As an investor, you always want to ensure that your portfolio is diversified well. This means investing in a variety of asset categories. These assets can include stocks, bonds, and even mutual funds. But what are the different types of investments that you can consider for your portfolio? Wait, first of all, what are the different types of portfolios?
Let’s dive deeper. Let’s learn about different types of portfolios. By the end, you would also have learned about various types of investments you can consider. Let’s dig in!
Types of Portfolio
Investing is an art and your portfolios can show if you are good at it or not. A person can have various types of portfolios. In the finance world, there’s a name for each one of these types. Let’s see some of the most popular ones:
This type of portfolio showcases a lot of high-risk investments. These are typically made in the desire for higher returns. These portfolios describe the investor as a risk taker and adventure seeker. Aggressive Portfolios need keen observation and close monitoring at all times.
These portfolios do not have any high-risk stocks. These are usually the safest investments. They don’t react much to market movements. Thus, the defensive portfolio is very immune to risky moves in any direction!
Income portfolios are a great way to diversify your investments. They have the potential of creating stability in an unpredictable market. They focus on dividends, interest payments or other forms of revenue.
Speculative investments are often compared to gambling. They require such an appetite for taking risks. Most people would consider this type of trading risky. However, it’s important not to get caught up in the essence that comes with such a high degree of risk.
The name says it all — this type of investment portfolio contains a mixture of assets with different types of criteria. You can use it to get both growth and dividends.
Well, enough about types of portfolios! Let’s now move forward to the main deal — types of investments for your portfolio.
Types of Investments for Portfolio Stocks
If one wishes to invest, the options are endless. However, only a few are worth your while. Stocks are a type of investment that represents ownership in a company. There are two main types of stocks: common stock and preferred stock.
Common stock allows the shareholder of voting rights and a share of the company’s profits. Preferred stock does not have voting rights. However, it does have a preference over common stockholders for receiving dividends and other distributions from the company.
A bond is a debt investment, where an investor loans money to an entity (usually a government or corporation). In return, receives interest payments over a fixed period. Corporations often use bonds to raise capital for growth or other projects.
A mutual fund is an investment vehicle that takes money from many investors and invests it in a variety of securities, such as stocks, bonds, and short-term debt instruments. Mutual funds are managed by professional money managers and offer investors diversification, which can help mitigate risk.
Real Estate Investment Trusts (REITs)
A REIT is a type of security that invests in real estate and allows investors to pool their money and receive regular income payments (in the form of dividends). REITs can be publicly traded or privately held. They must meet specific conditions to be eligible for special tax treatment.
Exchange Traded Funds (ETFs)
An ETF is a type of security that tracks an index, commodity, or basket of assets like an index fund but trades like a stock on an exchange. ETFs offer investors exposure to various asset classes in one investment plan.
A commodity is a physical good that is interchangeable with other goods of the same type. Commodities include metals (such as gold and silver), energy (such as oil), food (such as wheat and corn), and livestock (such as cattle).
Cash equivalents are short-term investment options that are highly liquid and considered very low risk. Examples of cash equivalents include money market funds, commercial paper, and Treasury bills. Short-term government bonds with maturities of three years or less also come under cash equivalents.
Alternative investments are non-traditional assets that can provide diversification benefits. This is due to their low correlation with other asset classes in your portfolio.
Some examples of alternative investment options include:
- hedge funds,
- private equity,
- venture capital,
- real estate,
- precious metals, and
- collectables, such as art or wine.
A derivative is a financial instrument whose value is derived from the underlying asset on which it is based (hence the name “derivative”).
The most common types of derivatives are futures contracts, options contracts, and swaps contracts. Derivatives can be used for hedging purposes or for speculating on the future price movements of the underlying asset.
A structured product is a financial instrument whose payout depends on the performance of one or more underlying assets, such as stocks, bonds, commodities or currencies. Structured products can be custom tailored to meet the specific needs of investors.
For example, a bank might create a structured product that pays out if the S&P 500 Index rises above 3000 points within the next year. If the index does not reach 3000 points, the investor would receive nothing.
As you can see, there are many different types of investments you can consider for your portfolio. It’s important to remember that no single investment plan is right for everyone, so it’s important to do your research before making any decisions.
Also, keep in mind that all investing involves risk, so please consult with a financial advisor before making any final decisions.
Make your financial decisions risk-proof. Consult with experts from Piramal Finance today.