Investment Advice

What is the best investment option for beginners?

Investing can be quite confusing for beginners. With a wide array of investment options and financial products available, investing often seems taxing. As beginners, there are many things that one should consider before investing. One has to pick the right investment after factoring in their age, understanding of risk, goals, income, and expenses. Hence the best investment option is very subjective to each individual. However, few investment options that have a wide range of choices suiting all investors are equity mutual funds, debt mutual funds, PPF and fixed deposits.

Equity Mutual Funds

Equity mutual funds are an excellent way of entering equity markets. These funds majorly invest in equity and equity-related instruments. One can invest in these funds through SIP or lump sum route. For beginners, SIP can be a more preferred route as they can invest with a sum of as low as INR 500 and later on increase their investments. Within equity funds, large-cap mutual funds are considered relatively safe when compared to mid-cap and small-cap funds. Also, investing in equity funds best works in the long term. Beginners can invest in equity funds for long term goals like retirement.

Debt Mutual Funds

Debt mutual funds majorly invest in corporate and Government debt securities. They are more stable and less volatile when compared to equity funds. Beginners can park their emergency fund in liquid funds, which are a  type of debt funds. Debt funds are best suited for an investment horizon of 1-3 years. These funds will help gain investor’s confidence in investing.

Public Provident Fund (PPF)

Public Provident Fund (PPF), a post office savings scheme, is a government-backed scheme and is launched by the National Savings Institute. It currently offers 7.1% interest and has a 15 year lock-in period. Investment in PPF up to INR 1,50,000 is exempt from tax. Moreover, the interest and maturity amount is also exempt from tax. PPF is considered as a good investment option for a long term that provides capital protection with risk-free and guaranteed returns.

Fixed Deposits (FD)

Bank FDs are also considered a good investment option for investors who want guaranteed returns. They usually have a minimum investment of INR 1,000-INR 10,000 and no cap on maximum investment. The investment and interest on FDs are taxable. They have a tenure ranging from 7 days to 10 years. Investors worried about market volatility can invest in FDs. However, mutual funds offer higher returns than FDs.

What are the four types of investments?

There are a variety of investment options available for investors. Broadly, the investments are classified as Growth Investments and Defensive Investments. Growth investments help grow the value of the original investment over the medium to long term. Also, suitable for investors who are willing to withstand the market ups and downs. On the other hand, defensive investments focus on generating regular income rather than growth. These are comparatively low volatile than growth investments. Following are four types of investments:

Cash Investments

Investments such as everyday bank accounts, term deposits and high-interest savings accounts. These are investments where the potential returns are lower in comparison to another type of investment options. They do not offer any capital growth; however, they aim to deliver regular income. Therefore, play a vital role in protecting wealth and reducing risk for an investment portfolio.

Fixed Interest Investments

The popular fixed interest investments are bonds. These are either GovernmentGovernment issued or corporate-issued bonds. The companies and GovernmentGovernment borrow money from investors and pay them interest regularly. These are considered a defensive investment because they carry lower potential returns than shares. Additionally, they can be sold quickly. Furthermore, these are not completely risk-free investments. Credit or default risk and interest rate risk exists in these investments.

Equity Investments

Shares are growth investments that help in generating significant returns over the medium to long term. The shareholders receive dividends from the profits the company makes. Equity investments are the most volatile investments. The share prices are subject to fluctuations based on various external and internal factors. Therefore, these investments are suitable for investors with high-risk tolerance levels to withstand the ups and downs in the market. Also, the returns from equities are significantly high in comparison to other asset classes.

Property Investments

Property investments are also a type of growth investment. The price of the property may rise substantially over the medium to long term period. It is considered a riskier type of investment as it can also carry the risk of losses. Like shares, property prices can also fall, and hence they carry the risk of losing value. One can invest in property by directly buying it or through a property investment fund like REITs.

What is the safest investment?

