Investing is an important part of building wealth in India. By investing your money in the right asset and instrument, you can earn high returns without doing much work. People in India are increasingly turning to long-term investment types to build wealth. These investment types can help you achieve your financial goals while also providing security in the event of an unexpected event in your life.
Let’s embark on your investment journey together!
But, wait! Before you invest your hard-earned money, you should consider these three factors in your life. If you don’t have any of these, you are making a mistake when investing your money.
The Importance of Term Insurance
If your family is dependent on your income, this is by far the most important aspect of your life that you must address immediately. Term insurance protects your family’s financial future, even when you are not around. So it is a basic financial necessity, particularly in today’s world. You can buy a term insurance plan of your choice for as little as ₹ 500 per month.
The Significance of Health Insurance
Nowadays, any health problem that you or a family member may develop is completely unpredictable. Many people spend all of their savings on hospital bills to treat their medical conditions. Health insurance ensures that you do not have to worry about your finances while in the hospital, allowing you to focus on providing the best care possible to yourself or a family member. Most importantly, the younger you are, the lower your premiums for health insurance will be. So buy it as early as possible.
The Role of an Emergency Fund
An emergency fund is also important for your financial well-being. In the event of a job layoff or a desire for a career break, having this emergency fund will prove handy. Ideally, this fund should cover 6 to 12 months of your current monthly expenses.
Now that you are aware of what you need to do before investing, let us look at the top nine investment types in India. I have divided all investment types into three categories: low risk (low returns), medium risk (medium returns), and high risk (high returns).
Investment Types in India
Low-Risk Investment Types
1. Fixed Deposit
A fixed deposit is an ideal investment type for you if you want a total risk-free asset. It is one of India’s most traditional and popular ways of investing money.
Banks, post offices, and non-banking financial companies (NBFCs) like Bajaj Finserv offer fixed deposits. They are best suited if you want to invest a lump sum for a period of 1 year, 2 years, 3 years, and so on.
FDs typically provide a return of 6% to 7%. It depends on the bank or NBFC.
Though they are the safest form of investment, they do not provide a means of increasing your wealth because of inflation and taxes. I believe FDs are better suited for storing and protecting emergency funds rather than for investment purposes.
2. Gold
Compared to other income-generating assets, gold carries a lower risk. That’s why in India, people mostly consider gold as an investment rather than jewelry.
But if you want to grow your wealth in the form of gold, buying gold jewelry is a bad option because it will add to a number of other aspects like GST, making charges, purity, etc.
The best way to invest in gold is by investing in sovereign gold bonds (SGBs). SGBs are basically bonds or certificates issued by the Reserve Bank of India against grams of gold. They provide an additional 2.5% in fixed annual returns on your initial investment. So, you see, it outperforms any gold-related investments in India.
The maturity or lock-in period of an SGB is 8 years. The average rate of return of SGB 2016-I was 13.6%, which is higher than any gold fund or ETF. Due to its low-risk nature and promising returns, investors quickly buy this asset. But there is a secondary market too, with many players, where you can buy SGBs.
3. National Pension Scheme (NPS)
The government backs the NPS, making it another better investment type in India. This investment tool is best suited to plan your retirement, as it matures only when you turn 60 years of age. The amount you invest in NPS is divided into different tools like equity, corporate bonds, government bonds, etc.
You can start by investing monthly ₹ 500 into your NPS account. Historically, NPS has provided an average return of 8% to 10% annually. After you turn 60, you get this money back in two parts. You receive 60% of the amount as a lump sum, and the remaining 40% on a monthly basis. As a monthly salary or pension.
Medium Risk Investment Types
1. Real Estate
Real estate is a popular type of investment option in India, as are FDs. In this option, you can earn income in two forms: rental income and appreciation income. However, the major drawbacks of investing in real estate are the large initial investment it requires and its low liquidity. When you really need that money, maybe you won’t find the right buyer for your property.
According to me, the best way to invest in real estate is through Real Estate Investment Trusts (REITs). REITs are basically companies or developers who club their projects and form a REIT. Now, investors like you and me can invest in these REITs to earn a part of the rental income that these companies will earn through their projects.
