• shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities
• mutual funds
• government securities
• post office schemes
• insurance
• bank deposits
You can invest in any of the following according to your ability to take risk and the returns you are expecting from the invested amount. There are basically three asset classes based upon the risk profiles. They are
• Equity,
• Debt and
• Cash.
Equity is risky, debt has low risk and cash has even lower risk. Within each asset class, the investor has to select specific instruments for investment.
Financial instruments vary in terms of the
• Liquidity
• Safety
• Returns they offer.
The challenge in making the investment decision is to choose the right combination of instruments to get the maximum returns with considerable amount of risk which would vary. Various options available are described in the following paragraphs and evaluated broadly on criteria such as
• Liquidity
• Safety
• Returns
• Tax savings
• Active involvement required to manage the investment
• Minimum amount that can be invested.
• The duration of your investment.
• Your investment goal.
Each investment option has some advantages and some limitations. For example, while bank savings account would be highly liquidity i.e. you can withdraw whenever you like, investment in Fixed Deposit cannot be withdrawn as easy as SB account.
Risks are generally positively correlated with probability of returns. For example, returns in equity shares can be high, but the associated risks are also relatively higher than other options. Risks can be classified into systematic and unsystematic.
Unsystematic risks are those that can be minimized by diversifying one’s portfolio. For example, instead of investing in the shares of steel companies alone, one could invest into other sectors like pharmaceuticals and software. In this situation, your portfolio may not be terribly affected even if the steel sector were to register a mediocre performance.
Systematic risks are those that cannot be minimized through portfolio diversification. For example, an investor could not possibly have minimized or eliminated his loss due to currency crisis, through a strategy of diversification of his portfolio.
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