Introduction
In recent times, There is a lot of buzzing around the concept of “Investment”. The idea of investment has evolved to a great extent and paved the way to access various investment opportunities at the fingertip. Over the time, People have moved their savings from investing in Fixed deposits to investing in new age financial products like stocks, forex and many more with the expectations of higher return. When we think about investing, we get a lot of questions in our mind like Where to invest? Why to invest ? When can I start investing? How much return can I expect? . Hence in this guide, we will understand the topic of investment in detail.
An investment is an activity where the investor is expecting the asset to appreciate in the future and gain returns and grow their wealth from it. This could be purchasing a house, buying bonds or investing in stocks.
1A.Different kinds of investments:
Stocks:
A stock is a security which entitles the stockholders to have ownership in the issuing company limited to the shares they own. The investor can buy shares of a company they envision growth in by carefully analyzing the fundamentals of the firm. Publicly listed stocks are generally bought & sold on the stock exchange which is regulated by a governing authority to protect investors' wealth from any fraudulent activities.
Mutual Funds:
A mutual fund is a professionally managed fund where the investments from several investors are pooled together and invested in stocks, bonds or other securities as decided by the fund manager. This helps to minimize the risk as the portfolio will be diversified among various assets. The Investors have their mutual fund investment in the form of units which represent the fraction of the fund.The performance of the mutual fund units are usually measured by calculating the Net Asset Value. Based upon the nature of the funds, Mutual funds can be of several types such as Equity fund , bond fund , balanced fund and so on.
ETFs:
ETF (Exchange Traded Funds) is a combination of stocks grouped together as a fund which is actively traded on an exchange. The key difference between a mutual fund and ETF is that ETFs can be bought and sold on the stock exchange as stocks. They are usually available at lesser prices and can be traded with minimum margin.
Bonds:
Bonds are fixed income securities issued by the borrower where the lender agrees to lend money at the benefit of receiving interest in the specified fixed intervals and principal at the maturity date. Bonds can be issued by the government, Municipality, Company. There are various types of bonds such as zero coupon bonds, corporate bonds, high yield and municipal bonds. There are some risks associated with bonds such as credit risk, liquidity risk or inflation risk. Due to this, bonds are rated by agencies on the basis of their safety.
In 1911, the US issued 50 year bonds to fund the construction of the Panama canal. 1B.Choosing the right investment:
The nature of the investor varies from person to person. For Instance- The young aged investors can have a higher risk appetite and have majority of the investment in Equity , Forex when compared with the senior investors who can have their major investments in Bonds, pensions funds.
The following characteristics of the investor are considered before deciding the investments
- Age
- Income
- Existing portfolio
- Financial goals
- Market knowledge
- Risk tolerance
1C.Diversification:
Diversification is a portfolio strategy to invest in various assets rather than one. This helps to protect the investor’s capital in situations of crisis. It is also a good method of limiting unsystematic risks, since it is only associated with a single sector or company. Diversification could be on the basis of various factors such as investing in various sectors, stocks of different market capitalization, different asset classes, based on risk profiles and time period. We should also understand over- diversification can also be the reason for the reduction in return in the well managed portfolio.
For instance, If an investor is invested in gold and equities, during a financial uncertainty, the profit in gold would possibly compensate for the losses faced in equities and vice versa.
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