1. TYPES OF INVESTMENT
BY
T.Gowri Shankar,
Assistant Professor,
Department of B.Com (BPS)
2. Meaning of Investment
Investment is the activity of investing money.An
investment is an asset or item that is purchased with the
hope that it will generate income or will appreciate in the
future.
In an economic sense, an investment is the purchase of
goods that are not consumed today but are used in the
future to create wealth.
In finance, an investment is a monetary asset purchased
with the idea that the asset will provide income in the
future or will be sold at a higher price for a profit.
4. I .Traditional Investment
Investing in well-known financial products falls into
the category of traditional investments. These include
bonds, shares, real estate etc. These are categories which
are quite popular among investors as active investment
strategies to make your money grow. Following are the
investment products that fall under the category of
traditional investment.
5. Bonds
A bond is a fixed income investment in which
an investor loans money to an entity (typically
corporate or governmental) which borrows the
funds for a defined period of time at a variable or
fixed interest rate. Bonds are used by companies,
municipalities, states and sovereign governments
to raise money and finance a variety of projects
and activities. Owners of bonds are debt holders,
or creditors, of the issuer.
6. 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. Shares are
one of the most popular investment avenues in the world.
This is because the returns offered by stocks is generally higher
than any other financial instrument. However, to balance out the
high return associated with stocks, the risk associated with these
products is also quite high.
Any business may issues different types of shares based on the
financial urgency and need. In exchange for the money,
shareholders are issued Stock certificates.
Stocks are mostly divided into two basic types, common stocks
and preferred stocks.
7. Small saving schemes
Small savings is another popular savings tool in the Indian financial
market.
The name itself suggests that these tools are meant for saving money
in small amounts.
The idea behind this financial tool is to enable the habit of saving in
people from almost all economic sections.
Some of the most common small savings tools are
Sukanya Samriddhi Scheme, EPF (Employees Provident Fund), NPS
(National Pension Scheme, Kisan Vikas Patra, Personal Provident
Fund (PPF) etc.
Almost all small savings schemes are initiated and facilitated by the
government so as to enhance the spread and penetration of savings
schemes in the country. Let us look into some of the most prominent
schemes out of these.
8. Mutual Funds
Mutual Funds are financial instruments that are professionally
managed and that invest money on behalf of any investor, in
different securities.
These mutual funds are classified into various types based on
the type of securities that they invest in.
Some of the most popular mutual fund types are balanced
funds, stock funds, open-ended funds etc.
These funds are classified based on their percentage allocation
in different securities.
So, an equity fund invests purely is equity and is a high risk
high return product while a debt fund invests purely in debt and
money market instruments and is hence a low risk low return
financial product.
9. Fixed Deposits
As the name itself indicates, fixed deposits are financial
instruments that are one of the oldest and safest ways to
save money.
These are not necessarily active investment tools, but are
rather a passive way to save and earn returns.
A fixed amount of money is kept aside with a financial
institution for a fixed number of days or months or years.
In turn, interest is earned on this money. The rate of
interest differs with the deposit tenure and also with the
banking entity
10. Real Estate
Property rates are soaring with every passing day which
has made real estate a hot investment avenue for investors.
Buying, selling and leasing of property offers substantial
returns to investors.
Appreciation of property makes real estate a good
investment tool.
This has made these places hot hubs for real estate
investors.
Most investors take loans from banks to purchase real
estate and then lease out or sell the same property to enjoy
returns offered due to appreciation in price of the property.
11. II. Alternative Investments
Alternative Investments are those that are not regular
investments like stocks, bonds etc.
These are investments made in order to acquire jewelry, precious
metals etc. which are expected to yield returns in future.
Hedge funds, some real estate types, venture capital and
derivatives also form a part of alternative investment.
Alternative investments are so called due to their non-traditional
as well as complex nature. Also, another distinguishing feature of
alternative investments is relatively low liquidity and well as very
high minimum investment limits.
While a common investor may not access alternative investments
like hedge funds or derivatives due to their complex nature,
others like gold and real estate are available to even the common
man.
12. Hedge Funds
These can be understood as a professionally managed private
investment company or partnership structure.
Techniques to manage the fund can be those that are not
commonly allowed for SEC regulated companies.
Hedge funds invest in both financial derivatives and/or publicly
traded securities.
These are popular as an alternative investment tool owing to
their high leverage and high returns.
However, they are characterized by high fees as well as low
liquidity. It is seen that managers of hedge funds generally have
a personal stake in the fund
13. Private Equity
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.
Institutional investors employ various strategies to indulge
in private equity trading.
Private equity is popular since it offers diversification of
financial portfolio by allowing investment in avenues that
are not tightly coupled to normal investments.
14. Venture Capital
Venture Capital is one of the most popular investment
strategies currently being deployed by investors in the
Indian start-up scene.
The idea behind this investment strategy is to invest
substantial capital in a budding company in return for
stocks of the same.
This is done with companies who are either in their
initiation phase or in their growth phase.
Venture capitalism is generally based on ideas that find
substance with the investors or any new technology that
the investors feel might take the market by storm in future.
15. Structured Products
Structured products are alternative investment tools that
generally combine two or more financial instruments to
make a packaged investment strategy in a single product.
Most often, derivatives are combined with securities or
with other derivatives.
Structured products have a fixed maturity date like bonds.
These offer a convenient strategy to implement a complex
investment strategy across various financial products.
16. Collectible items
Collecting items that have substantial value and those that have
historical and artistic significance is one of the most difficult types of
alternative investments.
This requires knowledge of the article that you are purchasing.
Mostly, collectibles like stamps, jewelry, boats, planes, art works
etc. tend to appreciate in value and are considered good and
profitable assets to own. The value of artifacts is generally expected
to appreciate and keep pace with inflation and hence collectibles
make a good form of alternative investment.
There are a few more alternative investment instruments available in
the financial world. However, their use is limited since these are
more complex products and are hence not considered by the common
investor.
Seasoned investors and professional investors tend to consider these
alternative investment strategies to increase wealth.