TYPES OF INVESTMENT OPTIONS

Various investment options are available in the market on basis of investment goals of an individual:

• Investing for safety (high liquidity) – like bank deposits, money market mutual funds etc
• Investing for income – Companies deposits, G-sec and T-bills, preferred stocks etc
• Investing for growth – Domestic and overseas stocks & equity mutual funds
• Investing to fight inflation – gold, residential real estate, bonds etc.

Here we will discuss briefly various investment options with slight elaboration:

Knowledgeable and well informed investors excels in between the group of average and mediocre investors simple because he is aware of the various investments options available at their disposal. Investors can pick their options depending upon their investment goal with respect to time and their risk taking capability. Investment options that offer low risk produces lower returns; and options which can give high returns carries high risk. Different investment options offer various levels of risk. Investors can choose the investment options of their choice depending on the level of risks they can take. Investment market of today provides many investment products like stocks, bonds, fixed deposits, debentures, gold/silver, real estate etc.

SHORT TERM INVESTMENT OPTIONS

• Savings bank account

This investment option is used only for short-term (less than 30 days) surpluses. This investment option is often the first option people use for investment. , savings accounts offer low interest (3.5%-4% p.a.), making them only marginally better than safe deposit lockers.

• Money market funds

This investment option offer better returns than savings account without compromising liquidity. Money market funds are a specialized form of mutual funds that invest in extremely short-term fixed income instruments. Unlike most mutual funds, money market funds are primarily oriented towards protecting your capital and then, aim to maximize returns. Money market funds usually yield better returns than savings accounts, but lower than bank fixed deposits. With the flexibility to issue cheques from a money market fund account now available, explore this investment option before putting your money in a savings account.

• Bank fixed deposits

This investment option is for investors with low risk appetite, best for 6-12 months investment period. Also referred to as term deposits, this product would be offered by all banks. Minimum investment period for bank FDs is 30 days. This investment options shall be ideally used to the period of 6 to 12 months. Normally interest on bank less than 6 months bank FDs is likely to be lower than money market fund returns. It is important to plan your investment time frame while investing in this instrument because early withdrawals typically carry a penalty

LONG TERM INVESTMENT OPTIONS

• Post Office savings

This investment option carries low risk and no TDS. POSS are popular because they typically yield a higher return than bank FDs. The monthly income plan could suit you if you are a retired individual or have regular income needs. Besides the low (Government) risk, the fact that there is no tax deducted at source (TDS) in a POSS is amongst the key attractive features. This investment option (POSS) offers various schemes that include National Savings Certificates (NSC), National Savings Scheme(NSS), Kisan Vikas Patra, Monthly Income Scheme and Recurring Deposit Scheme.

• Public Provident Fund

This investment option is the best fixed-income investment for high tax payers. PPF is a very attractive fixed income investment option for small investors primarily because of -

• An 11% post-tax return – effective pre-tax rate of 15.7% assuming a 30% tax rate
• A tax-rebate – deduction of 20% of the amount invested from your tax liability for the year, subject to a maximum Rs60,000 for a tax rebate
• Low risk – risk attached is Government risk

So, what’s the catch? Lack of liquidity is a big negative of this investment option. You can withdraw your investment made in Year 1 only in Year 7 (although there are some loan options that begin earlier). If you are willing to live with poor liquidity, you should invest as much as you can in this scheme before looking for other fixed income investment options.

• Company fixed deposits

This investment option shall be considered to maximize returns within a fixed-income portfolio. FDs are investment options used by companies to borrow money from small investors. This investment option shall be considerd only if you have surplus funds for more than 12 months. Select your investment period carefully as most FDs are not encashable before maturity. Just as in any other instrument, risk is an embedded feature of FDs. Investors should consciously select the companies they invest in.

• Bonds and debentures

This investment option shall be considered for large investments or to avail of some capital gains tax rebates. Besides company FDs, bonds and debentures are the other fixed-income instruments issued by companies.

