In our last post titled "Why to invest?", we discussed about how investing allows us to grow our capital over time, which can provide us with a comfortable retirement corpus. Another reason to invest is that it can help us reach our financial goals sooner. In this post, we shall discuss about major types of investments, and their risk-return profile to better understand the world of financial markets and investments.
The main types of investments are:
1. Fixed income investments
These are debt securities that offer a fixed rate of return. Based on the specific fixed-income instrument type, these are the investable instruments with minimal risk to the principle, and the investor is paid the return as an interest. The most common types of fixed income investments are bonds, which are issued by the governments and corporations.
These bonds make periodic interest payments to investors, and the principal is returned at maturity. Other types of fixed income investments include bank fixed deposits, annuities, and certain types of loans. These investments typically generate low returns, but with highest probability of capital preservation. The interest rates offered on these instruments are generally linked to the policy rates decided by the respective central banks such as US Fed and ECB.
2. Equity investments
An equity investment is a type of investment in which the investor purchases shares of ownership in a company. The benefits of equity investment include the potential for better capital appreciation when compared to fixed income instruments and the possibility of receiving dividend payments. Equity investors also have a say in the management of the company, and may receive preferential treatment in the event of a liquidation.
Long-term capital gain taxation for equity investments is generally more favorable for investors than other asset classes. However, every investor or trader bears the capital risk to generate these returns which may be significantly better or worse than individual expectations. Historically, equities have provided better inflation adjusted return versus other asset classes.
3. Real estate investments
There are many benefits to investing in real estate. Real estate is a physical asset that can be used as collateral for loans, it appreciates in value over time, and it can generate rental income. Real estate can also be a hedge against inflation, as property values tend to increase when the cost of living goes up. Real estate investing can be a great way to build wealth over time. It can also be a source of passive income, which can provide financial security in retirement.
There are a few drawbacks to investing in real estate, however. It can be a highly illiquid investment, as the average ticket size of investment is large. As the value of property can go up and down, it might be difficult to exit an existing real estate investment. It can be a time-consuming and expensive investment, as you may have to put a lot of money into fixing up a property before you can sell it or rent it out. Overall, though, investing in real estate can be a great way to build wealth and secure your financial future.
4. Precious metals investments
Precious metal investment refers to investing in gold, silver, and other metals in the form of coins, bars, or jewelry. Gold and silver are the most popular precious metals to invest in, but other metals such as platinum and palladium can also be considered. Precious metals are a finite resource, so there is a limited supply. They are also durable and have a long history of being accepted as a store of value.
Gold, in particular, is often seen as a safe haven asset, meaning that investors tend to buy it when they are worried about the economy or political stability. Precious metal investment can be a way to diversify one's portfolio and protect against inflation.
5. Alternative investments
Alternative investments are those that do not fall into the traditional categories of stocks, bonds and cash. They can include investments in hedge funds, private equity, and venture capital. Alternative investments tend to be more volatile than traditional investments, but they can offer the potential for higher returns. They can also provide diversification, which can help to reduce overall portfolio risk.
6. Digital assets
Digital asset investments are a type of investment that allows investors to purchase and trade digital assets, such as Bitcoin, Ethereum, and Litecoin etc. These assets are stored in a digital wallet and can be used to purchase goods and services, or traded on digital asset exchanges. Digital assets offer the traders and investors access to global markets and vast liquidity with 24X7 trading.
Decentralized finance, or “DeFi,” refers to the growing ecosystem of financial protocols built on blockchain. From lending and borrowing platforms to stablecoins and tokenized BTC, the DeFi ecosystem has launched an expansive network of integrated protocols that are changing the way we think about financial infrastructure. By deploying immutable smart contracts on blockchains, DeFi developers have created a parallel financial system that runs on decentralized infrastructure, offering anyone with an Internet connection access to a world of open finance.
However, the value of digital assets can be extremely volatile and unpredictable. There is a risk of fraud or theft due to hacks when investing in digital assets. There is also a risk that the underlying technology of digital assets, such as blockchain, could be rendered obsolete by new developments.
What to consider before investing?
Always consider your financial goals, risk tolerance, return expectations and your time horizon before making any investment. Why not start investing today? It is a great way to reach your financial goals, diversify your portfolio, and secure your future.
Invest in equities, fixed income precious metals and hedge funds. Open an account with WealthMark, today!
Disclaimer: All investments are subject to market risk. The statements made in this article are for educational purposes only and should not be considered financial advice or an investment recommendation.
