A rupee saved is a rupee earned. This saying definitely holds true as it highlights the importance of savings and investments. Today, there are several investment options present. However, while deciding which investment option to go in for, you must analyze your risk-return parameters as well as other factors like your age, the time period or term of investment and so on.
Short term investments
Short term investments work best when you don’t want to make investments for longer period of time and need funds handy in a short period of time. For short term investments to give significant returns, you should have a good lump sum of money to invest. Many a times, investments are affected by market volatility, and it may not be possible for short term investments to generate good returns owing to this volatility.
Even when you are investing for a short term, it’s best to not put all your eggs in a single basket. Diversifying your investments will help reduce the risk and safeguard your returns.
Short term investment options
Savings accounts: These type of accounts help you keep aside your money in a safe place. The bank pays a small amount of interest on your savings every month. You may require to maintain a minimum balance (for example, $25) or no balance at all; depending upon the bank.
The returns on savings accounts are quite low. However, they are a good way to manage your basic personal finances.
Money market accounts: These type of accounts are generally handled by banks or brokerages. These accounts give you the option to put aside the money that may be used in future investments or the money that you have earned from the sale of a security. The returns are quite low in these type of accounts.
Money market funds: In case of money market funds, the risks are low and the returns are comparatively higher. Here, you can store the money that is not invested at present. Usually, brokerages manage these type of funds which offer great liquidity.
Certificates of Deposit: In case of CDs also, the risk is low while the returns are high. These are safe instruments that offer good returns in exchange of the money that remains invested till the CD matures.
Treasury Securities: Treasury securities are also a good short term investment option. They offer decent returns and good liquidity in the short term.
Long term investments
The advantage of long term investments is that they are able to take care of the market fluctuations over a period of time and generate good returns in comparison to short term investments.
In this case also, it’s important to diversify your portfolio so that the risk is minimized and the returns are maximized.
Long term investment options
Stocks or shares: Stocks trade on exchanges (such as NASDAQ or New York Stock Exchange). When one purchase shares of a company, he becomes part owner of that company.
The share prices fluctuate depending upon the market and the performance of the company. It’s important to stay invested for longer periods to be able to gain good returns on the investment in shares.
Investing in shares can be quite risky. If it’s not possible for you to track the market on a regular basis, it’s best to seek professional help when you wish to sell existing shares or buy new shares.
Bonds: Governments and businesses raise money through the issuance of bonds. An interest is paid on the amount invested in the bond – which depends on the ability of the borrower to pay the original loan amount. Generally if the risk is high, the returns are also high but the chances of losing all the money is also high.
The type of bond also depends on the duration or the term of the bond. The money earns interest for the term invested. Certain bonds pay the principal and interest at intervals during the term while others pay everything when the bond matures.
Mutual Funds: A mutual fund is a pool of money that is collected from several investors and invested by an Asset Management Company according to the objectives of the investors or the mutual fund scheme.
Mutual funds have several advantages. The money is professionally managed by fund managers, there are several options available (such as growth option or dividend option, to name a few), and they offer liquidity and transparency. Diversification is also possible through investing in mutual funds as a single mutual fund invests in a bunch of different securities depending upon the objectives of the scheme.
So, when deciding to invest, it’s best to analyze the pros and cons of different securities – whether short term or long term. It’s also important to know the time that you want to stay invested as well as the amount of returns that you are expecting out of the investment. Diversification is the key element that helps in balancing the risks and returns in any form of investment.
Posted in Investing category.