• Mutual Funds

Unless you have good knowledge of the market it is always advisable to start investing in equity through this investment option. Use mutual funds as a vehicle to invest in equity. Have you ever made an investment in partnership with someone else? Well, mutual funds work on more or less the same principles. Investors pool together their money to buy stocks, bonds, or any other investments. This investment option allows an investor to (1) Avail the services of a professional money manager AND (2) Access a diversified portfolio despite making a limited investment

• Life Insurance Policies

Don’t buy life insurance solely as an investment option. Life insurance premiums, depending upon the policy selected, include the costs of – death-benefit coverage, built-in investment returns (average 8.0% to 9.5% post-tax) and significant overheads, including commissions. This implies that if you buy insurance solely as an investment, you are incurring costs that you would not incur in alternate investment options. It is, however, important to insure your life if your financial needs and profile so require.

• Equity / shares This investment option gives maximum returns over the long-term. You can invest your money in this investment option if you do not need it for at least five years. There are two ways in which you can invest in equities-

• through the secondary market (by buying shares that are listed on the stock exchanges)
• through the primary market (by applying for shares that are offered to the public)

Over the long term, equity shares have offered the maximum return to investors. As an investment option, investing in equity shares is also perceived to carry a high level of risk.

INVESTMENT OPTIONS FOR SENIOR CITIZENS

Unlike young investors who generally would like to invest only for growth, senior citizens would like to invest with the following three investment objective:

• Protection of capital
• Regular income form capital
• Growth of capital

For people who have just retired i.e near age group of 60 These people have some surplus in the form of pension funds, provident fund, other old investment etc. But very often it has been observed that this money gets spent on not very important things of life. In this age people should think only about generating an alternative source of monthly income and this can be done by investing wisely. Actually it is best to lock your money (invest it) before one actually retires. Retirement date is always planned, take necessary action almost one/two years before and start channeling your savings towards regular income schemes of mutual funds, post office, LIC etc. If one does not do this, then at the time of retirement there is too much to be done and lots of cash left hanging in hand. This triggers wrong and illogical spending. Remember, at this time of life nothing is more important than planning your savings and generation of regular income. All the life till retirement people live a life of financially independent but after retirement wrong decisions (about money) makes the same person dependent of their siblings.  Lets see what best one can do to affect a perfect retired life

• Monthly income plan (MIP) of post office (min 35% of total capital for next 5/7 years)
• Monthly income plans of mutual funds (min 25% of total capital for at least 3-5 years)

The above two funds be so allocated that the interest generated shall be just sufficient to manage the basic necessities of like food, monthly bills etc and other expenditures required to maintain a minimum standard of living. Surplus money can then be invested in a slightly risky schemes for growth of capital and value protection

• Fixed Deposit of banks (10% of total capital fixed for at least next 5 years)
• Large cap linked mutual funds (10% of total capital for at least 5 years)
• Government Bonds (20% of total capital for next 5 years)

NEED BASED INVESTMENT OPTIONS

Liquidity needs (< 1 month)

Short term investment needs (1 month to 5 years)

Medium term investment needs (5 years to 10 years)

Long term investment needs (>/=10 years )

Medical and insurance needs

Regular income needs

If

WHERE SHOULD I INVEST MY MONEY?

If you too are puzzled with this investment decision of where to invest $1000 (say) being a beginner. No matter what big boasting articles may say but any investment decision will be driven by the investors risk taking capability. Try to answer yourself a simple question that if I loose this $1000 will it make lot of effect on your life or psyche? if your answer is no then try the next higher value like $5000. As your self the same question; if I loose this $5000 will it make lot of effect on your life or psyche? If your answer if yes it means your risk taking capability is between $1000 & $5000. You can invest such amount in equity linked mutual funds, or stocks. But any amounts above $5000 must be invested in less risky investment options like bank deposits, debt linked mutual funds, companies deposits, government bonds etc. You can read more here

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