Those who do not understand how investments work might have tough time decoding options, which might suit their investment requirements. For instance, risk-averse investors will prefer investing in investment options that offer capital appreciation and moderate returns, while risk-tolerant investors may go for options that come with high risk and offer high returns.
Thankfully, there are investment plans that cater to the requirements of investors of all kinds and offer high returns. But before you start to progress on your investment journey, a little know-how on the types of investments and their yields will help you make better investment decisions.
Types of Investment Options
The risk appetite of the investor is one of the main factors that determine the choice of investment option. Based on the amount of risk involved, investment options can be classified into 3 main types:
Low-risk investments are instruments that provide maximum capital appreciation while yielding a moderate return on investment. Investments that involve low-risk come with fixed returns that are indifferent to market fluctuations. Due to the low volatility of investments, these investments are preferred by risk-averse investors who prioritized the safety of capital and root towards slow yet steady growth of their corpus. The rate of return on low-risk investments is governed by the interest rate movement of financiers and not by stock market trends and therefore, the returns are predetermined and can be anticipated. Fixed deposits, bonds, debentures, EPF, PPF, National Savings Scheme and Post Office Schemes are a few examples of low-risk investments.
Medium-risk investments involve a certain percentage of risk and come with a decent rate of return on investments. Medium-risk investments consist of debt funds, index funds and balanced funds and are characterized with moderate security of investments along with the element of decent returns. However, such investments are volatile to stock market fluctuations and thus, there is no guarantee on the regularity of income.
Investments that involve high risks are majorly equity-based investments that depend solely on the market performance of the investments. Within the category of equity-based funds, you will find investments pertaining to small, mid and high-cap companies. While large-cap investments come with moderate risk and relatively higher returns, small and mid-cap come with the risk of erosion of investment amount. The time and amount of return on investments are not fixed and hence, the risk associated with such investments is high.
Best Investment Plans in India
The notion about Indians being conservative and risk-averse investors has been changing of late. With the trend shifting towards more investments in mutual funds, stock market and corporate bonds, investment options that yield high returns are synonyms to the best investment options.
Listed below are some of the major investment options, which pay higher returns.
1. Equity Investments
Investment in direct equity is the ideal option for those looking out for investment to lock their funds away for the long term. Equity investments yield inflation-beating returns, which are also relatively higher than other market instruments in the market. To make the most out of your investments in equity, you must be speculative of the market trends and be mindful of the time of entry and exit from the market. You must have a Demat account and trade through authorized stockbrokers to invest in equity.
Benefits of Equity Investments:
- The returns are relatively higher than in the form of dividends and capital appreciation as compared to other financial instruments.
- Equity funds provide adequate coverage against inflation.
- Equities are simple to invest in; you can avail the services of a financial planner or stockbroker.
2. Mutual Funds
Mutual funds are one of the most considered investment options for those starting out with investing in instruments of high returns. Mutual funds can be defined as a collection of company stock and bonds upon which your mutual fund manager decides to put your investments into. The entire investment is distributed into small units, the value of which is known as the Net Asset Value (NAV).
Benefits of Mutual funds
- Mutual funds are managed by professional fund managers and therefore, investment in the mutual fund comes with the benefit of advanced portfolio management.
- Mutual funds allow investors to invest the dividend to purchase additional units, which in turn adds to the growth of the corpus.
- Investment in mutual funds is more affordable than direct equity investments. You can start investing an amount as low as Rs. 500.
3. Bank Deposits
Bank deposits are one of the most sought after investment options in India owing to benefits like the safety of deposits and a moderately high rate of return. Bank deposits (as investments) not only allow you easy access to money but also inculcate the habit of savings and investment in the process. However, bank deposits are not an ideal tool for tax-saving unlike equities and mutual funds. While the amount deposited to create fixed/recurring deposits qualifies for an income tax deduction, the interest income is taxable in the hands of the investor.
Benefits of bank deposits
- Both fixed and recurring deposits involve a simple documentation process and thus, starting FD or RD is easy.
- Both fixed and recurring deposits inculcate the habit of savings and investments in depositors while providing them with high returns.
- Both the options provide a chance to gain the most out of short term investments.
4. National Pension Scheme
The National Pension Scheme or NPS was opened to all sections in the year 2009. Regular investments were welcomed from working professionals during their lifetime and reap benefits of the same after retirement. Any citizen between the age of 18 years and 65 years can join the scheme. The scheme offers the option of investment in two accounts- Tier I and Tier II. While Tier I is a mandatory account, Tier II is voluntary. The investor can withdraw money from a Tier II account, there are certain restrictions on withdrawal from Tier I, pre and post-retirement. The money deposited is mainly invested in equity, alternate assets, corporate bonds and government bonds.
Benefits of National Pension Scheme
- National Pension Scheme extends the flexibility for the investor to make a systematic investment in Tier I and Tier II accounts, both of which are subjected to a different rate of interest.
- Partial withdrawals are allowed after a certain time span.
- Tier I investments qualify for tax deduction under Section 80C of the Income Tax Act, 1961.
5. Public Provident Fund
Public Provident Fund is an appropriate investment option for investors with low-risk appetite. PPF has an investment term of 15 years throughout which the investor may make regular and systematic contributions, which are subjected to an interest rate. It is a flexible investment option for all, irrespective of their investment calibre. One may invest an amount as low as Rs. 500.
Benefits of PPF
- PPF is one of the most tax-effective instruments in the hands of investors. PPF comes with exempt-exempt-exempt tax status.
- Investors can also extend the tenure of investment after a period of 15 years.
- Partial withdrawals can be made after the 7th financial year.
- It comes with a high rate of interest on deposits.
The above explanation of the best investment options with a high rate of return would give you a clear idea of creating an investment portfolio, which comes with low risk and moderate to high returns.