Every investment has a certain type of risk or uncertainty in it. There are no investments that are 100% safe. However, certain investments are a low-risk investment that is comparatively safer. Following are some of the lowest risk and safe investments:

Savings Account

Savings account isn’t technically an investment. However, they are the lowest risk with the least growth of principal. Holding money in a savings account is similar to holding cash in hand. They are highly liquid.

Government Bonds

Government often raises money to finance infrastructure, development projects, etc. They do so by issuing bonds to the public. These bonds earn interest rates to investors. Since the Government issues them, they are considered to be the safest.

Certificates & Bank Deposits

The CDs are based on a pre-agreed rate of return over a specified period of time. CD is an agreement between the depositors and the financial institution or authorised bank. The agreement is for a specific period of time where the financial institution pays interest for the amount invested.

Corporate Bonds

Corporate bonds with high ratings are comparatively safer investment options. Bonds with low ratings have higher default risk. A corporate bond is a type of fixed income instrument issued by companies to raise money from investors. The company issuing the bond raises capital they need, and in return, pay the investor some interest. Upon expiry of the bond, the investor gets back the money from the company.

Dividend-paying stocks

Some companies are known for paying dividends to their shareholders. These dividend-paying stock investments can generate regular income for investors. Also, these are less volatile than other stocks.

What is the best investment for monthly income?

There are plenty of ways to earn a regular monthly income. Identifying and investing in such schemes will help individuals during their retirement or unforeseen circumstances. Having an alternate regular source of income helps in attaining financial stability. Some of the popular best monthly income schemes are:

Dividend-paying stocks: Many companies pay part of their profits as dividends to their shareholders. Investing in such stocks will help in generating an additional source of income. However, it is important to consider that dividends and its amount is not guaranteed.

Bonds: Both GovernmentGovernment and corporate organisations often raise money to finance their working capital requirements or to undertake new projects. To raise the money, they issue bonds to the public. These bonds earn interest rates to investors. The borrower pays interest throughout the tenure of the bond, and upon maturity repays the investment amount. The interest paid by the borrower is a good source of regular income.

High-interest savings accounts: Savings accounts are another form of holding cash. Though they offer low-interest rates, they guarantee high liquidity.

Post Office Monthly Income Scheme (POMIS): POMIS is one of the investment schemes offered by India Post. The scheme offers regular monthly income for its depositors. It is suitable for investors with low-risk tolerance levels.

How do I start investing?

To invest in any financial instrument, there are few things more important than just money. One will have to define their goals, tenure of investment, understand their risk taking capacity, select which investment, and finally decide on the amount of investment.

Define goals

This is the most important step in starting one’s investing journey. One needs to decide on their goals. Then they have to attach a monetary value to them. Finally, decide on how many years they will want to achieve their goals.

Tenure

Once the goals are in place, one can easily determine their investment tenure. The number of years that one needs to fulfil their goal is their investment tenure. For example, retiring by the age of 60, and the person’s current age is 30. Hence, the investment tenure is 30 years.

Understand risk taking capacity

At the start of the investment journey, one doesn’t know how deep the markets are. They usually test the waters through smaller investments. However, one can fill a risk profiling questionnaire to understand whether they are risk-takers or risk-averse. Another way to fund out one’s understanding of risk is to assess one’s expenses and income, through various factors like age, the number of dependents, etc.

Select the investment option

Before one starts investing, they have to decide on where they want to put money. For this, they can take the help of financial advisors or experts. Alternatively, they can approach any of the online platforms that offer Robo-advisory services.

Decide on the amount of investment.

One can directly allocate a certain percentage of their income towards investment or go by the target amount approach. In the target amount approach, one needs to define its goal. For example, the goal can be to buy a house at the end of 10 years. In this case, they will have to be clear which type of house they are looking for and the cost of the house at the end of 10 years. Then using any of the online calculators, one can calculate how much to invest currently to be able to reach the target at the end of 10 years.