Specific investment plans could help investors in multiplying their investments but locating those investment items can be challenging. Furthermore, they may take longer than people believe to achieve the desired returns. To effectively manage money, individuals have to align the available investment strategies with their investment horizon and risk-taking capability.
Read along to find out more about the types of investment options and different risk appetites to create the best investment plan.
Types of Investment Options Based on Risk-appetite
Typically, investors can be divided into three categories based on their risk-taking capabilities:
- Low-risk investors
- Mid risk investors
- High-risk investors
Based on one’s needs and requirements, investors with varying risk levels can add suitable investment options into their portfolios to come up with the best investment plan.
1. Low-Risk Investment Options
A Low-Risk investor possesses a low risk-taking capacity. They do not want to expose their investment portfolio to market risks. Usually, retirees and those with considerable financial responsibility come under this category and are most comfortable with investing in low-risk investment instruments. This is because returns on most low-risk investment options are guaranteed and fixed.
Here are a few popular low-risk investment options:
Fixed Deposit Scheme
Fixed deposits are considered to be among the safest investment options. The savings scheme also allows individuals to accumulate substantial returns on their deposited amount. Since fixed deposits are not linked to the market, they are free from fluctuations and adept at generating secured returns. This also ensures that the investor’s capital remains intact and doesn’t depreciate due to market forces.
Public Provident Fund (PPF)
A PPF is a government-backed investment instrument in India that ensures returns. The scheme is known for providing investors with risk-free returns. Notably, the interest accrued on the PPF amount is revised and paid out by the government quarterly.
Money Market Funds
These are essentially short-term debt funds and they park money into multiple money market instruments. These funds are known to offer high returns in a year, which is its average maturity period, and are highly liquid.
Treasury Bills
The Government of India uses these bills to raise funds for a period of 365 days. Besides being backed by the government, treasury bills are also known for offering the best returns. However, such returns may not be more than those received from other money market tools.
Municipal Bonds
This debt instrument is issued by municipal corporations or associated bodies. Such government bodies use the bonds as a tool to raise funds for socio-economic projects.
Certificate of Deposit
Essentially a term deposit that is offered by scheduled commercial banks. Notably, the certificate of deposit does not come with the option to redeem prematurely.
2. Medium-Risk Investment Options
Individuals who can stomach moderate risks and are willing to generate slightly better returns than those offered by low-risk investment options are those with mid-risk-taking investors. Hence, those who can withstand exposing their investment portfolio to a certain level of risk park their money in mid-risk investment options to make the most of the best investment plans.
Some of the most popular investment plans with medium risk include:
Dividend-Paying Stocks
These are great ways to invest in the stock market as they offer investors a means to generate steady income. However, these stocks are not as popularly sought after as the high-yield bonds. Balanced Mutual Fund
These popular mutual fund options are subjected to certain levels of market risk. However, they are known to offer better returns to grow invested capital significantly.
Corporate Bond Funds
This is a mutual fund that puts more than 80% of the money in corporate bonds. Business organizations tend to sell them to account for their short-term expenses, such as working capital requirements, advertising charges, insurance premium payments, etc. When compared to bank loans, the cost of raising finances via Corporate bond funds is relatively less, making it a popular funding option for entrepreneurs.
Debt Funds
These mutual funds put money into fixed-income securities like treasury bills and bonds. Essentially monthly income plans, the debt funds assure locked-in money and do not lead to a total loss, during a downturn. This is why they are considered to have a low-risk ratio when compared to high-risk investment options. Investors can use an investment calculator to determine the returns on these instruments and plan their finances as per requirements.
Exchange-Traded Funds (ETFs)
Exchange-Traded Funds are similar to stock and can be described as a basket of securities that are traded on the stock market. ETFs pool resources of multiple investors and use the money to buy tradable monetary assets like shares and debt securities. Notably, most exchange-traded funds are registered with the SEBI, making it an appealing option for many beginners and investors with little expertise.
3. High-Risk Investment Options
Individuals who wish to generate high returns in their investments and can stomach high risks mostly park their money in high-risk investment options. Usually, individuals who often don’t have major financial responsibilities are keen on taking big risks with their investments and these investment options offer them the perfect avenue to do so. Besides them, seasoned investors possessing an in-depth knowledge of the market instruments and other Influential external forces are comfortable with these options as they tend to generate higher returns.
Here are a few high-risk investment options
Direct Equities
These are counted among the best investment options for long-term financial goals. These are essentially equity shares of a firm bound by lt
the legal terms related to firm ownership. When an individual invests in equity shares of a company, they own a percentage of the company equivalent to their shareholding. However, direct equity comes with a high-risk and reward aspect as the performance is dependent entirely on the performance of the company.
Equity Mutual Funds
These funds tend to primarily put money into stocks. Individuals can decide to invest their money in these kinds of stocks via the Systematic Investment Plan route. Investors can either choose to invest a small amount at frequent intervals or park a big lump sum amount in the fund. While the profit margin is significant in this investment instrument, the risk involved is also quite high. This is why only seasoned investors with thorough market knowledge are comfortable with these options.
Hedge Funds
Hedge Funds, including the fund of funds, are described as unregistered private investment pools, partnerships, or funds, that may trade in different markets, instruments, and even strategies, and are not necessarily subject to the same regulations framed for mutual funds. These funds are added to the investment portfolio for diversification. However, they come with a significantly high-risk level.
FOREX Trading or Foreign Exchange
Foreign Exchange or FOREX is simply described as a network of investors, i.e., buyers and sellers who exchange foreign currencies at a pre-fixed price. Foreign currency trading is a procedure through which entities like businesses and the central bank exchange currencies.
Individuals can invest in any of the best investment plans from the three different categories to achieve their financial goals. However, accounting for their risk-taking capability will equip them to face unforeseen market turns and spread out the impact of risk better.