Types of Investments to Make Your Wealth Grow
Investing can be confusing for most people, as choosing the right investment assets and the perfect mix can be challenging.
It is crucial to know the types of investment opportunities available and their features to choose the most suitable one for you.
A thorough understanding of the available opportunities will help you select those that fit your financial goals and are most suited to your requirements.
What is an Investment?
Investing refers to putting your money to work for a fixed span by channelising it into a project or asset to generate profits or positive returns. The investor allocates resources (capital) to generate income, profits or interest.
There are different types of investment options to pick from; you can start a business with your funds to generate income or profits from it or invest in real estate to get rental income or profit by reselling it after its value appreciates.
Why Should You Invest?
- Investing puts your money to work and can help you build wealth. Smart investing can help you outpace inflation.
- The power of compounding helps you earn interest on interest. Money invested over the long term ensures that your earnings also earn and help you build a bigger corpus.
- Investing helps you fulfil your financial goals, like children's education or retirement planning.
What are the 4 Types of Investments?
The investment type you choose will depend on your financial goals, time horizon and risk appetite. Investment assets belong to four different categories:
1. Growth Investments
This category includes assets suitable for long-term investment; the investor must be willing to deal with market ups and downs in the market when they invest in these products.
Equity, mutual funds and property are growth investment products.
2. Defensive Investments
These assets are focused on generating income instead of growth. Defensive investments are lower risk compared to growth investments.
The cash investment category includes money in your savings accounts and term deposits. These offer potentially the lowest returns; the risk is also minimal.
4. Fixed Interest
Fixed-interest assets offer fixed returns on your investment. They are also considered defensive investments as both risk and reward are low. Bonds are an example of fixed-income products.
12 Different Types of Financial Investments
Earlier, we discussed the 4 types of investment - those are broad categories. Under each class, you have various options for investment:
Bonds are loans that you make to the government. When you buy a bond, the issuer uses your money and gives you interest on them.
Bonds are generally low-risk and have low returns, with government bonds being less risky than corporate bonds. Though minuscule, there is a risk of default by the issuer.
When you buy a stock, you invest in a particular company; you become a shareholder and the owner of a small part of the company.
Companies sell shares to raise capital, and investors are free to buy and sell them as per their choice. Equity investments are high-risk and high-return investments.
You can get returns through dividends that the company may declare from time to time and by appreciation in share value.
3. Mutual Funds
Mutual funds (MFs) pool the money from different investors and invest it in a basket of securities. Professionals known as fund managers manage the funds and choose which security or stock to invest in based on the MF objective.
Each fund has a specific goal; some may be growth-oriented, while some may focus more on stability. You can choose the right option as per your risk tolerance.
When you buy an MF, you can purchase multiple securities in a single buy without researching each stock.
4. Exchange-Traded Funds
Exchange Traded Funds (ETFs) are another market-linked type of investment. They track a benchmark index to mirror its performance.
ETFs are not actively managed; hence, they are less expensive than mutual funds. Investors can buy and sell ETFs like stocks.
5. Retirement Plans
Many employers offer retirement plans for their employees. If your employer does not provide one, you can buy an individual retirement plan.
Retirement plans are not a separate category in types of investment products, but they are a tool to invest in funds, stocks and bonds.
An option gives you the right to buy or sell an asset at a certain price at a given time. Options are of two types - call and put.
Call options give you the right to buy an asset or security; put options give you the right to sell it. Options are an advanced and complicated investment product. You should invest in them cautiously.
You can invest in physical assets like metals, livestock, and energy through commodities.
Producers and commercial buyers hedge their risks by dealing with them. These may not be suitable for retail investors unless they understand how commodities trading works.
You can invest in commodities indirectly as well, through stocks, mutual funds, ETFs and futures contracts.
8. Security Futures
A security futures contract denotes a legally binding agreement between two parties to buy or sell a fixed quantity of shares of one specific equity or securities index at an agreed price. The buyer agrees to purchase an underlying security while the seller agrees to sell it.
Security futures are amongst the high-risk types of investments; you can earn a lot of money in a short span or lose a substantial amount. There is no upper limit to the loss that one may incur.
9. Certificate of Deposits
When you invest in a Certificate of Deposits (CD), you give the bank a fixed sum of money for a fixed tenure and interest. After the term ends, you get the principal back with interest.
They are a low-risk product but low on liquidity. If you need the money before the tenure is over, there are high penalties for premature withdrawal.
10. Real Estate
Real estate investments in Nigeria have earned good returns over the years. You invest in property and wait for it to appreciate, or you can earn through rentals.
Property investment requires a huge outlay and may not be possible for small investors
Investing Tips for Beginners
- Understand a product well before you invest.
- Have an investment strategy based on your financial goals
- Diversify your risk by including different types of investment assets in your investment portfolio.
- Always choose a product based on your risk tolerance level.
- Have different short-term and long-term investments based on your goals.
- Do not let emotions cloud your judgement.
- Begin small if you are new to a product or a market, and add more as you gain a better understanding.
- Do not hesitate to take the help of professionals if you feel overwhelmed or confused.
Different types of investment assets offer a blend of advantages and disadvantages. You should pick a combination of opportunities based on your risk tolerance and financial objectives.
A single asset can fulfil all your financial objectives. But before you start investing, have a clear goal and devise your strategy accordingly.
1. Is it better to save or invest?
Saving is putting money aside for future use. Investing is putting your money to work for you. Both are important, as they cater to different needs.
3. What are the 4 types of investment types?
The 4 investment types are growth, cash, fixed interest and defensive investments.
4. Where should a beginner invest?
A beginner should invest in assets for which they have done adequate research, ensure the investments are per their risk tolerance and start small.