Classification of Investments

14th October 2021 1 By indiafreenotes

Invest means owning an asset or an item with the goal of generating income from the investment or the appreciation of your investment which is an increase in the value of the asset over a period of time. When a person invests, it always requires a sacrifice of some present asset that they own, such as time, money, or effort.

In finance, the benefit from investing is when you receive a return on your investment. The return may consist of a gain or a loss realized from the sale of a property or an investment, unrealized capital appreciation (or depreciation), or investment income such as dividends, interest, rental income etc., or a combination of capital gain and income. The return may also include currency gains or losses due to changes in the foreign currency exchange rates.

Low-Risk Investments

Low-risk investment plans, essentially are those in which there are approximately zero risks involved. These low-risk investment plans usually provide consistent and reliable growth of value, with minimal losses. Such types of investment include:

  • Public Provident Fund (PPF)
  • Post Office Monthly Income Schemes
  • Senior Citizen Savings Scheme (SCSS)
  • Employee Provident Fund (EPF)
  • Sukanya Samriddhi Yojana
  • Tax Saving FDs
  • Sovereign Gold Bonds
  • Life Insurance
  • Bonds

Medium Risk Investments

Investments plans classified as medium or moderate risk options not only provide opportunities t avail of diversified and balanced investment returns but also help you accept a certain level of market volatility. These medium-risk investment options, thus help diversify your investment portfolio by including a mix of equity and debt instruments, which then generates stable returns with minimal risks. Examples of these medium risk investment plans include:

  • Hybrid debt-oriented funds
  • Arbitrage funds
  • Monthly Income Plans

High-Risk Investments

Investment plans categorized as high-risk are suitable for investors who wish to sustain long-term capital growth. While most of these high-risk investment plans are likely to incur fluctuations throughout the investment tenure, they provide ample opportunities to create substantial returns. These high-risk investment plans usually include:

  • Direct equities
  • Unit Linked Insurance Plans
  • Mutual Funds

Stocks

Investments in equity markets or stocks provide avenue for wealth creation over a long period of time. It takes a great deal of research and prudence to identify the right stocks to invest in. You also need to time your entry and exit prudently, and it involves continuous monitoring of investments. Capital appreciation happens over long period of time and is dependent upon market volatility. The good news is that in the long run, some of the stocks has been shown to deliver greater inflation-adjusted returns when compared with many other classes of assets.

Bonds

Bond is one of the types of debt investments available in India. Investors lend money to the issuer company in exchange of a bond and in return of the bond, the issuer is obliged to pay interest on the principal amount. The issuer is required to repay money borrowed along with a fixed rate of interest on the amount borrowed. Nowadays, variable rate of interest is also quite common.

Certificate of Deposit

Certificate of Deposit is a money market instrument which is issued against the funds deposited by an investor. It is invested with the bank in a dematerialized form for a certain period of time. Certificate of Deposit is issued by Federal Deposit Insurance Corporation (FDIC) and regulated by the Reserve Bank of India (RBI).

Real Estate

Investing in real estate involves purchasing residential or commercial properties to allow your capital to appreciate or to generate regular rental income. This way, you get to enjoy a steady stream of income in the form of rent. Another strategy is to purchase real estate units, hold them, and then sell them at a later point in time for a higher price, thus earning a significant return on your initial investment.

Mutual Funds

Mutual funds (MFs) invest in market-linked instruments such as stocks, bonds, or a mix of both equity and debt instruments. You can choose between equity funds, debt funds, and balanced funds depending on your financial goals and requirements. Furthermore, you can also invest small amounts periodically in MFs using a Systematic Investment Plan (SIP).

Fixed Deposits (FD)

Mutual funds (MFs) invest in market-linked instruments such as stocks, bonds, or a mix of both equity and debt instruments. You can choose between equity funds, debt funds, and balanced funds depending on your financial goals and requirements. Furthermore, you can also invest small amounts periodically in MFs using a Systematic Investment Plan (SIP).

Public Provident Fund (PPF)

Considered to be one of the safest types of investment in India, Public Provident Fund (PPF) is an instrument backed by the government. You can invest in PPF by opening an account with any bank or post office. While opening the account, the minimum investment amount is as low as Rs.100 in some of the banks (can vary for every bank). Thereafter, the annual limits for PPF deposits range from a minimum of Rs.500 to a maximum of Rs.1.5 lakh. The amount invested in your PPF account comes with a lock-in period of 15 years and is eligible for tax deductions under section 80C of the Income Tax Act, 1961.

Unit Linked Insurance Plans (ULIP)

Unit Linked Insurance Plans (ULIPs) are among types of investments that come with tax benefits as well. It’s an instrument that offers you the advantage of investment combined with insurance. The premium you pay to remain invested is divided into two portions. One part goes towards providing you a protective life cover, while the other is invested in market-linked instruments or funds. ULIPs also provide deductions under Income Tax Act 1961 as per prevailing tax laws, since the premium paid is deductible, and the maturity benefits and long-term capital gains are tax-free.

National Pension System (NPS)

The National Pension System (NPS) is another investment plan backed by the government of India. It’s a product that focuses on saving for the long term, making it the perfect addition to your retirement investment plan. The amount you park in this scheme is invested in a variety of other investment vehicles like equity, deposits, government securities, corporate bonds, and other funds. You can remain invested till you reach the age of 60.

Senior Citizens’ Savings Scheme

Senior Citizens’ Savings Scheme (SCSS) is one of the types of investments backed by the Government of India. Indian residents over 60 years of age can open an SCSS account and invest in this scheme for a block of 5 years. Thereafter, the investment can be extended by another 3 years, if needed. You can deposit up to Rs.15 lakh in your SCSS account in multiples of Rs.1,000 only. Deposits up to Rs.1 lakh can be made in cash. However, deposits over Rs.1 lakh need to be made using a demand draft or cheque. Investments in SCSS also qualify for deduction under section 80C, up to a limit of Rs.1.5 lakh.