The world of investment is dynamic and full of uncertainties. If you are all set to put the best foot forward as a novice investor with a sound investment plan, it’s always better to be well-equipped with the knowledge. In this ever-evolving financial framework, what seems to be trending now can decline in the next moment.
However, the investors who are well-versed in the fundamental principles and different asset classes remain to stand firm in gaining significant profit in the long run. Understanding the principles of each asset class and their potential risks in the risk ladder is of utmost importance. Let’s try to break down these asset types and their chances.
- Cash deposits: One of the safest and probably the most common forms of investments are depositing funds in a bank account. It assures the return of capital and the interest incurred on the deposited amount. The interest rate provided in the Certificate of Deposits (CD) is relatively higher than those available in the savings account, but the liquidity is lower in the CD. Once the amount is invested in CD, it gets locked up for a certain period, and pre-date withdrawal will require a penalty charge by the investors.
- Bonds: It represents the investment scheme as a debt instrument because the investor company or an individual will lend a certain amount to the borrower, regularly deciding on a particular interest rate for a month. Usually, organizations handling big projects apply for such a type of loan, and the time when federal financial institutions tend to increase the interest rate is the ideal time for such investment.
- Mutual funds: Mutual funds are another type of investment scheme that is drawing most people’s attention nowadays. “How to invest mutual fund” might be the usual question in your head. All you need to know is that you need to hop on the bandwagon with several other investors to pool the funds and invest them in stocks, bonds, and other securities. Portfolio managers may allocate and manage investment funds, so this may not be a passive investment.
Suppose someone is looking for a disciplined investment process through mutual funds. In that case, the person should invest in SIP (Systematic Investment Plan ) because the person can invest as minimum as Rs 500 to a maximum of Rs 5000 in a month without providing any lumpsum amount at once. There is less risk of market volatility and timing of the market, and long-term investment in SIP means maximum returns in the end.
- Exchange-traded funds (ETF): They are very similar to mutual funds and are currently in demand by investors, but the difference lies in the fact that, unlike mutual funds, they are traded throughout the day on the stock exchange. Due to this, the price which the mutual fund investors receive at the end of the day will remain constant, but for ETFs, it may differ among the investors.
- Stocks: The companies which offer their shares to potential investors to raise capital or finance a massive project let investors become partial owners. Shareholders are of two types, common stockholders and preferred shareholders, and their rights and claims differ.
It is always advisable to start with new investors, and if they look forward to diversifying their investment portfolio, they should gradually expand incrementally. Mutual funds and ETFs are great starting platforms before moving to stocks, bonds, etc.