There are different investment options, categorized into financial and non-financial investments.
Non-financial investments include real estate, gold, and commodities, while financial investments involve cash flow exchanges.
Financial instruments represent claims on future cash flows and can be categorized into debt and equity. Additionally, investments can be classified by market type (public vs. private) and maturity profile (capital market vs. money market).
Equity
Equity shares grant ownership in a company, allowing holders to participate in profits and vote on company matters. As residual owners, equity shareholders receive profits after other claims are settled and have control over the firm's operations. Investments in equity shares offer two rewards: dividends and capital appreciation. They also provide time diversification benefits, where fluctuations in returns balance out over time, leading to better risk-adjusted returns when held long-term.
Fixed Income
Debt instruments, or fixed income instruments, are contracts promising cash flows to investors during the contract term. They can be transferable or non-transferable.
Typically, they involve periodic payments, but any cash flow arrangement can be negotiated. The contract outlines the borrower's financial obligations and the rights of the debt holder in case of default. Issued by companies, municipalities, and governments, these instruments finance various projects.
They are classified into government and corporate debt securities, with government securities making up the largest part of the debt market globally and in India.
Commodities
Investments in soft commodities (e.g., corn, wheat, soybean) and hard commodities (e.g., gold, silver, oil) present various opportunities.
Soft commodities are perishable and volatile, affected by demand and supply dynamics, and have low correlation with stocks and bonds, offering portfolio diversification. Weather prediction is crucial for soft commodity investments. Exposure can be gained through derivatives like forwards or futures, necessitating careful risk assessment.
Hard commodities, historically viewed as reserve assets, are influenced by global demand and supply. Gold, in particular, is seen as a safe haven during economic uncertainty, providing diversification benefits.
Unlike financial investments, commodities rely solely on capital appreciation for returns.
Real Estate
Real estate stands as the largest asset class globally and has played a crucial role in driving economic growth. It provides considerable opportunities for diversification and has long been regarded as a reliable hedge against inflation. Investors can engage in real estate not only for capital appreciation but also to earn consistent income through rental payments.
Typically, this is considered a long-term investment. Real estate is divided into two main categories: commercial and residential.
Investments in real estate often require substantial commitments; however, real estate funds and Real Estate Investment Trusts (REITs) have become excellent alternatives, allowing investors to access this asset class with lower initial financial commitments.
Other investment opportunities
Artwork, paintings, and rare collectibles are increasingly seen as a compelling long-term investment opportunity. This investment category has been yielding moderate long-term returns and demonstrates a low correlation with traditional financial investments like equity and debt, offering valuable risk diversification. However, these investments require substantial capital and are not standardized products, as each piece of art is one-of-a-kind. Additionally, the market for art is unregulated, and these investments do not generate income.
Every individual has a unique risk profile. It's essential to understand personal preferences before choosing investments, as many focus on market trends rather than their own needs.
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