People often think that savings are enough to support them in the future. However, if we only save, the true potential of our money is not realized. In order to reap the maximum benefits of savings, it is important that we invest some of our savings to multiply our money. We can choose from a variety of products to invest in, depending on our preferences. However, in the ever changing market conditions, different instruments behave differently, depending on factors such as risk. While equities are more risky but capable of giving higher returns, money market instruments are low on risk and return.
In today’s unpredictable market scenario, it is always better to spread your funds over a variety of asset classes. That way, you balance your risk. Also, if one asset class is facing losses, the other might just offset, or make up for, that loss. Investments vary from one person to another according to his motives and objectives. Following are the factors which affect investment:
- Capital growth or income
- Access to your savings and/or investments
- Time frame of investment
- Risk taking ability
In order to decide on an investment, one must very carefully weigh the financial soundness of the product.
Following are the points which must be taken into consideration:
One must invest in an instrument which spreads risk and keeps your savings intact.
Dealing cost must be small - In case of many instruments, there a processing fee involved which eats up a huge amount of investment and leaves very little in terms of returns in the hands of the investor.
Many investments often involve tedious paperwork and administrative costs. There might also be charges with respect to buying and selling of securities and brokerage etc. Always watch out for hidden costs while making your calculations.
Types of instruments available:
- Certificate of Deposit: Low risk but gives less return in the long run
- Bonds or Debentures: Medium to low risk and aimed at income rather than growth returns
- Gilt Fund: Invests in a wide range of government securities. They are suitable for people who aim at low risk investments
- Property: Commercial or residential property is illiquid but has scope for tremendous appreciation over time
- Private Equity funds: High risk and volatile income, depending on market situation
- Gold or semi precious metals: Medium to low risk aimed at both income and growth returns
- Commodities: Relatively risky, they aim at growth and income
The value of these instruments vary according to market conditions such as government policies, exchange rate, bank interest rates, demography of a country and unforeseen circumstances such as natural disasters.