With rising inflation and our ever-changing financial needs, saving money alone just doesn’t cut it. To realize our financial dreams and secure our future, we need to make our money work for us by investing it in suitable vehicles. But with so many options available, beginners can find it hard to figure out where to start. Worry not! Here we’ll break down some of the most common types of investments in India and how they work.
List of Types of Investment Plans in India
While there are many different types of investments in India which are available, we’ll take a look at 7 popular options:
1. Stocks
A stock represents ownership. When you invest in a company’s stocks, you are basically buying a part of the company, which is why they are also known as shares. This ownership gives you a claim on the company’s profits. If the company does well and its stock’s value goes up, you benefit from capital appreciation.
This profit, called capital gain, can be realised by selling your holdings on the stock exchange. At the same time, a company may also distribute a portion of its profits to shareholders in the form of regular income called dividends.
a. Risks
While investing in stocks directly can yield high returns, note that a stock’s price is influenced by a range of factors, like the company’s performance, market conditions, economic trends, and investor sentiment. That’s why investing in stocks carries higher risk compared to other asset classes, making them better suited for investors with a long-term horizon and a higher risk tolerance.
This investment demands rigorous research, monitoring, and emotional discipline. You need to stay updated with company news, industry changes, and any sort of micro or macroeconomic indicators that may have an impact on them.
If you choose this option, make sure you are willing to put in the effort and create a diversified portfolio to reduce risk. Guidance from a seasoned investment advisor can help you immensely in understanding how the stock market works. A professional can help you identify good companies that score well on qualitative and quantitative factors, time your entry and exit points more effectively, and ensure your portfolio aligns with your financial goals and risk profile.
2. Mutual Funds
Mutual funds are a type of pooled investment, meaning fund houses (called AMCs) pool money from multiple investors and invest it in a diversified portfolio of assets such as stocks, bonds, or other securities. This portfolio is managed by an experienced fund manager who makes all the decisions related to the fund, like selecting the assets to invest in, timing the purchases and sales, and adjusting the allocation based on market conditions.
What’s the benefit of pooling money? Well, it allows you to access a much wider range of securities. For example, if you have Rs. 1 lakh to invest in the stock market, you might be able to buy shares in only a handful of companies. However, with mutual funds that same amount can be spread across many stocks and you can diversify your investment instantly.
a. Lump Sum and SIPs
There are two ways to invest in a mutual fund – You can either invest a lump sum amount or make fixed contributions through Systematic Investment Plans. SIPs are growing more and more popular by the day as they offer many benefits. Here’s how a simple SIP works: You select the contribution amount and frequency of contribution (like monthly, weekly, quarterly, etc.) which then the AMC automatically deducts from your linked bank account on predetermined dates. The amount is then invested in the mutual fund of your choice. Flexible SIPs even allow you to alter the amount and frequency of investment, with most also allowing you to temporarily pause contributions. Each SIP counts as its own investment, which is important to note for taxation purposes.
b. NAV
In both lump-sum and SIP methods, you buy mutual fund units at the prevailing NAV (Net Asset Value), which is like a stock’s price and reflects the per-unit value of the fund at the end of each trading day. In lump-sum investments, units are purchased based on the NAV on the investment date. With SIPs, since the NAV changes daily, the number of units bought varies with each contribution. For instance, a ₹10,000 SIP in a fund with an NAV of ₹100 will buy 100 units. If the NAV rises to ₹105 the next month, the same amount will fetch about 95.2 units. The NAV fluctuates based on the performance of the underlying assets in the fund’s portfolio—if asset values rise, the NAV increases, and if they fall, the NAV drops. A rising NAV results in higher investment value and better returns for investors over time
c. Risks
Risk depends on the fund’s category. For example, an equity-oriented fund like ELSS is very risky in the short term as it primarily invests in stocks. On the other hand, a debt-focused fund like a gilt fund is relatively safe as the underlying assets here are government securities.
3. Fixed Deposits
FDs have been a very popular investment option among conservative investors for a long time due to their safety. Offered by banks and NBFCs, these investment vehicles provide a fixed interest rate for a predetermined tenor. During this time, you can typically not withdraw your funds without incurring a penalty.
The interest rate is fixed at the time of investment, so you know exactly how much you will earn over the period you select. Conservative investors choose FDs because they offer guaranteed returns and are not subject to market fluctuations like stocks and mutual funds. The interest is paid regularly and the principal is returned to you at the end of the term.
4. Public Provident Fund
The PPF is a government-backed scheme open to all Indian citizens. It is designed to encourage long-term savings which is why it comes with a lock-in period of 15 years. Like FDs, it also offers a fixed interest rate that is revised regularly by the government, also making it one of the safest investments available.
