An investment product is designed for investors and is based on an underlying security or a group of securities, purchased with the goal of earning a favourable return. For instance, buying equity stock of a listed company can yield regular dividends and capital appreciation through an increase in the share price.
If you want to grow your wealth, understanding investment products is an essential step. Investment products are financial instruments that provide a return on your investment. There are various products, such as stocks, bonds, and mutual funds, each with its own unique characteristics, risk profiles, and return generation capabilities.
Continue reading to find out about the definition of an investment product, the different types, and the reasons why you should invest in them.
What is an investment product?
The term investment product is used to refer to a financial instrument or vehicle in which you can invest your money with the expectation of generating returns. The returns on their investments can be in the form of capital appreciation, interest income, dividend payments or a combination of these three. Investing in investment products can get you closer to achieving your financial objectives, whatever they may be.
Types of investment products
Now that you know what an investment product is, let us look at some of the most common types that are available.
1. Shares
Shares represent a unit of ownership in a company. When you invest in the shares of a company, you gain ownership directly proportional to the number of shares you own. The value of shares increases or decreases over time, depending on how the company performs. In addition to an increase in the value of your investments through capital appreciation, you may also receive dividends from the company from time to time.
2. Bonds
Bonds are a type of debt instrument that companies and governments use to raise capital. When you invest in a bond, you essentially lend money to the company, effectively making you a creditor. In exchange for borrowing money, debt issuers make regular interest payments at a fixed rate until the bonds mature. Upon maturity, the principal investment amount is repaid to you.
3. Mutual funds
Mutual funds are unique investment products that pool money from different investors. The pooled money is then invested in different financial instruments, such as stocks, bonds or a combination of the two.
Since mutual funds often invest in multiple market-linked financial instruments, you get the benefit of diversification, which may potentially reduce risk. There are different categories of mutual fund schemes, each with its own characteristics, features and risk profiles.
4. ETFs
ETFs, or Exchange-Traded Funds, are a type of mutual fund that also invests in a wide range of financial instruments. However, unlike traditional mutual funds, ETFs are listed on the stock exchanges and can be traded between investors. One of the major advantages of ETFs is the low cost associated with investing in them.
5. Derivatives
Derivatives are investment products that derive their value from an underlying asset. The underlying asset could be stocks, commodities or currency pairs. Futures contracts and option contracts are two different types of derivative contracts available in India. Derivatives are offered in one-month (near month), two-month (next month) and three-month (far month) validities, making them ideal for short-term investors.
6. Money market instruments
Money market instruments are debt securities with short-term maturities. Issued by both governments and corporations, these financial instruments enjoy high liquidity and are low-risk. However, the rate of return on these securities tends to be modest compared to other market-linked investment options. Treasury bills (T-bills), Commercial Paper (CP), Certificates of Deposit (CDs) and repurchase agreements (repos) are some examples of money market instruments.
7. Money market accounts
A money market account is an interest-accruing account at a bank that provides a higher interest rate compared to typical savings accounts. One concept related to money market accounts is the requirement of maintaining a minimum balance. This is the minimum amount you must keep in your account at all times to avoid penalties. Another key aspect to note is that the interest rate offered can also increase with the amount in a money market account.
8. Hedge funds
Similar to mutual funds, hedge funds also pool money from multiple investors and use it to purchase various financial instruments. These funds are professionally managed by experienced individuals who typically use high-risk investment strategies to generate high returns.
Unlike traditional mutual funds, these investment products have greater flexibility in their investment approach, fewer regulatory constraints and cater to high-net-worth individuals and institutional investors.
Importance of investment products
Investing is important to grow your wealth and stay on top of the rising inflation. It is important to take calculated risks and invest to enjoy the benefits discussed below:
1. Money growth
Investment is a great way to grow your money and increase your revenue stream. Most of the investment products available in the financial market have a component of returns over time to attract investors. This can include asset classes like stocks, bonds, and certificates of deposit. These investments help you generate returns and augment your wealth.
