In today's world, the best way to achieve financial security is to make your money work for you the right way. It is no longer feasible to have just one source of income and your savings to fall back on; wisdom lies in making use of this money to build your wealth one step at a time.

Every year, inflation rises upwards of 8% and the best way to secure your future is to invest your money in the right avenues. The first step towards investing is saving enough to channel it elsewhere. Hence, learning to save is a key habit for making consistent investments. Figure out your essential expenses and aim to save at least 35-40% of your income eventually. You can start by investing 10% of your income initially and increase gradually as your income increases and you can manage your finances better.

There are various ways to invest your money and generate returns of 7-14% annually. Modern tools can help you boost your returns but you need a good grasp of the technical and fundamental workings of the field you are going to invest in. Another option is to work with experts who can advise you on which investment avenues would work best for you and seek their help for your investments.

Let’s start with a basic yet frequent question.

What is an investment?

Investments are nothing but a part of your savings delegated to an entity or an asset-buying/building company to generate profit on it over a period of time. When you invest, you buy or help to build an asset compensated by sharing the profit earned.

So this brings us to another question. What are the types of investments that exist?

Types of investments

The investment types in general, can be classified as stocks, bonds, mutual funds, bank products, annuities, retirement products, gold, cryptocurrencies, commodities, futures, options, insurance, real estate and saving for education and life goals.

We will cover 3 main types of investments in this article. All of them are easy to understand, goal based instruments and generate good returns.

Stocks

A stock is a security that represents ownership in a company. When you buy stock in a company, you hold a share of the company and get a corresponding share in its profits/loss as per the company’s financial performance. Stock investments though have a high-risk element but can be a good investment option if you know the fundamentals of the share market well and its workings.

Mutual funds

Mutual Funds are one of the most popular investment options you can rely on if you are starting your investment journey. Mutual funds are collective investment funds that invest in various assets like equities, debt and liquid funds, etc, and generate an average return of 11-12% yearly. 

There are 3 major types of mutual funds.

Hybrid: These types of mutual funds invest in multiple assets like equity and debt. These are ideal for investors with balanced risk appetite. Some good options of hybrid mutual funds are:

Equity: These types of mutual funds invest only in equity markets/assets. These are ideal for customers with high-risk appetite. These are also good options when customers want to invest vide Systematic Investment Plan (SIP) mode. Some good options of equity mutual funds to invest in are:

Debt: These types of mutual funds invest only in debt markets/assets. These are ideal for people who have a conservative/low risk-appetite. Some good options of debt mutual funds to invest in are:

Investing in mutual funds or directly into stocks presents a better option and return on investment than keeping your money in a savings account to accrue interest. Investment in Mutual Funds can be done in either Lumpsum (one time) or Systematic Investment Plan – SIP (recurring) and should be built towards goal planning.

Insurance

Investing in Insurance products is another avenue that many people choose to build a risk coverage against loss of life and/or create a wealth corpus to cater to their financial goals. When you buy insurance policies, you pay a certain sum periodically to the insurance company in the form of premiums for a certain pre-determined duration. Once this time is complete, your policy is said to have matured and you are compensated with maturity proceeds as per the policy features. The details of the risks involved are mentioned in the policy.

There are different types of insurance, viz. life, health, genral etc. You can buy health insurance for yourself and your family to take care of your hospital bills without relying solely on your savings. Health insurance is a must for every individual as it covers your medical bills during difficult times. There are various types of Insurance Products in Life Insurance space, including participating traditional plans, non-participating traditional plans, annuities, Unit Linked Insurance Plans (ULIPs) and Term Plans. Life insurance can be bought by anyone and that person becomes the policyholder. In the event of the death of the policyholder, the nominee is compensated with the insured amount and other payouts basis product features.

What is Risk vs. Reward and Risk Management:

Risk vs reward is a principle used in the world of investment to calculate the risk of loss for every unit of money that is invested to gain profit. People often overlook this and end up losing their hard-earned money. That is why it is advised to study this ratio of every instrument you plan to invest in. It broadens your perspective on the workings of the investment world.

Having the right kind of education for picking the right investments for you can make a crucial difference in your wealth-building journey. We at Bandhan Bank aim to provide you with the right information to make this decision easier.

Take charge of your future and finances by investing in mutual funds and insurance products distributed by Bandhan Bank.