Investing can be a daunting task for a person who doesn’t know what to do. You might think like that, but you can learn it quickly. It’s not a complicated process to learn.
There are multiple types of financial instruments that you can use to invest your hard-earned money and gain that compound interest that we talked about. These types of topics are generally region-specific, so I’ll try to cover as much as possible in this article. So here are the types of investments.
You might have heard everyone say that you should save a significant portion of your money, and you might do it, but let me tell you one interesting thing about a savings account.
These accounts generally have meagre interest rates compared to other investments. The interest is only enough to beat inflation in most cases, and some countries like the USA, the interest is not even high enough to cover the inflation rate.
What I believe is that you should always save your money to invest it further. This will help you a lot as getting good returns on your money. Hence you can grow wealthy a lot quicker than everyone else.
In India, at the time of writing this article, the savings bank interest rate is around 3%. The rule of 72 states that your money will double in 72/3 = 24.
So, your money will double every 24 years while in the USA, the interest rates are around 0%. So that means that you keep your money in your high yield savings account, your money will never double.
Fixed Deposit (FD)/ Certificate of Deposit (CD)
These options are incredibly safe, as the savings account and give much better returns compared to the savings account.
FD interest rates in India are around 6.5%, which is more than double and will double your money in approximately ten years.
While in the USA, the CD interest rate is around 1.5%, which is still lower than the average inflation rate in the USA. Your investment in cd will double itself in roughly 48 years. Not inadequate compared to never doubling your money.
Most FD/CD will have a certain lock-in period depending on the region, so consider that before investing your money in FD/CD.
When you give a loan to a company or a government, it’s called bonds. When you buy a bond, you are allowing the bond issuer to borrow your money at a fixed interest rate.
Bonds are generally considered a safe investment. Therefore, they return lower interest rates. The primary risk is that the issuer might default on the loan.
You can buy high-interest rates bonds, but these are riskier investments to a company that might not have enough cash to pay you back. This increases your risk, and therefore your reward is increased as well.
Government bonds are the safest bonds as they are backed by the government and will only fail when the government fails. Interest in these bonds is generally paid at regular intervals.
Stocks may be the most well-known investment out there, but it surprises me that very limited person actually how to earn money effectively from the stock market.
Buying stocks essentially means that you are buying ownership of the company that you purchased shares of. You can easily purchase shares of publicly-traded companies on the stock market.
Public traded companies are the companies that are listed on the stock market like NSE, NYSE, NASDAQ, BSE, etc.
Getting consistent returns for retail investors like ourselves can be difficult, but it can be done if you learn how to do it. People do it, and it’s not dumb luck that they can achieve good returns.
15% a year from stocks are pretty easy to earn using specific methods like value investing. We will discuss this later in an article, but in the meanwhile check this blog here.
You can follow Rule #1 investing for getting a 15% return per year. you can check all about it here.
Warren Buffet, the most significant investor of all time, is a value investor, and he manages to get a 19% growth rate for his investments each year. He has around 500 billion dollars under his management.
He claims that he can get 50% returns each year if Mr. Buffet was a retail investor with less money as he can find small companies. Right now, if he invests in a small company, his portfolio won’t move much with it as his portfolio is too big.
Even if you cannot get 50% like Mr. Buffet could, 15% per year will double your money every 5 years. If you can get a 26% return each year, you double your money every 3 years.
In my opinion, stocks are the best investments you can make. You might feel differently about it, and that’s quite alright, as an investment is a subjective matter and will differ for each individual.
There are a ton of mutual funds out there for you to choose from. This might confuse many people. It can be a tough decision to select mutual funds.
You need to know the basic types of mutual funds that are out there in the market, and then you can make an informed decision about them.
The types of mutual funds are: –
These funds invest in short term bonds like government bonds, commercial paper, short term company debt, FD, etc. They are generally considered a safe investment as these funds invest in bonds that mature in a day. These funds have a slight risk but also give a low return on your investment.
These funds buy debt bonds like the government bonds, high-grade company bonds, etc. These bonds mature within 3 months and therefore are also considered a safe investment. These bonds have higher interest rates, compared to overnight bonds and thus reward investors higher than overnight funds.
These funds invest in the stock market. These funds have a target of getting a higher return than the stock market index or at least more than the liquid funds.
These are actively managed funds, which means a qualified money manager makes all the decisions about when to buy and sell individual shares etc. Therefore, these funds can provide a good return on your investment, but these types of funds can also lose your money in bad times like this (recession or depression).
There are a lot of equity funds to choose from, and these funds can be further classified into
- Growth stocks (Which don’t usually pay dividends)
- Income funds (Which hold stocks that pay significant dividends)
- Value stocks
- Large-cap stocks, Mid-cap stocks, Small-cap stocks
- Or combinations of these.
