There are seven basic ways to invest your money by
1. There are seven basic ways to invest your money by:
Putting it in the bank
Lending it to someone
Buying stocks
Buying a house
Buying gold and silver
Buying collectibles
Buying mutual funds
Let’s use an example to demonstrate the types of investments. For instance,
pretend you are going to start a lemonade stand. You need some money to get
your stand started. You ask your grandmother to lend you $100 and write this
down on a piece of paper: "I owe you (IOU) $100, and I will pay you back in
a year plus 5% interest." Your grandmother just bought a bond (IOU) by
lending money to your "company" named Lemo. To get more money, you sell
half of your company for $50 to your brother Tom. You put this transaction in
writing: "Lemo will issue 100 shares of stock. Tom will buy 50 shares for
$50." Tom has just bought 50% of the shares of stock from Lemo.
You sell $500 worth of lemonade. Business is good. Your costs for setting up
the stand are $150, plus you pay yourself $100 for the hours you work. The
company makes profits of $250.
After one year, from the $250 profits, you pay back your grandmother $100 plus $5 interest. You
pay $20 to Tom and yourself, shareholders (a fancy name for owner). In business, the $20 paid to
the owners is called a dividend. You decide to put the dividend money in the bank. Banking the
money is a short-term investment.
This example covers three types of investments: short-term investments, bonds, and stocks.
Besides these three, there are real estate (buying a house), commodities (gold and silver),
collectibles (such as baseball cards), and mutual funds. Let’s examine these seven, one at a time.
Financial Investment Options
Summarised below are the short-term and long-term financial investment options available for Indian investors.
Click on the instrument names to see a short explanation.
Short-term investing
Savings bank account
Use only for short-term (less than 30 days) surpluses
2. Money market funds
Offer better returns than savings account without compromising liquidity
Bank fixed deposits
For investors with low risk appetite, best for 6-12 months investment period
Long-term investing
Post Office savings
Low risk and no TDS
Public Provident Fund
Best fixed-income investment for high tax payers
Company fixed deposits
Option to maximise returns within a fixed-income portfolio
Bonds and debentures
Option for large investments or to avail of some capital gains tax rebates
Mutual Funds
Unless you rate high on our Investment IQ Test, use mutual funds as a vehicle to invest
Life Insurance Policies
Don't buy life insurance solely as an investment
Equity shares
Maximum returns over the long-term, invest funds you do not need for at least five years
1. Savings Bank Account
Use only for short-term (less than 30 days) surpluses
Often the first banking product people use, savings accounts offer low interest (4%-5% p.a.), making them only
marginally better than safe deposit lockers.
Back
2. Money Market Funds (also known as liquid funds)
Offer better returns than savings account without compromising liquidity
Money market funds are a specialized form of mutual funds that invest in extremely short-term fixed income
instruments. Unlike most mutual funds, money market funds are primarily oriented towards protecting your
capital and then, aim to maximise returns.
Money market funds usually yield better returns than savings accounts, but lower than bank fixed deposits. With
the flexibility to issue cheques from a money market fund account now available, explore this option before
putting your money in a savings account.
Back
3. Bank Fixed Deposit (Bank FDs)
For investors with low risk appetite, best for 6-12 months investment period
3. Also referred to as term deposits, this product would be offered by all banks. Minimum investment period for
bank FDs is 30 days.
The ideal investment time for bank FDs is 6 to 12 months as normally interest on bank less than 6 months bank
FDs is likely to be lower than money market fund returns.
It is important to plan your investment time frame while investing in this instrument because early withdrawals
typically carry a penalty.
Back
1. Post Office Savings Schemes (POSS)
Low risk and no TDS
POSS are popular because they typically yield a higher return than bank FDs. The monthly income plan could
suit you if you are a retired individual or have regular income needs.
Besides the low (Government) risk, the fact that there is no tax deducted at source (TDS) in a POSS is amongst
the key attractive features.
The Post Office offers various schemes that include National Savings Certificates (NSC), National Savings
Scheme(NSS), KisanVikasPatra, Monthly Income Scheme and Recurring Deposit Scheme.
Back
2. Public Provident Fund (PPF)
Best fixed-income investment for high tax payers
PPF is a very attractive fixed income investment option for small investors primarily because of -
1. An 11% post-tax return - effective pre-tax rate of 15.7% assuming a 30% tax rate
2. A tax-rebate - deduction of 20% of the amount invested from your tax liability for the year, subject to a
maximum Rs60,000 for a tax rebate
3. Low risk - risk attached is Government risk
So, what's the catch? Lack of liquidity is a big negative. You can withdraw your investment made in Year 1 only
in Year 7 (although there are some loan options that begin earlier).
