How you can choose a better investment option?

 

So, after understanding the importance of financial literacy. There is a need to focus on what kinds of investments are there to allocate your money for making asset allocation, as the diversified portfolio of your investments, lesser risk. As it is necessary to choose an appropriate vehicle according to your goals and risk-bearing capacity, when you will have knowledge about them then you can choose by yourself which investment the vehicle should be appropriate in a certain kind of situation. To make yourself aware of the multiple investment vehicles.

On what basis you should choose an investment vehicle, there are some reasons to be taken into consideration

Risk vs. Reward

Risk is an important factor to be taken into consideration. Risk or reward ratio compares the expected returns of an investment to the amount of risk undertaken to invest in that asset. The ratio is calculated by dividing the amount the investors stand to lose if the price moves in the unexpected direction by the amount of profits one expects to have made when the investment is closed out.

Individual risk appetite

One man’s food is another man’s poison – this is best suited when we talk about making an investment.  The main reason could be you have a different risk tolerance, investment choices totally depends on risk-bearing capacity which may lead you to sell off the investment during volatile periods.

Investment Capital

The amount is investment capital you have can also affect your choice of investment. There is a clear difference between what you can invest in with Rs.10000 compared to Rs.100000.However, this does not mean that you are severely limited if you do not have a huge amount of spare cash. It is not rare for investors to invest in leveraged products or use loans to give them the gearing they need.

Time horizon

There is a key distinction between trading and investing is that the latter usually takes a longer time horizon. The investment horizon determines the investor’s income requirements and desired risk exposure, which then helps in choosing the appropriate investment product.

Types of Investment products

In India, investment options can be broadly classified into two categories i.e financial and non-financial assets. Financial assets are also divided into two categories market-linked activities and fixed income products.

 

• Unit-Linked Insurance Plan
• Public Provident Fund
• Mutual Fund
• Bank Fixed deposits
• National Pension Schemes
• Senior Citizen Saving Schemes
• Direct equity
• Real estate Investment
• RBI Bonds
• Gold ETF
• Pradhan mantra Vaya Vandana Yojana(PMVVY)
• Post office monthly income scheme
• Initial Public offerings

I will discuss these investment products in detail individually in my next consecutive blogs to more and better acknowledge you all.

Choose an investment plan according to your risk appetite, as returns and risk have a positive relationship in investments.

Low-risk investments

These are investment options that pay fixed income regardless of the changes in the economy or business. Debentures, bonds and fixed deposits come under this category. Besides this, there are other investment options such as EPF, PPF, Sukanaya Samriddhi scheme and national saving certificate which are government initiated schemes and offers low – risk guaranteed returns.

Medium-risk investments

Balanced mutual funds, debt funds, and index funds fall under this category. Even though medium risk investment options have an element of stability and debt but their market volatility can hamper the principal amount. These kind of investment options include an element of stability and debt however the volatility associated with the returns in the loss of principal amount due to market volatility associated with these instruments, it is not possible to get a regular fixed income.

High-risk investments

Equity mutual funds, stocks of companies, derivatives, and even stocks come under. Market savvy investors who have a better knowledge of the market and have a high-risk tolerance appetite and consider investing in these investment options. There is no limit of gains and loss, high risk is involved.