You need to also research the money manager and his track record before investing in actively managed funds.
These funds invest in a mix of equities and fixed-income securities. They try to balance the aim of achieving higher returns against the risk of losing money.
Most of these funds follow a formula to split the money among the different types of investments. They tend to have more risk than fixed-income funds but less risk than pure equity funds.
Aggressive funds hold more equities and fewer bonds, while conservative funds hold fewer equities relative to bonds.
These funds aim to track the performance of a specific index such as the NIFTY 50, S&P 500, etc. The value of the mutual fund will go up or down as the index goes up or down.
Index funds typically have lower costs than actively managed mutual funds because the portfolio manager doesn’t have to do as much research or make as many investment decisions.
These funds focus on specialized mandates such as real estate, commodities, or socially responsible investing. For example, a socially responsible fund may invest in companies that support environmental stewardship, human rights, and diversity.
It may avoid companies involved in alcohol, tobacco, gambling, weapons, and the military.
These funds invest in other funds. Similar to balanced funds, they try to make asset allocation and diversification easier for the investor. Depending on the fund, it can be an excellent option.
The fees of these funds are on a higher side as they need to pay fees to other funds as well.
Generally, people buy houses to live in it themselves or rent it to someone else and earn a side income from it as well as property appreciation. Real estate investing also includes any purchases related to land like plots, farms, etc. Investing in real estate can be very tricky due to multiple factors like:-
- Rental income earned from the house usually ranges between 2-3 percent a year, although you can use leverage(loan) to your advantage to make more than that.
- The appreciation of the prices of house property can depend on various factors such as size, locality, location, etc.
- investments in real estate is not liquid(can’t sell immediately for cash in case of an emergency) and can be very costly when adding the costs of maintenance, property taxes, vacancies, etc.
- Due to this nature, governments give a lot of tax advantage to real estate owners, and if you do it intelligently and within your means, you can get wealthy as it is one of the oldest and most time-tested investments out there.
Cryptocurrencies are new types of investment options. Among all the cryptocurrencies, bitcoin is the most famous one, but there are thousands of currencies out there. Some retailers in certain countries like the USA, Japan, etc. let you transact and purchase items through cryptocurrencies.
They are digital currencies, and they don’t have any government backing, so they don’t have any intrinsic value to them. All cryptocurrency investments are speculative in nature.
These types of investment should be avoided if you can’t see your money going down to 0. Cryptocurrencies have wild fluctuations and are not regulated, so a lot of market manipulation is present.
Due to this nature, you can double your money in a single day or loose all of your money in the same amount of time. Investing in cryptocurrencies is like gambling in a casino.
Therefore, you should never invest money you can’t afford to lose.
Exchange-Traded Funds (ETFs) are similar to mutual funds as these are a collection of investments that tracks their performance and can be traded on the stock market.
The key difference between mutual funds and ETFs is that unlike mutual funds, which are bought through fund houses, ETFs are traded on the stock market.
The most popular ETFs is the index fund ETFs. These track the performance of the index and are generally recommended to beginners who don’t have the knowledge of selecting shares and want to get the gains from the stock market.
You can buy all kinds of ETFs, ranging from dividend ETFs, growth ETFs, value ETFs, bonds ETFs, commodities ETFs, sector ETFs, to name a few.
Annuities are a type of systematic withdrawal plan where you give money to a bank or an insurance company, and they give you periodic payments. The periodic payments can start right now or at a future specified date.
You need to pay a lump sum amount to the company to receive periodic payments or buy a policy from an insurance company that will return your money with interest at a later date in the form of an annuity.
Commodities are the physical items that you can buy. They could range from a wide variety of products like metals, oil, crops, coal, etc.
Precious metals, like Gold and Silver, are the most common and well-known commodities that people buy and trade.
Gold is considered a “Safe haven” of investing as this commodity has held its value from thousands of years and will continue to do so for a thousand more.
Gold has consistently good returns, although it’s less than stocks and mutual funds. Still, instead of those investments going down in times of trouble (recession or depression like the one we are in right now), gold tends to increase because it’s considered a “safe haven,” as mentioned earlier.
This investing can be risky depending on the item as the prices tend to move in a particular direction quicker than most things.
At the time of writing, the price of oil touched −37$ for the first time from 15$ in a single day. That’s about 50$ drop per barrel of oil.
So before investing in commodities, make sure to understand your risk tolerance.
Public Provident Fund (India)
If you are India, you might have heard about the Public Provident Fund (PPF), and it’s a common investment tool.