If you are willing to live with poor liquidity, you should invest as much as you can in this scheme before looking
for other fixed income investment options.
Back
3. Company Fixed Deposits (FDs)
Option to maximise returns within a fixed-income portfolio
FDs are instruments used by companies to borrow from small investors. Typically FDs are open throughout the
year. Invest in FDs only if you have surplus funds for more than 12 months. Select your investment period
carefully as most FDs are not encashable prior to their maturity.
4. Just as in any other instrument, risk is an embedded feature of FDs, more so because it is not mandatory for
non-finance companies to get a credit rating for this instrument.
Investors should consciously (either though a credit rating or through an expert) select the companies they invest
in. Quite a few small investors have lost their life's savings by investing in FDs issued by companies that have
run into financial problems.
Back
4. Bonds and Debentures
Option for large investments or to avail of some capital gains tax rebates
Besides company FDs, bonds and debentures are the other fixed-income instruments issued by companies. As
a result of an illiquid secondary market and a lack-lustre primary market, investment in these instruments is
largely skewed towards issues from financial institutions.
While you might find some high-yielding options in the secondary market, if you do not want the problems
associated with bad deliveries and the transfer process or you want to invest a large sum of money, the primary
market is the better option.
Back
5. Mutual Funds
Unless you rate high on ourInvestment IQ Test, use mutual funds as a vehicle to invest
Have you ever made an investment in partnership with someone else? Well, mutual funds work on more or less
the same principles. Investors pool together their money to buy stocks, bonds, or any other investments.
Investing through mutual funds allows an investor to -
1. Avail the services of a professional money manager (who manages the mutual fund)
2. Access a diversified portfolio despite making a limited investment
Our primer Investing in Mutual Funds should educate you a lot more on the benefits of investing in mutual funds
and strategies you could employ.
Back
6. Life Insurance Policies
Don't buy life insurance solely as an investment
Life insurance premiums, depending upon the policy selected, include the costs of -
1) death-benefit coverage
2) built-in investment returns (average 8.0% to 9.5% post-tax)
3) significant overheads, including commissions.
This implies that if you buy insurance solely as an investment, you are incurring costs that you would not incur in
alternate investment options.
5. It is, however, important to insure your life if your financial needs and profile so require. Use our Are You
Adequately Insured planning tool to find out if you need life insurance, and if yes, how much.
Back
7. Equity Shares
Maximum returns over the long-term, invest funds you do not need for at least five years
There are two ways in which you can invest in equities-
1. through the secondary market (by buying shares that are listed on the stock exchanges)
2. through the primary market (by applying for shares that are offered to the public)
Over the long term, equity shares have offered the maximum return to investors. As an investment option,
investing in equity shares is also perceived to carry a high level of risk.
Learn more about building an equity portfolio in Investing in Equities
Investment
From Wikipedia, the free encyclopedia
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For other uses, see Investment (disambiguation).
"Invest" redirects here. For the term in meteorology, see Invest (meteorology).
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Investment has different meanings in finance and economics.
In economics, investment is related to saving and deferring consumption. Investment is involved
in many areas of the economy, such as business management and finance whether for
households, firms, or governments.
6. In finance, investment is putting money into something with the expectation of gain, usually over
a longer term. This may or may not be backed by research and analysis. Most or all forms of
investment involve some form of risk, such as investment in equities, property, and even fixed
interest securities which are subject, inter alia, to inflationrisk.
In contrast putting money into something with a hope of short-term gain, with or without
thorough analysis, is gambling or speculation. This category would include most forms of
derivatives, which incorporate a risk element without being long-term homes for money, and
betting on horses. It would also include purchase of e.g. a company share in the hope of a short-
term gain without any intention of holding it for the long term. Under the efficient market
hypothesis, all investments with equal risk should have the same expected rate of return: that is
to say there is a trade-off between risk and expected return. But that does not prevent one from
investing in risky assets over the long term in the hope of benefiting from this trade-off. The
common usage of investment to describe speculation has had a effect in real life aswell: it
reduced investor capacity to discern investment from speculation, reduced investor awareness of
risk associated with speculation, increased capital available to speculation, and decreased capital
available to investment.
Contents
[hide]
1 In economics or macroeconomics
2 In finance
3 History
4 Types of investment
5 See also
6 Notes
7 External links
[edit] In economics or macroeconomics
In economic theory or in macroeconomics, investment is the amount purchased per unit time of
goods which are not consumed but are to be used for future production (i.e. capital). Examples
include railroad or factory construction. Investment in human capital includes costs of additional
schooling or on-the-job training. Inventory investment is the accumulation of goods inventories;
it can be positive or negative, and it can be intended or unintended. In measures of national
income and output, "gross investment" (represented by the variableI) is also a component of
gross domestic product (GDP), given in the formula GDP = C + I + G + NX, where C is
consumption, G is government spending, and NX is net exports, given by the difference between
the exports and imports, X − M. Thus investment is everything that remains of total expenditure
after consumption, government spending, and net exports are subtracted (i.e. I = GDP − C − G −
NX).
