Let your money work for you

Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t, pays it.” If you want your money to work for you, you will have to consider Einstein’s quote and learn to manage your wealth efficiently.  For this, one needs to have a financial plan that ensures smart investments to yield high returns on your hard-earned money. Investments in the stock market, among others, can provide you with this opportunity.

Let’s us take a closer look at these investment vehicles:

1)    Equity

Investing in the equity markets means buying shares of a listed company. In doing so, one becomes a minority owner/stakeholder of the company and is liable for the profit and loss the company incurs.

The way to equity investments is through trading in the stock markets, where one can buy and sell shares of public companies. The buying and selling are done through a broker after doing a thorough analysis of the company you wish to invest in.

This instrument, however, is considered risky, as one’s funds are mostly dependent on the company’s performance.

2)    Mutual Funds

Mutual funds are financial instruments which pool a variety of stocks of different companies from different sectors to form a portfolio. Thus, the risk involved with trading in the equity markets is divided amongst a bunch of stocks that have been selected to give the best returns.

A fund manager usually manages a mutual fund. Depending on the investor’s appetite for risk, mutual funds are divided into high-risk (aggressive), medium-risk (moderate), and low-risk (conservative) categories.

The main advantage of this instrument is that it is less risky when compared to equities and the investor has the liberty to invest smaller amounts over a period of time as opposed to investing a lump sum. This is called a Systematic Investment Plan (SIP). SIP allows an investor to start investing amounts as low as Rs500 at predefined intervals into mutual funds.

Returns on mutual funds are not as high as those from the equity markets; however, they are better than conventional modes of investment like debt instruments.

3)    Derivatives Trading

Derivatives are financial contracts that derive their value from an underlying asset. These could be stocks, indices, commodities, currencies, interest rates, etc. It is used as a hedging as well as speculating tool, i.e. to make profits by betting on the future value of the underlying asset.

In India, we have mainly two exchange-traded derivatives known as Futures and Options (F&O).

Futures: A futures contract is a contract between two parties where both parties agree to buy and sell a specific quantity of a particular asset at a predetermined price at a specified date in the future.

The buyer of the futures contract is said to have a bullish view on the particular security/index, while the seller is said to have a bearish view.

Options: An options contract offers the buyer the right to buy, but not the obligation, at a specified price or date. Options are available as either Call or Put, depending on whether they give the right to buy, or the right to sell.

Call options give the holder the right to buy the underlying security, while Put options give the right to sell the underlying security. Based on your view of the market, you can consider to buy either a call option or a put option. If you think the price of a security will rise, you’ll buy a call option, and buy a put option if you think it will decline.

4)    Bonds

Government bodies and public and private institutions issue bonds to garner funds for activities like raising capital. These bonds, or fixed-income securities, offer a fixed rate of interest on returns. Government-issued bonds are tax-free and carry lower risk compared to bonds offered by private institutions.

5)    Fixed Deposit (FD)

Fixed deposits, or FDs, are the most common and well-known savings instrument in India. Every bank account holder tends to have a certain corpus invested in fixed deposits. Though the risk associated with these instruments is low, the returns are low too.

Your investment strategy should be carefully analyzed in order to make your money work hard for you. Making the most of the stock market boom in India is a smart way to increase returns. One can also hire professional financial planners and advisors for efficient financial planning and investment management.