What are the different investment options available in India? We will explore this topic with a brief understanding of each of the options. As always, I am sharing this information from my personal experience so you can make better financial decisions and avoid the mistakes that I made.
Welcome to the third post of the series – In Pursuit of Financial Freedom. If you have not read them already, I urge you to read the first two posts in the series –
1. Why is investing your money necessary
2. The Basics – Do this before investing your money
Now, there could be a thousand different ways to invest your money – equity, commodities, real estate, a business, funds, etc. I am going to share the most common ones that I am aware of. But if you think I missed an important one, please leave a comment below. Also, this is not a very comprehensive guide in understanding each option because each option is huge individually. We will explore them in-depth in the blogs to come. But for this one, we will focus on their summary and my opinions on them.
1. Direct Stocks
It is important to understand the term ‘Equity’. As per the Cambridge dictionary – ‘Equity is the value of a company, divided into many equal parts owned by the shareholders, or one of the equal parts into which the value of a company is divided‘. In short, when you buy a ‘share’ of the company, you become part-owner of the company. There are 2 ways you make money here – When the company does well – 1. the value of the company increases, thus increasing the value of individual shares you own. 2. The company offers ‘dividends’ (distribution of profits) to its shareholders periodically.
Dealing with Stocks is one of the best investment options there is. This topic is too huge to cover even in a book. But, if you are a new investor – your best bet is to identify companies you can depend on and buy their shares when their prices are down and hold them for a long time. There are a lot of other investment strategies, but this is good to start with. We will explore this topic in more detail in a separate blog. But for now, please don’t make these mistakes I made –
- Listening to stock tips – There are a lot of fake tips out there. But, as a best practice, please do not follow any stock tips anyone offers you. Do your own research. Learn more about the company. Read all recent news about it. Watch the historical figures of the company closely. And if you believe that this company will do well in the future, only then invest in it. Remember, you will be an ‘owner’ of the company, even if for a small bit. So, think like an owner and invest in things you believe in.
- Trying Intraday trading – I jumped into intraday trades very soon in my investment journey. It was a mistake. If you are a new investor and this is not your full-time job, you are better off buying good shares and holding them for the long term.
You need a Demat account to deal with stocks. If you don’t have one, I recommend opening an account on Zerodha and using their Kite app to do this.
2. Mutual Funds
Mutual Funds are one of my favorite investment options. If you are a new investor, if you cannot spend a lot of your time tracking your investments, and if you are looking for experts to handle your money – invest in Mutual funds. A Mutual Fund is essentially a pool of money that we investors put in and the Fund manager then invests that money in different places like stocks, bonds, money market instruments, assets, etc. There are a lot of different types of Mutual Funds and I will share my method of selecting a mutual fund in another blog, but let’s look at a few basic types –
i. Equity based Mutual Funds –
As the name suggests, these funds mainly focus on equities i.e. they invest in stocks (more than 65% of the total sum). These give the best returns in general. Since they are linked to the market, they also face the same risks as individual stocks. But, as a mutual fund is a portfolio of different stocks, the risk also gets spread and unless the entire market falls or goes into recession, the stocks balance each other and give a good return. There are a lot of different types of Equity-based mutual funds like Large Cap, Mid Cap, Small Cap, Multi-Cap, ELSS (tax saving), etc. We will explore more of that later. These are best for long-term goals and higher returns. This is where my majority of investments are currently.
ii. Debt Mutual Funds –
To explain in layman’s terms, Debt Funds are like loans that we as investors give to companies. And, as is with all the loans, the rate of interest is generally fixed or floating in a range and there is a time period associated with the loan. You can guess by now that the returns on these funds are almost guaranteed unless the company you give the loan to goes bankrupt. They are more stable as compared to Equity funds. But they also provide lower returns. Again, there are a lot of different types of debt funds like – Dynamic Bonds funds, Liquid Funds, Short term and Ultra Short term funds, etc. These are best for short-term and lower returns (still higher than banks’ savings interest).
Tip: If you plan to invest 100 Rs in mutual funds, I would recommend putting 100 – your age in Equity Mutual Funds and the rest in debt funds. So if you are 20, put 80% in Equity funds and 20% in debt funds. But if you are 60, put 40% in Equity funds and 60% in debt funds. This will help manage your risk as per your age.
3. Cryptocurrency
Cryptocurrency is not at a place where it will replace the centralized money system. But, it is on its way. I do believe the future of money is digital but I am not sure if the answer is the current crypto lot. Still, it would be stupidity to ignore it. To understand what cryptocurrency really is, we first need to understand blockchain technology. I will write a separate blog post to try to explain that in layman’s terms. But as far as this post is concerned, I do feel that crypto should be part of your portfolio. Considering how volatile it is, I would recommend keeping this between 5-10 % of your overall portfolio. I started recently. I have tried CoinSwitch Kuber and WazirX. While they are both far from perfect, they are a good start to jump into this market.