7. Non-residential fixed investment (such as new factories) and residential investment (new houses)
combine with inventory investment to make up I. "Net investment" deducts depreciation from
gross investment. Net fixed investment is the value of the net increase in the capital stock per
year.
Fixed investment, as expenditure over a period of time ("per year"), is not capital. The time
dimension of investment makes it a flow. By contrast, capital is a stock— that is, accumulated
net investment to a point in time (such as December 31).
Investment is often modeled as a function of Income and Interest rates, given by the relation I =
f(Y, r). An increase in income encourages higher investment, whereas a higher interest rate may
discourage investment as it becomes more costly to borrow money. Even if a firm chooses to use
its own funds in an investment, the interest rate represents an opportunity cost of investing those
funds rather than lending out that amount of money for interest.[1]
[edit] In finance
In finance, investment is the application of funds to hold assets over a longer term in the hope of
achieving gains and/or receiving income from those assets. It generally does not include deposits
with a bank or similar institution. Investment usually involves diversification of assets in order to
avoid unnecessary and unproductive risk.
In contrast, dollar (or pound etc) cost averaging and market timing are phrases often used in
marketing of collective investments and can be said to be associated with speculation.
Investments are often made indirectly through intermediaries, such as pension funds, banks,
brokers, and insurance companies. These institutions may pool money received from a large
number of individuals into funds such as investment trusts, unit trusts, SICAVsetc to make large
scale investments. Each individual investor then has an indirect or direct claim on the assets
purchased, subject to charges levied by the intermediary, which may be large and varied.
[edit] History
The Code of Hammurabi (around 1700 BC) provided a legal framework for investment,
establishing a means for the pledge of collateral by codifying debtor and creditor rights in regard
to pledged land. Punishments for breaking financial obligations were not as severe as those for
crimes involving injury or death.
In the early 1900s purchasers of stocks, bonds, and other securities were described in media,
academia, and commerce as speculators. By the 1950s the term investment had been co-opted by
financial brokers and their advertising agencies to promote speculation. The terms speculation
and speculator have long had negative connotations.
[edit] Types of investment
8. Types of investments include:
Traditional investments
Alternative investments
Investment Types
Once you’ve made the decision to invest your money, there are two important decisions you
need to make: how much to invest and where to invest it. It’s important to understand your
options as well as the risks associated with each of them.
There are three main types of investments:
Stocks
Bonds
Cash Equivalent
You can invest in any or all three investment types directly or indirectly by buying mutual funds.
You may also want to consider an individual retirement account (IRA) or annuity, both of which
can offer tax-deferred investment savings.
Stocks
When you invest in stocks, you’re buying a share of ownership in a corporation and become a
shareholder. Companies sell shares of stock to raise money for start-up or growth.
There are two types of stock: common stock and preferred stock.
With common stock, shareholders have a percentage of ownership. For example, if you own one
share of common stock in a company that has 100 shares, you own 1 percent of the company.
Common stock shareholders also have the right to vote on issues affecting the company.
Preferred stock usually does not offer voting rights, but shareholders are generally entitled to
dividends (the company’s profits distributed in cash). Preferred stockholders typically receive
dividends at specified times and in predetermined amounts; common stockholders may or may
not receive dividends based on company profits.
Investment returns and risks for both types of stocks vary, depending on factors such as the
economy, political scene, the company's performance and other stock market factors.
Bonds
When you buy bonds, you loan money to the government or to a company. Bonds are issued for
a set period of time during which interest payments are made to the bondholder. The amount of
9. these payments depends on the interest rate established by the issuer of the bond (the government
or company) when the bond is issued. This is called a coupon rate. Coupon rates can be fixed or
variable. At the end of the set period of time (called the maturity date), the bond issuer is
required to repay the par or face value of the bond (the original loan amount).
Bonds are considered a more stable investment compared to stocks because they usually provide
a steady flow of income. But because they’re more stable, their long-term return probably will be
less than that of stocks. Bonds, however, can sometimes outperform a stock’s rate of return,
depending on the particular stock.
Keep in mind that bonds are subject to a number of investment risks including credit risk,
repayment risk and interest rate risk.
Cash-equivalent
Cash equivalent investments, like passbook savings accounts, money market funds or certificates
of deposit (CDs), protect your original investment and let you have access to your money.
