Introduction to Investment: Types and Strategies

• Investment is the act of investing money in assets with the expectation of generating income or appreciation in the future.
• From an economic perspective, investment involves purchasing goods not for immediate consumption but for future wealth creation.
• In finance, investment refers to buying monetary assets with the aim of generating future income or selling them at a higher price for profit.
• There are two main types of investment: traditional and alternative.

Traditional Investment

• Investing in well-known financial products, such as bonds, shares, and real estate, is considered traditional investment.
• This investment category is popular among investors as an active strategy to grow their money.

Bonds

• A bond involves an investor loaning money to an entity (typically a corporation or government).
• The entity borrows the funds for a specific period at a variable or fixed interest rate.
• Bonds are used by companies, municipalities, states, and sovereign governments to raise funds for various projects and activities.
• Bond owners are debt holders or creditors of the bond issuer.

Stocks

• Stocks, also known as equity, are shares issued by companies and available for purchase by the general public.
• Buying stocks gives companies a way to raise funds and grants customers an ownership stake in the company.
• Returns from stocks are generally higher than returns from other financial instruments, but the associated risk is also higher.
• Businesses can issue different types of shares based on their financial needs, and shareholders receive stock certificates in exchange for their investment.
• The two basic types of stocks are common and preferred stocks.

Small Saving Schemes

• Small savings schemes serve as a tool for saving money in small amounts.
• The aim is to encourage saving habits among people from all economic backgrounds.
• Common small savings tools include certificates of deposit, savings accounts, and pension accounts.
• Most small savings schemes are government-initiated and facilitated to promote savings across the country.

Mutual Funds

• Mutual funds are financial instruments that are professionally managed and invest money on behalf of investors in various securities.
• These funds are classified into different types based on the securities they invest in and categorized by their percentage allocation in these securities.
• Popular mutual fund types include balanced funds, stock funds, and open-ended funds.
• Equity funds primarily invest in equity and are considered high-risk, high-return products. On the other hand, debt funds mainly invest in debt and money market instruments, presenting low-risk, low-return opportunities.

Fixed Deposits

• A fixed deposit is a secure savings method; a fixed amount of money is kept with a financial institution for a set period, earning interest.
• This is more of a passive way to save, not necessarily an active investment tool.
• Interest rates vary with the deposit term and the banking entity.

Real Estate

• Rising property rates have made real estate a popular investment option.
• Buying, selling, and leasing property can provide favorable returns for investors.
• Property appreciation makes real estate a worthwhile investment.
• Many investors obtain loans to purchase real estate, then lease or sell it to profit from price increases.

Alternative Investments

• Alternative investments are those that are not considered regular investments like stocks or bonds.
• Alternative investments include investing in jewelry, precious metals, etc., expected to yield future returns.
• Hedge funds, some real estate types, venture capital, and derivatives fall under alternative investment.
• Alternative investments are non-traditional and complex with low liquidity and high minimum investment limits.
• Common investors may not have access to hedge funds or derivatives due to complexity, but others, like gold and real estate, are more accessible.

Hedge Funds

• Hedge funds are professionally managed private investment companies or partnerships.
• They use fund management techniques not typically allowed for SEC-regulated companies.
• Hedge funds invest in both financial derivatives and/or publicly traded securities.
• Hedge funds are a popular alternative investment due to their high leverage and returns.
• They have high fees and low liquidity; managers generally have a personal stake in the fund

Private Equity

• Private equity involves trading shares of operating companies that are not publicly listed or available on the stock market.
• Institutional investors use various strategies for private equity trading.
• Private equity is popular for diversifying financial portfolios by investing in assets not tightly linked to normal investments.

Venture Capital

• Venture capital is a popular investment strategy, especially in the Indian start-up scene.
• Substantial capital is invested in budding companies in exchange for stocks.
• This is done with companies who are either in their initiation phase or in their growth phase.
• Venture capitalism typically supports ideas or new technology deemed likely to disrupt the market.

Structured Products

• Structured products are alternative investment tools that combine financial instruments into a single, packaged strategy.
• Derivatives are often combined with securities or other derivatives.
• These products have a fixed maturity date like bonds, offering a way to implement investment strategies across products.

Collectible Items

• Collecting items with substantial historical or artistic value is a difficult type of alternative investment.
• Knowledge of the item being purchased is required.
• Collectibles such as stamps, jewelry, boats, or artworks tend to appreciate in value and are considered profitable assets to own.
• Artifact values hold up against inflation, making collectibles a potentially good investment.
• Seasoned investors and professionals use alternative investment strategies to increase wealth.