Investing is a healthy financial habit that can help individuals save more and build a corpus for the future. With growing financial awareness among individuals, the availability of investment options has also multiplied in the market. While investment plans aim to help individuals to grow their capital not all of them would prove suitable for everyone.
To elaborate, different investment plans come with varying risk-reward components that may not match an investor’s risk-taking capacity or prove effective enough to generate robust returns. This is why it becomes crucial for individuals to identify their risk appetite, financial goals, and investment horizon to pick the best investment plan for their requirements.
Read along to find out more about the top types of investment plans and which one would suit you the best.
Types of Investment Plans Based on Investor’s Risk-appetite
Investors can be broadly classified under three categories on the basis of their risk appetite –
- Low-risk investors
- High-risk investors
- Balanced risk investors
Based on the ability to weather market risk, individuals can choose from the options discussed below to develop the best investment plan.
Pensioners, retirees, and individuals with several financial responsibilities are typically considered to be low-risk investors.
Such investors with low-risk appetites are not very keen on exposing their investment portfolio to market volatility. This is why they mostly prefer those investment options that have a low-risk component.
Some of the most popular low-risk investment options include –
Fixed Deposit Schemes
Fixed deposits are among the safest investment options and are widely preferred by those with low risk-taking capacity. This is because FD schemes are associated with the market, hence it remains unaffected by the prevailing volatility. The investment scheme helps investors mobilize their savings and build a corpus over the tenure by keeping the capital intact and appreciating the same at a steady rate. Typically, FD schemes come with a flexible tenure which allows individuals to pick a period that suits their financial goals.
Public Provident Fund (PPF)
Public Provident Fund is backed by the government, making it a reliable investment option. It is known for generating guaranteed returns and exposes one’s profile to negligible market risks. The returns on PPF are paid out quarterly. Notably, the rate of returns is revised by the government at regular intervals. Individuals can use an investment calculator to determine which investment amount would be best suited to generate high returns.
Money Market Funds
This is a short-term debt fund that invests in more than one money market instrument. It usually has an average maturity period of a year and is known to yield high returns. Money market funds also boast of high liquidity.
These bills come with a maturity period of 365 days and are issued by the government of India to raise funds from the public. The backing of the government makes treasury bills a safer investment option. Additionally, it generates substantial returns. However, the returns may not be more than that earned on other money market instruments.
High-risk investors are those individuals who have high risk-taking capacity. They usually do not hesitate to invest in high-risk investment instruments if they know they are likely to generate high returns. Usually, those with strong financial standing and a lack of major financial obligations invest money in high-risk options.
Here are a few investment options with high-risk-reward components.
These are equity shares of a company bound by the legal term of its ownership. Once an individual puts money into a company’s equity shares he/she owns a percentage of the firm equivalent to the shareholding. Since the fate of the share depends directly on the performance of the company, both the risk and reward component of direct equities is very high.
Equity Mutual Funds
This mutual fund parks money mainly in company stocks. Individuals have the option to invest in equity mutual funds either directly or via the systematic investment plan route based on their financial standing. In the long term, they are known to generate inflation-adjusted returns. Equity funds accompany a significant risk-reward component, making them ideal for seasoned and high-risk-taking investors.
These are essentially unregistered private investment partnerships or funds that tend to invest in different markets, instruments, and strategies. However, hedge funds including funds of funds may not be subject to the regulations that are directed towards mutual funds. Collectively, these make them quite risky. Usually, seasoned investors add hedge funds to their investment portfolios for diversification.
Those who can tolerate moderate levels of risk to generate better returns than low-risk investment instruments come under the category of mid-risk-taking investors. These individuals are comfortable with exposing their portfolio to only a certain level of risk and often prefer to park money into these instruments –
- Dividend-Paying Stocks
In this case, investors park their money into company stock that offers high dividends to shareholders. This proves to be an effective means of investing in the stock market as the instruments are known to offer steady returns.
- Balanced Mutual Fund
This fund invests in a blend of debt and equity instruments. This exposes the investor’s portfolio to a moderate level of market volatility. Regardless they can provide investors with substantial returns that will facilitate wealth generation.
- Debt Funds
This option invests primarily in fixed-income securities such as government bonds and treasury bills. Notably, debt funds often come with a lock-in period and are considered to be effective as monthly income plans.
Exchange-Traded Funds or ETFs have traits similar to that of stocks. They are essentially securities that pool resources from investors and use the capital to purchase tradable assets such as debt securities and shares. Notably, most ETFs are registered with SEBI and are traded on the market.
Corporate Bond Funds
The fund invests over 80% of the capital in corporate bonds. Corporate bond funds are issued by businesses to raise funds to meet short-term expenses. This ensures timely returns on investment that is higher than savings options. They are cheaper alternatives to bank loans, making them a popular financing option among businessmen.
Regardless of which investment option one picks it is critical to ensure the same aligns with the investment goal
Singh is an experienced spiritual writer and the resident author at Guruvanee.com. With a deep passion for exploring the mystical aspects of life, Singh delves into various spiritual traditions, philosophies, and practices to inspire readers on their spiritual journeys.