Investment Assets: Mutual Funds, Equity, and Risk
Types of Mutual Funds
Open-Ended Schemes
In this scheme, there is an uninterrupted entry and exit into the funds. The open-ended scheme has no maturity period, and they are not listed on the stock exchanges. The open-ended fund provides liquidity to the investors since repurchase is available.
Closed-Ended Funds
The closed-ended funds have a fixed maturity period. The first-time investments are made when the closed-ended scheme is kept open for a limited period. Once closed, the units are listed on a stock exchange. Investors can buy and sell their units only through stock exchanges.
Other Mutual Fund Classifications
Growth Schemes
These aim to provide capital appreciation over the medium to long term. Generally, these funds invest their money in equities.
Income Schemes
These aim to provide a regular return to their unit holders. Mostly, these funds deploy their capital in fixed-income securities.
Balanced Schemes
These offer a combination of steady returns as well as reasonable growth. The funds in this scheme are invested in both equities and debt instruments.
Real Estate Investment
The real estate market offers a high return to investors. The term “real estate” refers to land and buildings. There is a common notion that the price of real estate has increased by more than 12% over the past ten years. However, real estate investments cannot be encashed quickly; liquidity is a problem. Real estate investment also involves high transaction costs, and the asset must be managed (e.g., painting, repair, maintenance, etc.).
Commodities and Precious Metals
Commodities have emerged as an alternative investment option nowadays, and investors use this option to hedge against spiraling inflation. Commodities may be broadly divided into three categories: metals, petroleum products, and agricultural commodities. Metals can be further divided into precious metals and other metals. Gold and silver are the most preferred ones for beating inflation.
Gold
Of all the precious metals, gold is the most popular as an investment. Investors generally buy gold as a hedge against economic, political, social, and fiat currency crises. Gold prices are soaring to new highs in recent years compared to previous decades because whenever signs of an economic crisis arise in the world, markets find shelter in gold as the safest asset class for investors worldwide.
Silver
While the yellow metal is treated as a safe haven, silver is used abundantly for industrial applications. Investment in silver has often given investors super returns, sometimes exceeding what gold has provided.
Debentures and Bonds
A bond is a loan given by the buyer to the issuer of the instrument. Companies, financial institutions, or even the government can issue bonds. Over and above the scheduled interest payments as and when applicable, the holder of a bond is entitled to receive the par value of the instrument at the specified maturity date.
Equity Shares
Equity, also called shares or scrips, represents the basic building blocks of a company. A company’s ownership is determined on the basis of its shareholding. Shares are, by far, the most glamorous financial instruments for investment for the simple reason that, over the long term, they offer the highest returns. Predictably, they are also the riskiest investment option.
The Concept of Risk and Return
Defining Risk
The dictionary meaning of risk is the possibility of loss or injury; in finance, risk is the possibility of not getting the expected return. The difference between the expected return and the actual return is called the risk in investment. Investment situations may involve high, medium, or low risk.
Types of Risk
- Systematic Risk: Systematic risk is caused by factors external to a particular company and is uncontrollable by the company. This risk affects the market as a whole.
- Unsystematic Risk: In the case of unsystematic risk, the factors are specific, unique, and related to a particular industry or company.