When you have already decided to start investing for your future, a million dollar question in investing is “Where to invest?” And the answer you are looking for – is the place where you can maximize your wealth is the place where you should invest.
Now this answer differs from people to people depending on their risk bearing ability. If a person has a high risk bearing ability he may go for a high risk investment say Equities and a person with low risk bearing ability may go for lower risk investment i.e. Fixed Deposit (or FD).
Investments are of various types and are in various forms. Few investments are based on fixed returns and few are based on market conditions and of whose future cannot be predicted. But remember, not all of your money should go into one source of investment.
Investment types can be broadly classified into: Cash, Fixed Interest Securities (Bonds & Gilts), Property, and Shares.
Within each asset class there are investments to suit different kinds of risk, duration, returns and liquidity.
- Liquid Investments: Liquid investments are investments that could be turned into cash easily and resume various forms, such as savings accounts, Certificates of Deposit, Money Market Accounts, and other interest –bearing accounts offered by banks.
- Cash: Cash deposited in a bank or building society can earn interest. The amount of interest that you will get depends upon a number of different things. Savings in deposit accounts or National Savings products which offer interest, is the way most people start investing.
- Fixed interest securities (Bonds & Gilts): Bonds are issued by governments and companies as a means of borrowing money. Government bonds are known as gilt edged securities or “gilts”. Bonds issued by companies are known as corporate bonds.
Investment needs to be guided by a set of objectives. The main objectives taken into consideration by investors are capital appreciation, current income and safety of principal. The main aspect that affects the objectives is risk. Some investors are risk takers while others try to reduce risk to the minimum level possible. Identification of constraints arising out of liquidity, time horizon, tax and special situations need to be addressed.
The types of investments can be broadly classified into 3 groups:
A) Debt – Low risk, 6-12% returns
B) Equity – High risk, returns linked to market performance
C) Commodities / bullion and such – Low risk, low returns.
The investments can also be classified into:
Fixed income investments: When you invest in Fixed income investment types you will typically have a number of guarantees provided by the issuer, such as
- Guarantee that your savings will be returned to you on a certain date, and
- Guarantee that you will be paid a regular income (interest payments)
Growth investments: This section includes common shares, mutual funds, Exchange Traded Funds (ETFs) and segregated funds. Growth investments, or ownership investments, typically are considered riskier because they do not have guarantees; the value of investment is not guaranteed; the income paid by the investment is not guaranteed, and there is no guarantee that the invested savings will be returned.
So how does this work? For example, if you own the common shares of a corporation, then you actually own a portion of the company and its business operation. If the business does well, then the value of your ownership (the common shares) should increase, and as a result the company in some cases will at the discretion of the issuer pay you some money while you own the shares (in the form of dividends payments).
Hybrid investments: These type of investments cannot be strictly classified as neither a Fixed income nor Growth investment because they possess characteristics that may be those normally associated only with a Fixed income investment or a growth investment.
Investment that fall into this type would include Index – linked Guaranteed Investment Certificates (GICs), Principal Protected Notes (PPNs), Convertible bonds, Capital Trust Securities, etc.
A Hybrid investment is a trickier type of investment of to understand because its characteristics can be confusing.
Deciding how to invest? Understanding the basic types of investments that companies issue and how they fit in the corporations’ capital structure can be very helpful because the majority of retail investments originate from this structure.
You should also keep in mind that capital markets are constantly evolving and new variations of the two basic capital structures (equity and debt) are constantly created. When looking at specific investment, you should try to first identify and classify the investment’s capital characteristics.
Mostly people consider short term investment plans to make money quickly. So what do these plans contain? Short term investments allow you to invest an amount of money at a high yield interest rate, and gain access to the return sooner rather than later. So if you are interested in short term investments, talk to your financial advisor. He or she can tell you what the best short term investment opportunity you can use will be.
While planning investments it is crucial to know the strategies of managing it. There are two ways you can manage your investments- active and passive.
While investing you should first analyse what kind of investor you are according to your risk-taking capability.
- Aggressive investors: They use a stock market investing strategy that involves greater stock volatility, which is higher risk. For example, if an you put your money into an older apartment building than invests more money renovating the property, you are running a risk and you can call yourself an aggressive investor. In this case you expect to be able to rent out the apartments for more money than the apartments are currently worth or to sell the entire property for profit on their initial investments.
- Conservative investors: They often invest in cash. Conservative investment options may include mutual funds, interest bearing savings account, money market accounts, Cash deposits and US treasury bills. These investments (long-term investments) are relatively safe, low risk investments that grow over a period of time.Moderate investors: They often invest in bonds and cash and may occasionally participate in stock market. Moderate stock market strategies include low or moderate risk.
Hence, before you start investing, it is very important that you learn about the different types of investments, and what those investments can do for you. You also need to understand the risks involved, and pay attention to past trends as well.