Investing refers to the process of buying assets or putting money into various products with the aim of earning interest, dividends, or from capital appreciation. There are various investment vehicles for conservative and risky investors.
The risk-return spectrum links the rate of return to the risk involved. Alternative, risky solutions offer higher returns than safe products. The choice of product depends on one's risk tolerance and financial objectives. Lottery tickets, for example, are a risky solution in that there is a slim chance of winning. The list of risky investment instruments includes foreign stocks, corporate FDs, and Forex trading. The problem with foreign stocks is that they carry a higher risk than domestic securities. Another issue is that if the pound (for example) depreciates against the dollar, the return on the investment will be eroded. Corporate fixed deposits are an alternative to bank deposits.
There are safe instruments such as government bonds, certificates of deposit, savings accounts, and public provident funds. Public provident funds are a great option for low-risk investors because risk is not involved. The interest rate is about 8 percent a year. The problem with this product is the long lock-in period (15 years). Holders are allowed to withdraw only a portion of the amount. The good thing about provident funds is that interest is tax-free. This product is ideal for persons with long-term savings objectives and for retirement planning. Opening a savings account is another option for those who are new to investing. While this is a low-risk product, the interest rate is also low compared to money market and other accounts. There are minimum balance requirements and restrictions on the number of withdrawals per month. Holders benefit from income tax savings. Fixed deposits and government bonds are two other options. Certificates of deposits are issued by financial institutions, and holders receive a fixed interest payment. They have a maturity date. This is a low-risk solution because a certificate of deposit of up to $100,000 is insured by the government. The main problem is liquidity. Holders who withdraw their money before the maturity date face a financial penalty. Government bonds are issued by the U.S. Treasury or another government institution and offer an interest payment. Bonds can be purchased in different ways, including through payroll deduction plans or from financial institutions.
Investors can choose from a wide array of solutions such as treasury bonds, notes, and bills, stocks and bonds, mutual funds, and prepaid tuition plans. Individual retirement accounts are also an option. Notes, bills, and bonds are the preferred choice of novice investors because they are risk free. T-bonds are backed by the government. Mutual funds are another option. Customers can invest by mail, through a bank, brokerage house, investment company, or in other ways. The level of risk varies substantially based on the type and policies of the fund.