Investment Basics and Investment Options

Last updated: December 11th, 2017

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What is an investment?

In financial terms, an investment is an asset that is expected to generate income or appreciate in value in the future. Simply put, an investment is a product that you put your money into expecting to make a profit.

For most of us who started working in the early 2000s or even earlier, probably our first investment would have been a bank fixed deposit or a LIC policy. While these traditional forms of investing still remain a favourite among many, there are other better investment alternatives which offer much superior returns; and many of us have moved on to such alternatives.

Let us have a look at the different types of investment options available to the average person.

Traditional investments

1. Bank Fixed Deposits and Recurring deposits

Probably the most common and easiest-to-understand form of investment available. All of us have held a FD or RD at some point of time. You put your money in the bank for a certain period of time and earn a certain amount of interest. You know exactly how much you will get back after the deposit matures. Your invested capital is safe and you earn a little bit more as interest. Nowadays, with almost every bank offering online facilities, it is easier than ever to open a FD or RD account.

Banks now also offer various flavours of deposits, like linked deposits, variable RDs, etc. I will discuss more on bank deposits in a later post.

2. Insurance cum Investment policies

These policies have also been a favourite among the traditional investment options and have been dominated by LIC policies. They are known as traditional insurance policies. You get a double benefit of a life cover (insurance) along with some returns on your capital (investment). You also get tax benefits under 80C for investing in these policies.

The returns, however, are quite low compared to other options and the life cover provided is not usually adequate. In future posts I will discuss about the pros and cons of such policies.

3. PPF

Once again a favourite among traditional investments. This is used as a long-term investment option due to the long lock in period of 15 years. Tax benefits are also available under 80C. The returns are in the range of 8% per annum (currently 7.9% for Q1 of FY2017-18) and are tax-free.

4. Various small saving schemes

Small savings schemes such as NSC, KVP, Sukanya Samridhhi, Post office savings schemes can be purchased through Post offices or certain banks and have specified lock in periods. The interest rate varies from scheme to scheme and is revised from time to time by the government. Most of the schemes offer returns in the range of 8% per annum. The tax treatment differs for different schemes.

5. Gold

Most financial pundits would say that gold is not an investment, but I have included it in my list because we Indians absolutely love gold and value it as a must have asset. I will discuss about investment in gold in future posts.

Most of the above investment options (with the exception of gold) are designed to safeguard the capital and offer moderate returns.

Now let us look at other investment options that offer superior returns but are more risky.

Beyond traditional investments

1. Mutual funds

Mutual fund investments have gained popularity since around the early 2000s and have become an attractive investment option. They are professionally managed and offer superior returns, although they come with inherent market risks. I will discuss extensively on mutual funds in later posts.

2. Listed Stocks / Equity shares

The stock market has long been a source of wealth for some while being the road to bankruptcy for others. In this age of the internet, as information is easily available and awareness spreads, more and more people are warming up to the idea of stock market investing. The returns can be amazing, but the risks are also great. The key is to do proper research. More on stock markets in later posts.

3. Real estate

Many of us consider our homes to be the biggest and most important investment. However, if we purchase a real estate for our own use, then it should not be considered as an investment. Investment real estate is that which puts money in your pocket. So a second home that is rented out, commercial property, plots that would appreciate in value would be considered as investments.

I have briefly touched upon the most common investment options out there. Throughout my blog, I will discuss more about various types of investments, income strategies, tax planning and much more, so stay tuned.

Meanwhile, I would love to hear from you. What are your favourite investments? Where do you park your surplus funds? How do you save tax? Do let me know in comments and through email.

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