is also tax free. Everyone should have PPF account.
- National Saving Certificate (NSC)
Like PPF, it is also a debt instrument and is supported by government. Rate of interest and tenure is pre-decided, which makes it risk free. The sum invested in the NSC is eligible for tax deduction under Section 80C, including the accrued interest on the existing certificates. Since the interest earned on the NSC is automatically reinvested, it can be claimed as a deduction under Section 80C. But if the accrued interest is not added to the deduction under Section 80C, then the entire income is taxable on maturity. Interest earned in the last year is always taxable as it is never reinvested.
- National Pension Scheme (NPS)
It offers regular pension to the investor working in private or public sector. Amount invested in NPS is eligible for an additional tax benefit of Rs 50,000 under Section 80CCD. On maturity 40% of the corpus is tax free, while 60% of the corpus is taxable. Of the 60% taxable corpus, 40% is tax-exempt as it has to be compulsorily used to purchase an annuity.The annuity income will be taxed, though.
- Derivatives
A derivative is a contract between two or more parties which derives its value from an underlying asset. The most common types of derivatives are futures, options, forwards and swaps. For example, when a farmer agrees to sell his corn to a broker at a certain price in future, he signs a derivative with him. If corn price goes up, farmer misses out on profits. If corn price goes down, he is protected from losses. Price of derivative varies according to the price of corn (underlying asset) in this example, derivative as such doesn't have any direct price.
- Private Equity
This Instrument allows companies to raise capital without going public. Private equity is trading in shares of an operating company that is not publicly listed and whose shares are not available on the stock market. It offers diversification of financial portfolio by allowing investment in avenues that are not tightly coupled to normal investments.
- Real State
It's one of the traditional methods of investing. Increasing property rates makes real state a very good investment. Buying, selling and leasing of property offers decent returns especially in urban cities. It may take some time to sell property, therefore it has less liquidity, which defines available of cash when needed.
- Precious Metals
Precious Metals includes Silver, Gold etc. It is a traditional way of investment and considered safe. You own the metal you are buying and can be traded when in need of money. Unlike before where you have to buy gold physically, you can invest in Gold Exchange Traded Funds (ETFs) which provides the flexibility of stock investment and the simplicity of gold investments. ETFs trade on the cash market of the National Stock Exchange, like any other company stock, and can be bought and sold continuously at market prices.
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