Types of Investments and Characteristics

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There are many investment options available today for investment. The traditional tax saving investments are National Saving Certificate (NSC), PPF, etc. Essentially there are three forms of investments they are

1.       Real Investments

2.       Financial Investments

3.       Non-Securitized Financial Securities

Real Investments

Real investments are physical investments which includes real estate, gold, silver, precious stones rare coins and art objects. Real investments are traditional form of investments

•       Real estate
•       Commodities
•        Bullion
•       Art

Financial Investments

Financial investments are freely tradable and negotiable. Financial investments would include equity shares, preference shares, convertible debentures, public sector bonds, saving certificates, guilt edged securities and money market securities. Broadly speaking, following are the important financial investments.

Debts

Debts are investments, which give a fixed rate of interest for a fixed period of maturity. Hence they are low risk, low return investments. Debts could be in the form of government bonds, treasury bills, corporate bonds, bonds of public sector companies like railway bonds, ONGC bonds, etc. government bonds are treasury bills issued by the government are absolutely risk free security.

Equities

Equity investments carry more risk than investing in debts. There is no assured returns when we invest in a share of a company, we become an owner of the company to the extent of the capital invested. So one can invest in different types of stocks belonging to different sectors. For instance, one can invest in IT stocks like Infosys, a telecom share like Bharati Telecom, etc., depending on his risk appetite. There are two types of stocks for investments:

•          Aggressive stocks
•          Conservative Stocks

Conservative stocks for example HLL, are less risky but give fewer returns, where as aggressive stocks are more risky but give higher returns.

Mutual Funds

If an investor doesn’t directly want to invest in the markets, he can do it through a mutual fund scheme. A mutual fund pools money from investors and invests in different securities. A professional fund manager decides the investment strategies and securities, where one can purchase unit of a fund. But one must also note that mutual fund investments bear the same risk as the market, the only difference lies in the fact that the funds are managed by professional portfolio manager who may be better equipped, has access to analysed information and follows the market carefully. These schemes are mainly growth oriented, income oriented or balanced schemes.

Non – Securitized Financial Securities

These investment instruments are not tradable, transferrable or negotiable and would include bank deposits, post office deposits, company fixed deposits, provident fund schemes and life insurance.

Characteristics of Investment

Following are the important characteristics of all types of investments.

1.       Expected Return

Expected return is the overall profit that an investor might expect to receive from investment. Investor invests his or her money to earn return either as income, interest, and dividend or as capital gains resulting in the changes in the market value of the security.

2.       Risk

Risk is the degree of uncertainty about expected return from an investment, including the possibility that some or all of the investment may be lost.

3.       Liquidity or Marketability

Liquidity is the ease with which investor can convert his investment quickly into cash, at or near the current market price. For non-redeemable securities, liquidity will depend on the owner’s ability to sell the securities to other investors in the open market.

4.       Tax considerations

Income tax considerations are important because they will affect the net return from an investment. Interest, dividends, capital gains and capital losses are all treated differently for tax purposes.