Before you jump on the Crypto bandwagon and explore it as one of your investment options, make sure you understand the technology behind it. There are 1000s of cryptos out there. Read about their use-cases, what are they trying to solve. And if you believe in them, only then invest in those coins.
4. Gold
Gold is great for investment. And historically, its prices have always gone up. I was never interested in Gold because I always associated it with buying jewelry. I was wrong. And stupid to ignore Gold as an investment. Don’t get me wrong, I am still not into buying physical Gold. In my opinion, that is an ‘expense’ and not an ‘investment’. Until recently, I wasn’t aware that you can also buy ‘Digital Gold’.
There are multiple ways to invest in Digital Gold. Upstox digital gold is one way where Upstox buys and stores gold on your behalf. I have not tried it personally though. The other way to invest in Gold is ‘Sovereign Gold Bonds’ and ‘Gold ETFs’ that I have started to invest in. I use my Zerodha account to do this.
5. Smallcase
Smallcase is not a separate category of investment options. But, it is a fantastic middle ground between direct stocks vs mutual funds. This is why I have included it separately. It is a startup backed by Zerodha. What they do is create portfolios of stocks (similar to Mutual funds). The portfolio can be industry-focussed or something else. When you buy a smallcase, it basically buys those stocks directly in your Demat account. Now, you can either trade those stocks individually or as a portfolio. So, you have better control unlike in a mutual fund where all the decisions are taken by your fund manager. It is quite interesting and I recommend giving it a try.
6. Real Estate
Real Estate is one of the traditional investment options. It can also give you great returns. Commercial real estate usually gives a higher return than residential. So, if you are buying a house for staying in it, I would not exactly call it an investment. Though, it is very likely that the prices of the property will go up if you do want to sell it. I see two main problems with real estate as an investment strategy –
1. It requires a huge capital upfront.
2. It is a slow-moving asset. You cannot rely on it for emergencies when you are in need of liquid cash.
So, in my recommendation, consider this option only if you have capital lying around that you would not use in emergencies. And consider commercial properties over residential. If you are a new investor, I would not recommend going the real estate route too early.
7. FD, PPF & NPS
FD or Fixed Deposits are investment options provided usually by Banks. They provide a fixed interest against your principal amount. The interest is usually in the range of 5-7 % which is higher than what a bank savings account offer. They are considered very low risk because the return is guaranteed. They generally have a lock-in period of 1-5 years and the income earned out of the interest is taxable.
PPF or Public Provident Fund is an investment instrument backed by the government of India. PPF also offers a fixed interest over your amount deposited. This option is also very safe as it is guaranteed by the government. This is also a taxing saving investment. The downside to this is that there is a lock-in period of 15 years, which is quite high. So it will not help you in times of crisis. This is a great option if you want to invest the money for child education (start right when the child is born).
NPS or National Pension Scheme is a long term investment scheme. It falls under the purview of the Central government and Pension Fund Regulatory and Development Authority. The idea is that you keep investing money in NPS while you are employed. And when you retire, you get a pension per month based on the money accumulated. Earlier, this was only open to the employees of Central Government. But now, any citizen can voluntarily opt for it.
My recommendation for these is that if you are young and have a long investment horizon ahead of you – skip these. As you have a higher risk appetite at the time, you can focus on high-return investments. But if you are looking for safe options with guaranteed returns, you should consider these.
8. Other investment options
We have only touched on the subject of investment options. There are a lot of different ways you can invest your money like – ULIP(Unit Linked Insurance Plan), SCSS (Senior Citizens Savings Scheme), SSY (Sukanya Samridhi Yojana), RBI Bonds, PMVVY(Pradahan Mantri Vaya Vandana Yojana), IPO (Initial Public Offerings), post office monthly income scheme, etc. Apart from this, you can start and invest in your own business. If you have a good capital, you can also become a Venture Capitalist and fund startups. The options are unlimited. You just need to find your mojo.
Conclusion
I am still new to this investment world. I have shared the options that I have either invested in or considered investing in or have heard of. Depending on your age, risk appetite, and capital available, your investment strategy should change. We will explore some of these investment options in detail. Stay tuned for the upcoming posts. Subscribe to my blog so you get notified when new posts are out.
Disclaimer: I am not a financial advisor. I have no affiliations with any financial institutes. All the opinions shared in this blog are mine only. I am sharing my personal financial experiences and the knowledge I have gained over the years.