That’s because it is backed by the Government of India, and your investment will only fail if the Government of India fails, which has an extremely slim chance of happening.
Therefore, it’s one of the safest options to invest in India.
The interest rates currently stand at 7.10% down from 7.90% just a couple of months earlier. These rates are still higher than what’s provided by FD.
You can expect to double your money roughly every 10 years according to the rule of 72.
One more advantage of using PPF is that its wholly tax-free and fallows an Exempt- Exempt- Exempt (EEE) model.
This means that you can invest your pre-tax money in this scheme. You don’t need to pay taxes on the capital gains that you earned from this, and when you withdraw your money, it’s completely tax-free.
Sounds too good to be true, but it is real. However, the only drawback here is that there is a 15-year lock-in period.
That means that you can’t withdraw your money before that except certain circumstances mentioned here.
Life Insurance Cooperation (LIC) is the biggest insurance company in India.
You might be wondering why I am mentioning LIC as an investment rather than insurance. That’s because, in India, LIC offers both insurance and investment in the same policies.
There are two types of policies: –
It is a policy where the premium is high, and you are given the assurance that if something terrible happens, you can redeem the policy. If not, you get your principal money back with interest.
Term insurance policy
You pay less premium per year compared to the endowment policy. In term insurance, if something happens to you in a specific time, you can claim the policy, else it expires.
Both options are good, but if you can get a better return on your capital elsewhere, then the term insurance policy is a better option rather than an endowment policy.
The salesperson might try to tell you otherwise, only because they get a higher commission from endowment policy,
Depending on your country you may have different options available to you where different tax advantages are given by the government to you.
You should take advantage of these accounts as these are great way to invest and save tax deductions
Some of the retirement accounts out there are
Individual Retirement Account (USA)
IRA is an individual account you can open specifically for retirement purposes. There are two types of IRA accounts named ROTH IRA and Traditional IRA.
IRAs give you the flexibility to choose where you want to invest your money. Be it stocks, mutual funds, bonds, or some other assets. You can open your IRA account with a bank or a broker, and they will help you with the setup.
IRA’s are only a means of investment, which means that they give you certain advantages like tax breaks on your investments, but are not like other investments like we talked about in this article.
Traditional IRA lets you invest your Pre-tax income to your IRA, but you need to pay taxes on withdrawal of your money when you are eligible to retire. This can benefit a lot of people who can ramp up their contributions because they can do it before paying taxes on their money.
If you were on the fence and now are considering opening an IRA account, then you should consider opening a ROTH IRA account instead.
ROTH IRA is sort of opposite to a Traditional IRA as you can invest your after-tax money in the account but get to keep the entire investment without any taxes at the time of retirement.
Chances are that you are in a lower tax bracket compared to when you retire, and therefore, you can pay your taxes now to lock in a lower tax rate compared to a higher one at the time of your retirement.
A 401k plan is a tax advantage plan for any working American. You can be working for a big company or run your own company and still avail 401k benefits.
The main benefit of a 401k is that it is company-sponsored, which means your employer has to pay a certain amount in your account. This is essentially free money.
The employer will match your 401k retirement investment up to a certain limit. This can accelerate your portfolio, and you should always at least max out the match your employer gives.
401k mostly only allows you to invest in certain investments that your employer deems fit. Mutual funds are the most popular for 401k.
If you are self-employed, you have flexibility in what you want to invest in.
There are two types of 401k, just like an IRA. Traditional and ROTH, which are pretty much the same as the IRA. The only difference between both is the tax system.
National Pension System (India)
The national pension system (NPS) is a long-term retirement investment in India and is pension fund regulators. It is a mix of equity(shares), FD, bonds, etc.
Depending on your risk appetite, you can decide how much money should be invested in equities by the NPS.
Investing isn’t just for fund managers.
You can do it too
Knowing about all the investment options available in the market, you can make an informed decision about where you need to invest because everyone has a different mindset.
You might not be comfortable in investing in cryptocurrencies, while someone else might be.
Therefore, there is no correct answer to where you should invest. The only correct answer will be based on your risk tolerance, your minimum acceptable rate of return, and your tax deductions.
To help you in selecting the right investments for you, you can contact a good, trustworthy, and licensed financial planner that will help you and guide you with your investments.
Personally, I invest in stocks, mutual funds, PPF and cryptocurrencies.
So, where are you planning to invest?
Frequently Asked Questions(FAQ)
Where should I invest my money?
There is no correct answer to where you should invest. The only correct answer will be based on your risk tolerance, your minimum acceptable rate of return, and your tax deductions.
What is the main purpose of investing?
Investing is the path you path to achieve financial freedom and wealth. Therefore, the main purpose of investing is to earn money and grow your wealth.