A tax planner would likely recommend investing in the PPF due to its numerous benefits. Not only is the interest earned completely tax-free but the amount you invest (up to Rs. 1.5 lakh per financial year) is also eligible for deduction under Section 80C of the Income Tax Act. Also, the maturity amount you receive at the end of the term is exempt from tax, giving PPF an Exempt Exempt Exempt (EEE) status, and making it one of the most tax-efficient options in the country.
5. National Pension System
Yet another government-backed option, the NPS aims to encourage long-term retirement planning. Earlier, this scheme was available only to government employees but is now open to working Indian citizens above 18. Unlike the PPF, the NPS offers market-linked returns.
From the four available asset classes: Equity (E), Corporate Bonds (C), Government Securities (G), and Alternative Investment Funds (A), you can choose your allocation based on your risk appetite.
If unsure, you can simply go for the auto choice option, where the asset allocation adjusts automatically based on your age. As you get older, your funds will shift from riskier equity investments to safer debt instruments.
NPS is also a tax-efficient investment vehicle. In addition to contributions qualifying for deductions under Section 80C, an additional Rs. 50,000 deduction under Section 80CCD(1B) can be claimed, taking the total deduction up to Rs. 2 lakh.
However, your funds are locked in till you reach retirement age. After you retire, you can withdraw 60% of the corpus tax-free and must use the remaining 40% to buy an annuity. The latter plan will provide you with a regular income.
6. Real Estate
While real estate requires a large initial investment, its value can significantly rise over the long term. Meanwhile, the purchased property can be used as a source of passive income through rent, making real estate another investment with capital appreciation plus regular cash flow. However, there are some limitations and risks associated with real estate investments.
The first and obvious limitation is the high cost of investment. You also need to pay property taxes and maintain the asset. It also carries liquidity risk, which is the possibility of you being unable to sell the property quickly without potential loss in value.
a. REITs
Real Estate Investment Trusts, or REITs, are a relatively newer way to invest in real estate. A REIT is a company that owns or operates income-generating real estate across commercial offices, malls, showrooms, retail spaces, apartment buildings, and more. REITs work a bit like mutual funds.
They pool money from investors to purchase and manage properties and they generate income through rent. Most of this income is then distributed to investors in the form of dividends.
As they allow you to invest in real estate without a large upfront cost or the hassle of managing a property physically, they can be a way to gain exposure to the real estate market in a more affordable, diversified, and liquid manner.
7. Gold
Investing in the precious yellow metal can be a great way to diversify your portfolio and hedge against inflation or economic uncertainty. In the old days, the only way to invest in gold was through purchasing it physically – coins, bars, and jewellery.
However, physical investment in gold comes with its own concerns like purity, safe storage, insurance, and making charges. If you want to take a more modern approach, you can look into other ways of investing in gold, like digital gold, gold funds, gold ETFs, and Sovereign Gold Bonds. Each of these options has its advantages.
How to Buy Different Types of Investments in India
Here’s a peek into how you can invest in the above 7 instruments:
- Stocks: You need to open a Demat account to trade stocks on the exchange. The process includes KYC, and submitting documents like identity proof, address proof, and a photograph. Once your account is opened, you can link it with your bank account and buy and sell stocks through a broker (online or otherwise).
- Mutual Funds: Mutual fund units can be bought through the AMC’s website or other online platforms. This process also requires you to complete KYC before you can begin investing.
- Fixed Deposits: FDs can be opened at any bank either online or physically at the branch.
- Public Provident Fund: Select banks like SBI and HDFC offer PPF. You can also open your account at a post office.
- NPS: Registration can be done through banks providing NPS services or online via the NPS portal.
- Real Estate: A property dealer or advisor is your best bet when it comes to investing in real estate as they can help you research options, navigate registration and transactions, and advise you on expected property appreciation and rental yields.
- Gold: Can be bought physically from jewellery stores or digitally through platforms like GPay.
The easiest and safest way to buy different types of investments is through certified financial consultants as they make sure your choices are legitimate and align with your financial goals, risk tolerance, and investment horizon. They provide personalized advice and can help you avoid common mistakes that inexperienced investors might make, such as falling for fraudsters, high-risk schemes, or not diversifying.
Recognize Suitable Types of Investments for Your Goals
Let’s have a look at some common financial goals and understand which of the 7 types of investments would be most suitable. Remember that this is a common guide, for more precise, personalised recommendations, it’s always best to consult with an advisor financial services who can tailor a strategy based on your unique situation.