These types of investments generally deliver a more stable rate of return. On the other hand, the
rate of return (after taxes are paid) is often so low that it doesn’t keep pace with inflation. A
passbook savings account, money market fund or CD may give you quick access to your cash
and may provide more short-term security. However, they’re not designed for long-term
investment goals like retirement.
Here are some types of cash-equivalent investment types:
Money Market: A fund usually invested in Treasury bills, CDs and commercial paper
from large established institutions. They are typically safe, liquid investments.*
Certificate of Deposit: A fixed period, interest-bearing investment with a bank or
savings & loan. An FDIC-insured CD is a low-risk investment.
Passbook Savings: A bank account that generally provides a low, guaranteed, fixed rate
of return.
Mutual Funds: A mix of investments that may include stocks, bonds and cash-
equivalents. The fund is managed by a professional money manager and has a stated
objective or investment style.
More about mutual funds
Some high-growth mutual funds will consist of high-risk stocks; others may consist of more
stable stocks, as well as bonds in an attempt to beat inflation.
Always check the objective of the mutual fund and read the fund's prospectus to make sure it’s
consistent with your goals. A good place to get independent information on a mutual fund,
including its performance history is through Morningstar®, an independent fund rating service.
Morningstar materials can be found on the internet and at your local library.
10. * An investment in a money market fund is not insured or guaranteed by the FDIC or any other
government agency. Although the money market fund seeks to preserve the value of your
investment at $1 per share, it is possible to lose money by investing in the money market.
Investing may involve market risk, including possible loss of principal.
3 Types Of Investment Income, Predictable, Variable
Or Guaranteed
What Source of Investment Income Will Work Best For You?
By Dana Anspach, About.com Guide
See More About:
retirement income
annuities
choosing investments
investment income
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Imagine a never ending source of investment income. Is it possible? Perhaps… if you do things right.
First, you have to understand which investments generate what type of income. I find it helpful to
break investment income into three categories: predictable income, variable income and guaranteed
income.
The most effective way to generate investment income will be to use a combination of all three
strategies, each of which is outlined below.
11. Predictable Investment Income
Interest income from corporate bonds and dividend income paid by stocks are two good examples of
predictable investment income. These sources of income can be relied upon in most circumstances,
but they are not guaranteed.
You can use these predictable sources of investment income to supplement guaranteed income by
buying interest and dividend paying investments directly, or by buying funds that focus on such
investments.
Dividend income is paid by:
Dividend Paying Stocks
Dividend Income Funds
Closed End Funds
Interest income is paid by:
Bonds and Bond Funds
Certificates of Deposit
Money Market Funds
Other Safe Investments
High Yield Investments
Income From Selling Covered Calls
Dividend and interest producing investments are best used as part of a total return portfolio as
described in the last section below. If used on their own rather than in combination with other income
producing strategies, these predictable sources of investment income are best for people:
Who do not want to spend any of their principal.
Who have shorter life expectancies.
Who may not need their investment income to keep pace with inflation.
Variable Investment Income
One way to create lasting investment income is to build an overall portfolio consisting of cash, fixed
income and equities.
The cash and fixed income form the "safe" part of your portfolio. They will generate current
investment income in the form of interest. The equities form the growth portion of the portfolio, which
allows your future investment income to increase with inflation.
There are capital preservation rules and withdrawal rules that need to be strictly followed when
creating this type of portfolio and the income generated will vary from year to year.
Academic studies say that creating an income producing portfolio, such as described above, is the best
way to generate investment income that will last over a potentially long life expectancy.
12. If you don’t want to create your own portfolio, you can use a retirement income fund, which will do
most of the work for you.
This total return, or variable investment income strategy, is best for people:
With long life expectancies.
Who want to leave an inheritance.
Who take a long term, unemotional approach to investing.
A variable investment income strategy can be layered over a base of guaranteed income to create
what I call the Ultimate Retirement Income Strategy.
Guaranteed Investment Income
Guaranteed investment income is exactly what it sounds like; income that is guaranteed by either the
U.S. government, or an insurance company. Safe investments like certificates of deposit, treasury
securities and fixed annuities are the primary sources of guaranteed investment income. Learn more
in Making Safe Investments.
In addition, there are several ways you can purchase additional guaranteed income:
The most common way to purchase guaranteed investment income is by purchasing an annuity.
If you took social security early you may be able to repay benefits and essentially purchase a
higher future benefit amount.
Your employer sponsored pension plan may allow you to purchase years of service so you qualify
for a higher benefit.
Guaranteed investment income makes an excellent foundation for a more comprehensive retirement
income strategy.