Avenues of Investments
What are the various avenues of investments?
The avenues of investments can be broadly classified into two categories: Physical Assets and Financial Assets.
- Physical Assets are tangible, material assets such as Real Estate, Gold, Precious Stones, Antiques, Commodities, etc. The return on investments in physical assets can be earned when the assets are sold. Hence, the return is earned in the form of capital gains (appreciation).
- Financial Assets are intangible assets, the value of which is derived from the contractual agreement. Examples of Financial Assets – Bank Deposits, Debentures, Equity, Government Securities, Preference Shares, Mutual Funds, etc. The return on investments in financial assets can be divided in two parts – interim cash flows (interest, dividend, etc.) & Capital Appreciation
Financial Assets can be further classified as –
1) Assets with fixed returns – The returns associated with such investments are fixed i.e. they either provide a stable rate of interest or dividends to the investors. Apart from earning fixed return, an investor can also trade these assets to earn capital gains. Examples – Debentures, Preference Shares, Public Sector Bonds, Government Securities.
2) Assets with variable returns – The returns associated with such investments varies from time to time. Usually, investors expect higher returns from such assets as compensation for higher risk involved. Examples – Equity Shares, Mutual Funds, etc.
The market is flooded with different modes of investment. However, it depends on the risk aversion ability of the investor as to whether he invests in high-risk options with greater returns, low risk options with moderate returns or risk-free avenues. But before we start with our investment journey, there are some fundamental rules of investing. We will learn this in our next unit.