1. Building a Retirement Corpus
Since retirement is a long-term goal, retirement plan services often recommend individuals focus on investments that prioritize long-term growth and offer tax benefits.
- Equity Mutual Funds: Schemes like large-cap, small-cap, mid-cap, and ELSS can help aggressive investors accumulate significant wealth by the time they retire.
- NPS: This scheme is specially designed to help individuals build a retirement fund and generate regular income through mandatory annuities.
- PPF: PPF is also a long-term scheme with a 15-year lock-in period. Its tax benefits and guaranteed returns make it a decent option for investors.
2. Creating an Emergency Fund
An emergency fund must be liquid and accessible.
- Debt Mutual Funds: These low-risk mutual funds are ideal for parking an amount only to be used during emergencies. A type of debt fund called a liquid fund can be particularly useful to store your emergency savings.
3. Generating Passive Income
If you are looking to generate a steady and regular income, you can consider the following options.
- Real Estate: Rental income from properties is a solid source of passive income. REITs can also be an option with their regular dividend payouts.
- Dividend-Paying Stocks: Some stocks pay out regular dividends but the risks associated with them are higher.
- Mutual Funds (IDCW option): Growth funds reinvest their profits and generate returns through capital appreciation. Income Distribution cum Capital Withdrawal funds distribute profits to investors as regular income.
- Fixed Deposits: They also require a large initial investment but interest generated can be beneficial for regular income seekers like retirees.
4. Saving Taxes
These investments are often a part of tax planning services:
- Equity-Linked Savings Scheme: ELSS funds, also known as tax-saver mutual funds, offer benefits under Section 80C and are a good option for higher returns over the long term.
- PPF: EEE investment offering tax-free interest and withdrawals. Contributions are also eligible for tax deductions under 80C.
- NPS: Contributions made to the NPS qualify for tax deductions under Sections 80CCD(1B) and 80C.
5. Building a Diversified Wealth Portfolio
If you’re looking to grow wealth over the long term, a healthy mix of high-growth and stable investments is important. Your portfolio can include stocks, mutual funds, and gold. Gold is a good diversifier because it can perform well during times of uncertainty and inflation.
6. Specific Purposes
These cover specific goals like saving for your kids’ higher education or wedding or buying a car or a home. With such goals, you have a specific target amount based on your preferences (like where your kid will study) and inflation. Thus your investment strategy should balance growth with liquidity based on your investment horizon. Some investments you can consider here are:
- Mutual Funds (hybrid or equity funds): Hybrid funds offer a mix of equity and debt and are suitable for investors with moderate risk appetite investing for the medium term. Equity funds can be considered if the investor has a higher risk tolerance and longer horizon.
- Stocks: If your goal is five or more years away, investing in stocks can provide high returns, at a higher level of risk taken.
Conclusion
There we go! Now that you are aware of the basic types of investments available to you, remember to always align your choices with your financial goals, risk tolerance, and investment horizon. Diversify your portfolio to reduce risk and conduct regular reviews to make sure your plan does not get sidetracked.
Understand the tax implications of each type of investment as they can impact your returns over time. If you’re ever uncertain, give our experts a call! We can guide you to ensure you’re on track for success.
FAQs on Types of Investment
1. What are the main types of investments in India?
There are many different types of investments available like stocks, mutual funds, bonds, G-secs, FDs, Public Provident Fund, National Pension System, real estate (and REITs), physical and digital gold, ULIPs, and government schemes like SCSS, SSY, and NSC.
2. Which investment is best for beginners?
We should ideally assess the best investment for an individual by their goals, risk tolerance, and investment horizon, and not necessarily which one would be easy for beginners. That said, mutual funds can be an excellent starting point for most because they are versatile.
You can find conservative, balanced, and aggressive funds to suit you and start investing with a fixed and regular amount via an SIP. Since they are managed by professionals and have built-in diversification, they reduce the burden of picking individual assets and help mitigate risk
3. Is SIP an investment type?
SIP is not exactly a separate type of investment, rather, it is a way to invest in mutual funds. With this mode, you won’t need to invest a large lump sum amount but can easily make fixed, regular contributions and build long-term wealth.
4. Can I invest in more than one type?
Of course! Not only can you choose more than one type, it is recommended that you do. A diversified portfolio is one of the most important ways to manage risk. Spreading investments across different asset classes like equities, fixed income, real estate, and gold helps you reduce the impact of poor performance in any single area.
5. Which is the safest investment in India?
The safest types of investments are generally the ones that offer fixed returns, which include government-backed schemes like the PPF, and investments offered by banks such as fixed deposits.
