10 Types of Investments and How They Work

Personal Finance

Investments have become part and parcel of our lives. You may be salaried or self-employed.

The habit of saving has been instilled in us since childhood. You must remember how we saved our pocket money in piggy banks while waiting to buy our desired item. That was your first step towards an investment.

Types of Investments

Investment is nothing but saving for the future. Let me give you a brief idea.

1. Stocks

Stocks are one of the easiest types of investments. When you buy stocks of a company, you become an owner of the particular company, equivalent to your shares.

How they work:

When you invest in stocks, the company stands to gain too. It is a way to finance money for the growth of the company. When the stock prices go up, you can sell them at a profit. As the stock market is variable, it is advisable to invest in stocks when they are at a lower price. Keep on researching and investing in stocks that are sure to yield profitable returns. Go ahead and become the owner of your favorite and most trusted publicly traded company. No doubt there is a risk, as the stocks can also go down. In that case, refrain from selling at a loss.

2. Bonds

By investing in bonds, you are lending money to any business or government entity. Organizations issue corporate bonds. The government issues municipal bonds.

How they work:

You must be wondering what you stand to gain by lending money. In return, the borrower pays you interest. When the bond matures according to the contract, you get your principal amount back.

Even though the rate of interest is lower than stocks, it is still considered to be safer.

3. Mutual Fund

A mutual fund has become an easier and more attractive investment option nowadays. MF can be invested in both ways, either through a SIP (Systematically Investment Plan) or Lumpsum. In a SIP, you need to pay a fixed or variable monthly amount towards the investment, while in a lump sum, you need to invest a fixed sum.

How they work:

A mutual fund is managed by the fund manager, who invests your money in different avenues of investment, like government bonds, debt, and the equity of a company. The money will grow according to the market and contain risk as well. The investment can fetch better returns in the long term.

4. Bank saving products

Every bank account holder is entitled to certain services. Suppose you want to get stable returns and invest in FD or RD.

In FD, or Fixed Deposit, you invest for a fixed amount of time, while in RD, or Recurring Deposit, you can choose the flexibility of depositing a fixed amount monthly. The interest is compounded quarterly.

You can also opt for the Sukanya Samriddhi Yojana (SSY). Parents or guardians of a girl child (10 years old and below) can open an account in her name for 21 years. The investment can be made up to 15 years from the date of account opening, and it will mature after 21 years.

How they work:

Both of these deposits help you achieve your short-term goals. In the end, you get your principal back plus monthly interest payouts. Senior citizens get an additional 0.5% rate of interest. You can also apply for loans against your FD.

In the SSY scheme, parents can save for their daughter’s education.

5. Cryptocurrency

Cryptocurrency is a newer investment option. Everyone is aware of Bitcoin. Ethereum and Litecoin are also emerging. These cryptocurrencies are unregulated by the government. Buying and selling are done at the cryptocurrency exchanges. Some retailers allow you to make purchases using virtual coins.

However, the RBI is supposed to launch its own digital rupee. 5 banks, namely IDFC, ICICI, HDFC, SBI, and Yes Bank, have been selected for the trial run of the central bank’s digital currency.

How they work:

If you are interested, you can make a huge profit. Keep in mind that market fluctuations do occur.

6. Gold

We Indians, especially the female population, are in love with gold. We see it more as an asset than an investment. 

Keeping gold in the form of jewelry or coins is becoming risky. That’s where the gold bonds come in. Sovereign Gold Bonds, or SGB,

How they work:

SGBs are tax-free if you let them reach their maturity. If you sell them before they mature, they become taxable. You can also earn interest every year. You do not need to worry about the storage of physical gold.

7. Life Insurance

What is the best way to invest in yourself? The insurance policyholder makes a contract with the insurance company. You pay a certain amount of money for a specified period.

How they work:

At the time of the holder’s death, the beneficiary receives the face value of the policy along with some bonus for the value of the time invested in the investment.

8. PPF

PPF, or Public Provident Fund, is one of the most secure forms of investment. A person can invest in this government-funded scheme by opening an account at the post office or bank. The scheme is for 15 years (with a lock-in period of 5 years), but the same can be extended up to another 5 years.

How they work:

PPF also has a relatively high rate of interest in comparison to FD or RD, and it is a secure investment. It compounds annually. The best part of the investment is: the maturity and interest are tax-free.

9. Real Estate

In this type of investment, you purchase residential or commercial properties and rent them out. Not only will the property be an asset, but you can also enjoy the monthly rent. Even without purchasing the property, you can buy units of Real Estate Investment Trusts (REITs). REITs themselves invest in commercial properties, and you can earn based on the rental income.

How they work:

The market value of the property is always rising. You can use the rent you receive to pay your EMI.

10. Retirement Plans

As soon as you join a company, a certain sum of money is then deducted from your salary, and equal money is paid by the company too. This scheme is known as the EPF, or Employee Provident Fund.

An individual can also apply for the NPS, or National Pension Scheme. In this scheme, the government in turn invests in debt and equity.

How they work:

EPF is a retirement benefit plan that the company imposes on you. At the time of your retirement, you receive a lump sum.

Post-retirement, under the NPS, every subscriber is facilitated to a regular income by the Government.

The Bottom Line

Whatever investment you make, according to the Income Tax Act of 1961, you are eligible for tax exemption. You have to declare your deposits under Section 80C.

Most of the time, we don’t have enough balance to invest according to our desires. That is when you can take personal loans (https://www.piramalfinance.com/personal-loan) from Piramal Finance. Please feel free to check out the other products and services like Housing Loans and much more.