Various investment alternatives available to an Indian investor
There are various investment alternatives which are available to an Indian investor. An investor may select one or a combination of the best investment options which appeals to him or her. The selection of the investment options also depend on the age, income, dependents, etc of a particular person, you can read more about this in asset allocation strategies.
Investment carries some amount of risk. No risk leads to no or low returns! Few instruments carry less risk while a few of them carry higher risk. It is said, “higher the risk – higher is the return!” We here mean calculated risk.
Here is a list of various investment options available:
Government Securities (Bonds): Bonds issued by Central or State government. These bonds are termed as the safest investment instruments in India. Example of these bonds is “Dated government security” which are issued for a period of 10 years with a fixed coupon payment.
These securities carry the least amount of default risk as they are backed by the Government of India.
Equity: Investing in direct equity. One can start investing in Indian equities by participating in primary markets (applying for IPO’s) and also by purchasing securities from secondary markets (stock exchanges).
Investing in direct equity is termed risky and one needs to diversify the risk by investing in multiple securities from various sectors. Example: investing in real estate stocks, pharma stocks, PSU stocks, and oil stocks all at once.
Equities carry the maximum risk and (might) also provide you with maximum returns.
Interesting read: Power of Compounding.
Investors can also participate in equities by investing in mutual funds.
Mutual Funds: It is a financial instrument created with a pool of investments from many investors. Mutual funds are professionally managed and they invest in equity, debt, gold, foreign equity, etc. on your behalf.
Mutual funds are one of the best ways to diversify your portfolio.
SIP’s are a form of Mutual fund where one tends to invest systematically i.e. once a month or once in three months, etc.
Debentures/ Bonds: Corporate’s need money and they don’t go to banks every time to fulfill their needs, they have two options to raise money – come up with an IPO or issue a bond with a fixed term to maturity and fixed coupon payments. They function just like the government bonds and the only difference is that they are a bit riskier compared to government bonds.
Returns offered by these bonds are higher compared to government bonds.
Real Estate: In India investing in real estate is considered as the best form of investment but only after gold. Historically real estate has performed well in India.
Investing in metros has become very expensive so it is advisable to invest in outskirts. For example Vashi, Vasai, Bhiwandi around Mumbai.
Gold: The only form of investment which most of our mothers and fathers would believe in. Gold is considered as the best investment in India, that is the only reason why India is the highest consumer of gold in the world.
Most of the people in India buy physical gold. ETF’s, Mutual funds, etc. are yet to pick up as an investment avenue in India.
Bank fixed deposits: This considered as one of the traditional ways of Investing. Most of the people in India with a bank account will have at least one fixed deposit. FD’s offer a fixed return at the end of a specified period.
Currently, bank FD’s offer somewhere around 8% to 9% returns annually.
Corporate Fixed Deposits: They are just like bank FD’s they only difference is that they are issued by corporations. They are a bit riskier compared to bank FD’s as most of these corporate deposits are unsecured and hence offer higher interest rate.
They offer interest rates as high as 12% to 13% p.a.
An example of this would be – FD by Mahindra Finance, Shriram Transport Finance, etc.
Post office savings schemes: These saving schemes by post offices are trusted by many Indians. The scheme attracts decent returns. One can start investing with as low as Rs 100 per month. Check out the details here.
National Pension Scheme: The National Pension System (NPS) is a defined contribution based pension system launched by Government of India. This instrument is used for retirement planning by many. One can find more details here.
Commodity: This is one of the latest passion for investors, trading in MCX to offset the risk of their equity portfolio. Many headers and arbitrageurs use this financial instrument.
Retail investors can invest in commodities with the help of commodity mutual funds in India.
Investing in Art: Art as a form of investment is quite common in developed nations and the trend is picking up in India. Many affluent Indians buy art preserve it and diversify their portfolios! [I will soon be writing a detailed post on the same]
Venture Capital/ Angel Investing: Investing in someone’s business idea at an early stage of the venture. You get equity for the amount invested and one can exit the investment when the business is acquired by some other company or when the company gets listed. These investments are highly illiquid and carry a huge risk.
It is not advisable for a retail investor to invest in these kinds of instruments.
We tried to cover most of the assets where an Indian investor can invest their money. Did we forget to mention any instrument? Comment and share your thoughts.