Types of Investments and How They Work - Motilal Oswal

What are 4 Prominent Types of Investments

It has become fairly simple to invest in the stock market these days.Online trading as well as intraday trading can be easily done by opening up a demat account. 

However, there are many financial instruments that an investor can invest in these days. Let’s look at the 4 prominent types of investments and understand them better.

1. Equity Investments

Stock - Stocks are the most favourable and common type of investment.  When an investor purchases a stock, they are buying a small percentage of the company. The value of the stock appreciates or depreciates as per the performance of the company. Stocks are a lucrative investment for all types of investors. Stocks are volatile in nature, are high risk instruments and can also provide good returns to the investors. 

Mutual fund - Mutual funds are another very popular and favourable type of investment. Mutual funds are a collective investment. In a mutual fund, a large group of investors invest their money in a pool of securities. They get NAV (net asset value) which is a piece proportional to how much they put in.  Since mutual funds are managed by professional money managers, investors who do not have the time to study and understand the market can benefit from their expertise. The mutual fund managers determine how to distribute the fund’s capital. 

PMS & AIF - PMS (portfolio management services) and AIF (alternative investment funds) are high risk instruments which have a high minimum investment amount. 

PMS is a tailored investment portfolio in fixed income instruments, individual securities, equity, and structured products. PMS caters to high net worth individuals with a minimum ticket size of Rs. 50 lakhs.  

AIFs also cater to high net worth individuals with a minimum ticket size of Rs. 1 crore. They are  pooled investments for investing in hedge funds, venture capital, futures, and private equity. 

2. Debt 

Debt instruments are low risk fixed income assets that individuals, companies and governments use to generate investment income or to raise capital.

Bonds, Debentures, Certificate of Deposits and Fixed Deposits are some example of Debt instruments.

Bonds - Bonds are popular fixed income debt investment between an investor and a borrower. In a way, they  are a loan that an investor issues to some entity (corporate or government) with the promise of repayment by a fixed date. Bonds are also used as a means by companies and governments  to secure capital to finance projects.

Debentures - A debenture is very similar to a bond. It is a debt instrument and a type of bond that is unsecured by collateral. Since debentures have no collateral backing, they rely on the reputation and creditworthiness of the issuer for support. Both corporations and governments frequently issue debentures to raise capital or funds.

Fixed Deposit - A fixed deposit (FD) is a financial instrument offered by banks and NBFCs. FDs offer investors a higher rate of interest than a regular savings account, until the given maturity date.

3. Liquid  

Liquid funds are a class of liquid debt funds that invest in fixed-interest generating  short-term money market instruments. Treasury bills, commercial paper, and so on are some of the examples of the underlying securities in the portfolio of a liquid fund.

The main intention of liquid funds is to provide a high degree of liquidity and safety of the capital for investors. 

4. Others

Apart from the above mentioned investment instruments, two very famous and popular investment instruments are gold and real estate.

Gold - Gold is one of the most precious and valuable metals. It has always had a special value since centuries. Infact, gold was the only currency in ancient times. Even today, gold is used by many investors to hedge their position in the market. Gold’s value has only increased in the past few years and it continues to remain one of the safest and most reliable assets for investors. 

The only problem of gold as an investment instrument was the problem of storing it. However, nowadays there are several options available to purchase gold virtually just like stocks. 

One can purchase Sovereign gold bonds, virtual gold or invest in gold mutual funds.
Gold is highly liquid and is a stable investment. It is popular all across the world.

Real Estate - Like gold, even real estate is a traditional investment instrument that is still very popular. Since land on the earth is limited, the value of real estate continues to go up with time. Factors like weather, soil, opportunities, availability of water etc affect the price of a particular land. Real estate is a low risk, high return investment with a high ticket size. The only problem of real estate is the formalities and process that one has to undergo to buy it. However, in recent times, instruments like REIT (Real Estate Investment Trust) have enabled investors to purchase land virtually and even get rent on it. One can purchase a REIT by opening a demat amount.

Conclusion 

In 2022, there are a plethora of opportunities for someone to invest in a financial instrument. We just saw how many varieties of options are available. From high risk to low risk, from long term to short term, there are financial instruments available to suit the profile of all kind of investors. So what are you waiting for? Hop on to your investment journey.

Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account | 10 Points to Remember When Operating your Demat Account | Types Of Demat Account & Trading Account

 

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