Common Types of Investments in India 2024

In our previous chapter, we went through the lengths and breadths of risk-return relationships in investment. The next step is to understand the different investment types so that you can think about risk-return with respect to different types of investment. That is what this chapter is going to be all about.

We’ll walk you through some of the most common types of investments and detail their core features. By the end of this chapter, you’ll find yourself having more clarity in terms of the types of investments out there for you to pick from.

First, fixed-income instruments - what are they, and why might you consider them? Then there's equity. You've probably heard much about stocks, but what makes them tick? And real estate - is it all about location, location, and location?

We also have goods such as precious metals. Why is gold a safe investment haven? Have you ever asked yourself this question? Bonds, PPF, stocks… the list goes on. Sounds a lot, right? But don’t get nervous just yet. It will all become clear in a matter of time. We will unpack it together and break down different types of investment so you understand all of it better. Let's get started!

For those of you looking for a quick primer, here’s a summary of the different types of investment. We’ll discuss these different types in detail in the coming sections of the chapter.

Investment Type	Risk Level	Return Potential	Liquidity	Features
Fixed Income Instruments	Low	Low to Moderate	Varies	Regular income, lower risk
Equity	High	High	High	Ownership in companies, high growth potential
Real Estate	Moderate to High	High	Low	Tangible asset, the potential for appreciation
Commodities (Precious Metals)	Moderate	High	Moderate	Hedge against inflation, market fluctuations
Bonds	Low to Moderate	Low to Moderate	Moderate	Fixed income, safer than stocks
Public Provident Fund (PPF)	Low	Moderate	Low	Tax benefits, government-backed
Mutual Funds	Varies	Varies	Moderate	Professional management, diversified
Exchange-Traded Funds (ETFs)	Varies	Varies	High	Diversification, trades like stock
National Pension System (NPS)	Low to Moderate	Moderate	Low	Retirement savings, tax benefits

Fixed Income Instruments

Fixed income instruments are investments that can offer you a steady income. Think of them as loans where you're the lender. Like a government or corporation, the issuer promises to pay you back the principal amount plus interest over a specific period.

For instance, take in government bonds. Suppose you purchase a bond worth ₹10,000 to utilise its interest of 5%. You will earn ₹500 every year as interest. If the bond matures after, say, 10 years, then you get your initial investment back. 

These tools are usually viewed as having less risk than stocks because they tend to produce steady returns. However, don’t forget that the lower tail is associated with a decrease in prospects of making large returns. In addition to this, other effects like inflation may change their real value over time.

Fixed income instruments can be a good choice if you're looking for regular income or want to balance risk in your portfolio. They come in various forms, from government bonds to corporate debentures, each with different risk and return profiles.

How to Invest in SGBs with Angel One?

Investing in Sovereign Gold Bonds (SGBs) with Angel One involves a straightforward process. Here’s a quick, step-by-step guide tailored for ease and convenience:

1. Begin by opening a Demat and trading account with Angel One. If you already have one, proceed to the next step.
2. Access your account using the Angel One app or website, entering your credentials securely.
3. Look for the 'Bonds' section within the platform. Select ‘Sovereign Gold Bonds’ from the available options.
4. Browse through the available SGB issues and select the one you wish to invest in. Check the issue price, interest rate, and tenure.
5. Enter the amount or the number of units you want to purchase and confirm your transaction.

Equity

Investing in equity is like buying a stake in the company. When buying stocks, you are getting into the proportion of ownership in a company. The price of these common class shares may increase or decrease according to how well the company performs and what happens in its stock market.

For example, if you take ₹200 shares in a company and the company appears to be doing well, its value might rise up to ₹300, making for a profit when you sell. However, note that if the firm does not deliver as well as it is supposed to, then the value could fall below your purchase price.

Equity is a known source of high returns, but the risk levels involved are very critical. The market is volatile, and stock prices are unstable. It is concerned with the efficiency of attaining a risk/reward trade-off. Equity investments involve domestic research and assessments of the market situation. You can opt for it if you aim at growth and accept its ups and downs.

Real Estate

Real estate is an investment that involves buying property, such as land or buildings. Imagine you buy a house for ₹50 lakh. You could make money from this investment in two ways: First, property value appreciation. Over time, if the area develops, the value of your house might increase, say, to ₹70 lakh. Second, rental income. If you rent it out, you could earn a steady monthly income.

However, be noted that real estate is rather complicated. The market is vulnerable to swings, and not all properties are easy to sell quickly. Secondly, there are extra expenses, such as repair and maintenance costs and insurance coverage taxes, among others. Therefore, prior to taking the plunge, it's vital you do your due diligence on what is happening in the real estate market.

Commodities (Precious Metals)

Investing in precious metals like gold or silver is another option. These commodities have been valuable for centuries and are often seen as a safe haven during economic turmoil. For example, if you buy gold worth ₹1 lakh, and its value increases due to market demand, you could sell it for a profit.

