Investment is something that is purchased with money which is expected to produce income or profit. There are mainly three broad types of Investments: Ownership Investments, Lending Investments and Cash Equivalents.
1. Ownership Investments
These are the most volatile and also the most profitable of investments. Stocks, Businesses, Real Estate and precious objects are the various types of ownership investments.
These are certificates that state that a person owns a portion of the company in question handing out the stocks. The value of the said stocks depends on market situation. Post purchase, if the company X makes a record profit, then the value of the stock will go up and it is advisable to sell at this stage. If the company has posted losses, the value of the company stock will go down.
Money can be channelled into a business which is aimed at creating a product or service. This involves high investment and risk not just in terms of money but also in time and human resource or man-hours. If the Business turns out a sizeable profit however, then the rewards will also be great.
c. Real Estate
Houses or apartments you buy to rent out or remodel and resell are considered investments. Primary residence isn’t considered as an investment. This is usually a safe way to invest with minimal risk if the property or land is selected wisely.
d. Precious Objects
Precious metals such as Gold and Silver, valuable art pieces whose value appreciate with time etc. come under this category.
e. Mutual funds
A mutual fund is a agglomeration of bonds and stocks. When you purchase a mutual fund, you are merging your money with a number of other different investors, which in turn enables you (as part of a group) to pay a professional money manager to select specific securities for you.
The main advantage of a mutual fund is that you can invest your money while saving the time and the experience in choosing investments.
Public Provident Fund (PPF) is an investor and tax-saver’s favorite long-term debt scheme which is under the backing of the government. Anywhere from a minimum of Rs.500 to a upper limit of Rs 1.50 lakh can be deposited in PPF accounts in a single financial year. The deposit amount is deductible from an individual’s taxable income under section 80C of the Income Tax Act in India. As PPF is an EEE scheme, the contribution, interest and maturity amount, all three are tax free.
g. Life Insurance (Life Insurance Corporation)
Life Insurance investments require that the premium be paid at regular intervals to avail the protection or risk cover. The amount of risk cover provided by a policy is known as the sum assured under the policy. This sum assured is paid on the event of death or maturity depending on the type of life insurance purchased i.e. whether it is a plain term plan or a term plus savings plan. Premium paid for a life insurance policy also makes an individual eligible for tax benefits under section 80C. Also it is an EEE scheme subject to specific conditions as required.
2. Lending Investments
Lending investments are the ones that allow you to be the bank. They are of lower risk than ownership investments and return less as a result.
Bond is an umbrella term for a wide variety of investments from Treasuries and CDs to international debt issues and corporate junk bonds. The risks and returns vary widely between the different types of bonds, but overall, lending investments pose lower risks and provide lower returns compared to ownership investments.
A bond given out by a company will pay a fixed amount over a certain period, In comparison over the same time period, the stock of a company can increase as much as 200 or 300%, paying much more than a bond – or it can lose heavily and go bankrupt, and in this case the bond holders usually still get their money and the stockholder often gets nothing.
b. Savings Account
Once you open a Savings account in a bank to handle your money, you automatically become an investor since the bank hands out a small interest rate for holding your money. The returns are small here, along with the proportional risk which is almost nil.
3. Cash Equivalents
These include investments which are easy to convert back into cash compared to the first two types of investments. For example: Money market funds are investments where the return is very small- around -1 to 2%, but the risk is also tiny.
|Stocks||Business||Real Estate||Precious Objects||Mutual Funds||PPF||LIC||Money Market Accounts||Savings Accounts|
|Return on Investment||High||High||Medium to High||Medium to High||High||Low to Medium||Medium||Low||Low|
|Taxes Levied and Tax Benefit||Little to none tax levied||Complicated tax structure along with considerable levy of tax||Considerable tax levied on property||Considerable levy of tax on buying and selling||Capital gains tax||Mostly exempt from tax||Completely Exempt from tax||Minimal tax levied||Minimal tax levied|