One often wonders about the different types of investments one can invest in. Planning investments is a major issue that on faces from the very first paycheck. Following are the investment options one can opt for:
1. Bank –
Investment in bank is a safe option in terms of higher security, provided one is not looking for higher returns. In bank there are different types of account viz- savings account, recurring account, fixed deposits. There is one more account, which is mainly used by the businessmen called current account. The only difference is that one has to pay certain amount of charge to keep the account active. But in case of other accounts one gets interest.
Interest in savings account is low as compared to Fixed Deposit or Recurring Deposit.
2. LIC –
LIC offers various schemes for the safeguard of future and higher returns. It is one of the safest investment options assuring a higher return after a long-term investment.
3. Investment in Debt market –
Debt Market comprises of debentures, bonds and every note, which promises to provide a certain sum of money at the end of a time period. They are mainly treated as loan an individual gives to companies or other institutions. The security associated with debt instruments is more than in equity.
In case the company goes for bankruptcy the debenture or bondholder will be the first to be provided the money they have given after selling off the assets of the company. The debt instruments appear on the liability side of the balance sheet, which itself denotes that it is a liability to the company.
The rate of interest in high but is also fixed. In case the company ploughs higher profit the sum that will be disbursed to the debtors will always be as per the predetermined rate.
4. Equity –
Equity is also known as shares of a company. Previously there used to be three types of shares, viz – founders share (Deferred Share), Preference Share and Equity Share.
Deferred Share where mainly for the promoters they seldom carried any dividends but have voting rights, which are essential for the promoters to keep control over the management.
Preference Share carries extra preference like higher dividend rates, they are paid before equity shareholders but after debt instruments holder. Some of the preference shares have cumulative nature, i.e., in case the company is unable to pay the dividend then it will get accumulated and paid in the year the company is paying the dividend. These shares are also priced higher than the equity shares. Preference shares in today’s time are not available.
Equity shares are easily available and comprise most of the equity market. They don’t have any fixed return on them. Nevertheless, two salient features of this type of shares are that they carry voting rights and are priced lower than the preference shares. However, divided rate not being fixed often a shareholder may get a lower return or sometimes a higher return. The highest dividend one can expect is around 12 percent. These shares are often available at a premium, i.e., priced higher than the face value of the share or the original price. This is where the gamble is present. The rule says to buy share at a lower price and sell at a higher price. Mainly it is the income through the share selling and buying that attracts the investor. But one has to keep in mind that the income earned through share trading is charged under short-term capital gain in the income tax and the dividend earned through retaining the shares is long-term capital gain.
Further it also happens that sometimes the companies rather than paying the full dividend pays half and reimburses the rest through bonus shares.
5. Mutual funds –
This is an investment which has a mix of both equity and debt instruments. In Mutual Funds the money one has invested is channelized in the capital market through a combination of debt and equity instruments as per the plan. Many banks and financial institutions offer different types Mutual Funds. It is a good option for those who do not want to trade directly in the equity and debt market.
One has to ensure a proper mix of these entire channels. Though in bank the rate of return is low but the safety is high and is ideal if the amount of investment is low. LIC is also a good option and should be used in the initial years of career. When you start earning 40% of the earnings should be invested in Fixed Deposit and LIC in the first six months. The security associated with these instruments will be beneficial in the longer run. Similarly, to get a higher return on investment then mutual funds or the equity market is an ideal investment.