However, investing in precious metals can be volatile. Global factors like economic stability, inflation, and currency values influence their prices. Unlike real estate or stocks, they don’t generate income like rent or dividends. But they can be a good way to diversify your portfolio and hedge against inflation or currency devaluation.

Bonds

Bonds are like a loan that you give to an issuer, typically a government or corporation. In return, the issuer promises to repay you the principal amount on a future date and makes periodic interest payments. For instance, if you buy a ₹10,000 corporate bond with a 7% annual interest rate maturing in 10 years, you'll receive ₹700 every year, and at the end of 10 years, you get your ₹10,000 back.

Bonds are considered a relatively safe investment but it does come without risks. Credit risk (risk of issuer default) and interest rate risk (bond prices fall as interest rates rise) are key concerns. Your investment strategy might include bonds if you're looking for a steady income with lower risk than stocks.

Public Provident Fund (PPF)

The Public Provident Fund (PPF) is a popular long-term investment option in India, backed by the government. It's known for its tax-saving benefits and compound interest earnings. For example, you decide to invest ₹1,00,000 in PPF annually. Given the current interest rate of around 7-8%, not only does your money grow each year due to compounding, but you also get tax deductions on your investment.

PPF is ideal if you're looking for a safe investment avenue with decent returns and tax benefits. However, it has a lock-in period of 15 years, making it less suitable if you need liquidity. PPF is a smart choice for long-term goals like retirement planning or children's education.

Mutual Funds

Think of mutual funds as a collection basket of various investments, like stocks, bonds, or both. It's managed by professionals who pool money from many investors and strategically invest it. For instance, a mutual fund might include shares from different sectors like IT, pharmaceuticals, and consumer goods.

The advantage? Diversification. By spreading your investment across various assets, you reduce the risk of putting all your eggs in one basket. Plus, mutual funds offer options for every risk appetite, from aggressive to conservative. However, they come with management fees and are subject to market risks. So, while mutual funds can be a great tool for building wealth, understanding their structure and costs is key.

Exchange-Traded Funds (ETFs) 

ETFs are like a collection of investments that present characteristics common to both stock exchange and mutual funds. Suppose that one wants to invest in the technology domain but yet fails to come up with a firm. A tech ETF allows you to invest in different companies involved with technology by giving your money just once. Just as stocks are traded on the stock markets, so can ETFs be bought and sold.

The attractiveness of ETFs is their multitude and adaptability. Almost any sector, commodity, or index has an ETF. They usually have lower charges than other mutual funds and are robust in disclosures regarding their holdings. Nevertheless, note that even though ETFs offer diversification, they also take the market risks of their underlying assets.

National Pension (NPS)

The National Pension System is a government-backed retirement savings plan in India. It's aimed at providing you with a stable income after retirement. When you invest in NPS, your money is put into different assets like stocks, bonds, and government securities, based on your choice.

NPS offers tax benefits and flexibility in terms of contribution amount and frequency. At retirement, you can withdraw a portion of the corpus as a lump sum and use the rest to purchase an annuity for a regular pension. It must be borne in mind that NPS is a ‘buy and hold’ strategy, where returns depend on how the underlying assets perform over time. It is to ensure that you are financially stable even in your golden years, after retirement, by benefiting from tax savings. 

So Many Options! How to Choose?

Choosing between different types of investments like fixed income, real estate, commodities, bonds, PPF, stocks, mutual funds, ETFs, and NPS depends on several factors:

• Your Risk Tolerance: Equity or stocks offer high returns with higher risk, while fixed income options like PPF are slow, but they provide steady, low-risk Returns. Which of these two suits you?
• Investment Horizon: Short-sighted aims could be suitable for fluid financial aspects, such as stocks or ETFS, and long-term goals may require NPS’, alongside real estate.
• Diversification Needs: Various mixes of investments (such as stock, bond or real estate) can be balanced in terms of risk.
• Liquidity Requirements: Need cash fast? The advantages of stocks and ETFs are the higher liquidity compared to real estate or PPF.
• Tax Considerations: For investments such as PPF or NPS, tax benefits play a significant role in deciding the same.
• Market Conditions: Economic trends can affect some investments. For instance, commodities such as gold may perform better in a recession.

With the completion of this chapter on investment types, we have thus concluded our first module, Why invest? This voyage has only been a glimpse into an intriguing and dynamic world of finance. We’re sure now that at least the basic concepts of various investment categories – from fixed income and equities to real estate and ETFs- have become clearer, and the things ahead will seem less daunting. 

Do keep in mind that understanding these basics is critical because of the fact they serve as a basis for building more comprehensive financial knowledge. Further, in our subsequent modules, we will continue to explore each facet, bringing out more details of financial markets. Hence, stay glued and continue to find out!