REITs have an average rental yield of 7% to 8% plus capital appreciation in India. These REITs are available on stock exchanges, and you can buy them as stocks.
2. Corporate Bonds
Corporate bonds are similar to FDs, where you get a fixed rate of return on your investment. The only difference here is that you are investing your money in a particular company that issues these bonds.
If the company you invested in goes bankrupt, there is a risk that it will wipe out all your money. This is the reason why all the corporate bonds in India are rated by a credit agency as AAA, AA, A, B, C, and so on. The best category to invest in is AAA or AA.
The lock-in period for corporate bonds depends on which bond you are investing in. The average return on investment is 7% to 11%, which depends on the bond. There are some bonds that give higher returns but are rated below A, so it’s better to avoid them.
3. Mutual Funds or Stocks
Mutual funds are one of my favorite investment types in India. If you want to buy stocks or want to invest in the growth of the Indian economy but have zero knowledge about the stock market, mutual funds are the best.
Mutual funds are basically a basket of stocks that a fund manager manages on behalf of you. He buys and sells stocks based on his knowledge and experience. And for doing this, he charges a minimum amount, which is called the expense ratio.
You can invest in a number of mutual funds, which can be large-cap funds, mid-cap funds, small-cap funds, debt mutual funds, index funds, industry-focused mutual funds, and the list goes on. While writing this post, there are around 263 schemes in the market that you can invest in.
You can invest in mutual funds as a systematic investment plan (SIP) or as a lump sum. There is no lock-in period for most of the schemes. But you have to pay a fixed percentage as an exit load if you opt-out in a very short time. On average, a good mutual fund can give you 12% to 15% returns over the long term. Some mutual funds can also give close to 20% returns.
High-Risk Investment Types
1. Stock Trading or Futures and Options
Stock trading is by far the riskiest type of investing you can ever get into. Because the speed at which you can earn money is the same as the speed at which you can lose money in stock trading. This investment tool is only for professionals who have dedicated their time and money to studying the skill of trading.
If you are someone who is good at it, then you can earn much higher returns than any investment type in India. But if you are inexperienced or have zero knowledge about stock trading, then never ever invest your money in it.
This is something that is highly technical, so invest only when you have experience. The return on trading is unknown. It can be 20%, 30%, or even higher. It totally depends on your skill and talent.
2. Startup Investing
Today, India is seeing much more startups than ever before. Many young generations are starting up various businesses in the fields of technology and innovation.
But again, they are highly risky because they are new. The product or service may be new. You do not know if this product or service is market fit. How the market will react to this startup in the near future? How and when will I get an exit?
There are a lot of unanswered questions. So, my suggestion is to only invest that much money in startups that you can afford to lose. The return on this type of investment option is limitless.
3. Cryptocurrencies
Cryptocurrencies are nothing new to the market. Many of us have heard of it many times in the world of investing. However, the authority of a cryptocurrency remains complicated, at least in India.
This is the reason you have to invest in cryptocurrencies only when you completely understand the asset and are ready to lose all of the investment.
Conclusion
Investing isn’t just to keep your money aside. It is about putting it to work for you and growing over time. In India, there are a number of ways you can invest your money. In this post, I have discussed the top investment types today in India.
If you are someone who wants a totally risk-free investment type, you can always go with FD, Gold, NPS, or any other government-backed investment type.
If you are someone who wants a decent return on their investment, you can always go with mutual funds.
And if you are someone who is okay if your money is wiped out, if you are just investing in the hope that the investment will give you the highest return or nothing at all, then you can go with stock trading or cryptocurrencies.
According to me, the sweet spot here is to invest your money in medium-risk options and put a portion of it into any low-risk option, just to hedge your investment. By doing so, you can earn a decent return with a bit less risk.
It’s important to diversify your investment portfolio to mitigate risk and increase potential returns. Consider consulting with a financial advisor to help you make informed decisions based on your financial goals and risk tolerance.