2. Planning for retirement
If you are a working individual who draws a salary, you may already be investing in some investment product to allocate funds for use after retirement. This could be through provident fund schemes, mutual funds, stocks, bonds, or real estate, but the goal remains the same, which is securing your port-retirement life. To ensure financial security during the later stages of life, it is vital to start saving and investing as early as you can. Keep in mind that the returns you expect depend on your risk appetite and the investment product you have chosen. Typically, with high risk come high rewards. This perfectly highlights the importance of understanding risk tolerance and choosing the right investment product.
3. Higher returns
More often than not, savings accounts with traditional banks offer a lower rate of interest compared to investment instruments. However, there are also increased risks associated with higher returns. Investments are essential if you want to grow your wealth to keep up with or beat inflation.
4. Attaining financial goals
You may be able to keep your money secure with savings accounts and fixed deposits, but attaining your financial goals may be difficult with just these avenues. Investing offers higher returns that help you plan your financial future better to achieve goals, including big purchases like a car or house, starting a business, or paying for a family member’s education.
5. Tax saving
Several investment products offer tax benefits to investors. This means that you are not only signing up to grow your wealth and earn higher returns but are also directly reducing your tax liability to better utilise your earnings for your future.
6. Invest in business
In the present day, numerous small businesses are being established with impressive frequency. People are turning towards entrepreneurship with more and more access to resources that turn their ideas into a reality. This presents an interesting opportunity for investing in small businesses. As these companies are not initially established in the market, investing in them will not only support them but also have the potential to make you big bucks if the business makes it big.
7. Support people and communities
While you may be inclined towards the financial and business aspects, not everyone may share your proclivity. Several creative artists and communities in need can thrive if they receive the right kind of support. If you can relate to the cause, it may be a good idea to invest in such people and communities and help them flourish.
8. Less taxable income
Tax breaks or discounts are often provided to investors in the financial market. For instance, even if you lose money on an investment product, you may be eligible for a discount from the government to partially compensate you for the loss. However, be very careful when choosing investment products.
9. Help new ventures
As stated above, numerous businesses can thrive with sufficient funds to help them scale up. Despite a solid product or service, they may be facing cash shortages. If you choose to invest in companies like these, you can not only help a business flourish and increase its reach to the masses but also potentially reap handsome returns in the long run as the business grows.
Diversification of investment products
Investment products can be of many different types, including bonds, stocks, ETFs, mutual funds, and real estate. Such a wide variety of investment products has paved the way for a rich landscape for people to start investing by choosing an instrument that aligns with their financial goals and risk appetite. An in-depth understanding of the available options is a prerequisite to making informed decisions and diversifying investments.
Risk and returns of investment products
For all investors, it is important to note that no investment is without risk. Different investment products offer different levels of risk and return. For example, bonds are considered safer investments but offer lesser returns. On the other hand, stocks are riskier but have the potential to fetch higher returns. However, the goal of investments should never be to avoid all risks as it is unrealistic. Instead, the objective should be to comprehensively assess the risk and return profile of an investment product to make sure it works for you.
Role of time horizon in investment products
Different investment products have different investment horizons. For example, if you want to be in the market for the long run, investment instruments like index funds or real estate would be suitable. Conversely, if you are looking for short-term gains, more liquid assets like ETFs or stocks could be the ideal choice. Again, the goal is to align investment products with your expectations, preferences, and goals.
Influence of market conditions on investment products
Investments are not immune to the changes in the broader financial market. For example, if you invest in stocks, it is important to monitor the company’s and sector’s performance, economic policy changes, and market sentiments. Similarly, bonds are influenced by interest rate changes. Thus, it is important to not just invest but also monitor, track, and assess your investments periodically to minimise losses and maximise savings.
Conclusion
Investing in investment products is essential to creating wealth in the long term. However, it is important to understand that all investments carry inherent risks. It is advisable to look into the risk-return profile of a financial instrument before investing. This way, you can make informed investment decisions aligned with your goals and risk tolerance.
