Mobilizing savings into lucrative financial and investment options is a wise financial approach that can help individuals save more over time and build wealth to secure their future. As more individuals regardless of their income group or location become financially aware, the number of investment plans in India has also increased. However, while investment plans are made to help individuals increase their limited savings, not all savings options are suitable for everyone. This is because different investment plans possess different degrees of risk and reward potential, which may not match everyone’s risk tolerance or their requirements to generate returns equally. Therefore, investors need to understand their risk appetite, investment objectives, financial goals, and time horizon before putting money into any investment plan in India.
Investment Plans Based on Risk-appetite
- Low-Risk Investment Options
Individuals with a conservative investment approach prioritize protecting their savings and generating a steady stream of income, so they mostly invest in low-risk investment options like –
- Public Provident Fund
Public Provident Fund is a government-backed savings instrument that offers guaranteed returns and exposes the investor profile to limited market risk. The interest component on PPF is compounded quarterly and its rates are decided by the government. Individuals who intend to invest in a PPF scheme can use a free online PPF calculator to determine which amount would help them generate their desired returns at maturity.
- Money Market Funds
Money Market Funds are essentially short-term debt mutual funds that park money in several money market instruments, and they come with an average maturity of a year. These instruments offer high yields and liquidity, making them a key choice for those seeking a low-risk investment option.
- Fixed Deposit
Fixed deposits are counted as one of the safest and most preferred investment options today, especially for risk-averse individuals. This is because FD accounts are not linked to the stock market directly, so they are not influenced by severe market fluctuations. Fixed deposits help save money and accumulate wealth over time while protecting one’s principal amount and providing a steady interest income over the tenure.
Notably, FDs offer flexible investment tenures, so individuals can choose an investment term that aligns with their goals. For example, if one is saving for a down payment on a new house he/she might invest in a 5-year FD, while one who is saving for retirement may be better off with a 10-year FD plan.
- Treasury Bills
Treasury bills are short-term debt instruments that the government uses to borrow money from the public in exchange for proportionate interest. These bills typically mature in a year and are one of the safe investment options today. However, their returns may be relatively lower than most other money market instruments.
- High-Risk Investment Options
High-risk individuals are those entities who are willing to weather more risk in the hopes of generating higher returns on their respective investments. They often have a strong and reliable financial standing and few financial obligations, which helps them to absorb losses that often accompany high-risk options like –
- Direct Equities
Equity shares can be defined as an investment instrument that allows individuals to own a share of a company’s ownership. The value of equity shares held by an entity is directly linked to the firm’s performance, making them both risky and rewarding.
- Equity Mutual Funds
Note that equity mutual funds typically invest in company stocks on behalf of investors and these options are relatively less risky than investing in one company stocks. Investors have the option to invest in equity mutual funds directly or through a systematic investment plan. Over the long term, equity mutual funds can help beat inflation and appreciate invested capital. However, equity mutual funds also carry risks, so they are best suited for investors with market experience and a high-risk tolerance.
- Hedge Funds
Hedge funds are basically private investment partnerships that pool resources from investors to invest in different markets and assets with the help of complex strategies. Hedge funds are not necessarily subject to the same regulations as mutual funds, which makes them riskier but at the same time more rewarding under favorable circumstances. Seasoned investors usually include these funds in their investment portfolios to diversify their portfolios along with other financial instruments like recurring deposits and protection plans like term insurance and generate better returns over time.
- Medium-Risk Investment Options
The medium-risk investors are often willing to take on additional risk in exchange for better returns. However, they prefer investing in instruments that strike a balance between their inherent risk and reward components, like –
- Debt Funds
Debt funds invest majorly in fixed-income securities, such as corporate and government-backed bonds. They are known to offer a steady stream of earnings and are considered less risky than stock and equity funds. However, they also generate lower earnings, making it fit for investors who do not want to expose their portfolios to a high degree of risk.
- Balanced Mutual Funds
Balanced mutual funds park their money into a mix of company stocks and bonds, exposing the portfolio to a moderate level of risk and showing the potential for significant returns on investment. These funds are considered a good option for those looking for a balanced approach to mobilizing their savings for substantial returns.
- Dividend-Paying Stocks
Dividend-paying stocks are popular among investors as they offer a stream of steady income in the form of company dividends. Individuals can put their money in individual dividend-paying company stocks, to generate a substantial stream of income as its shareholders.
- Exchange-Traded Funds
Exchange-traded funds essentially track a basket of dividend-paying company stocks.
Note that these funds are passively managed and they are traded like company stocks on the exchanges. They offer individuals a convenient way to invest in a specific market sector or index and help generate money as per its movements. ETFs are typically more liquid than regular mutual funds, meaning investors can buy or sell them in the market with more ease.
Regardless of the investment instrument available in India, investors should pick an instrument that ultimately matches their risk profile, financial goal, and portfolio objective.