Earning a secondary income has become quite necessary in current times. The covid crisis has made it certain that you cannot solely rely on your 9 to 5 job. Hence, making smart financial investments seems to be the most preferred way to generate some extra cash.
Fortunately, with the rising digital world, there’s also been a rise in financial literacy, and interest in investing in financial products. People, especially millennials, are wooed by the self-proclaimed financial gurus encouraging everyone to invest in something or the other. What these ‘gurus’ forget to ask is your financial goal and ability to take a financial risk.
So to save you from this digital befuddlement, we have composed the 7 best investment options based on risk and financial goals to choose from in 2021.
- Debt Mutual Funds
Debt funds, also known as fixed-income mutual funds, are schemes that invest in fixed-income market securities like corporate and government bonds, debentures, treasury bills etc. As these securities come with a short-term maturity period, debt funds are ideal to fulfil a short-term financial goal.
Debt mutual funds give a fixed return and are relatively stable than equity funds. Hence, they are suitable for those looking for a consistent income with low risk. Besides, debt funds also contain a short maturity period, and hence, they are easy to liquify in case of an emergency.
Ideal for – Someone who is looking for a low-risk and stable source of income.
- Equity Mutual Funds
Equity mutual funds are high-risk mutual funds. Luckily, they are mostly managed by an asset management company under the experts who analyse the market and identify various investment opportunities and get you a high return.
Although equity mutual funds are a high-risk investment, they also bear the fruit of high return. By investing in different equity stocks, you get to diversify your portfolio and minimise the risk.
Another benefit of equity funds is the exemption from tax if the investment period is more than a year.
Ideal For – Someone who wants high returns and is comfortable with high-risk it pertains.
- Hybrid Mutual Funds
Hybrid mutual funds, as the name suggests, are a combination of both debt and equity mutual funds. The fund manager invests in components from both types of mutual funds, ensuring the stability and low risk of debt funds and high returns of the equity funds.
Based on your financial goals, you can also go for equity-oriented mutual funds (with majority investment in equity funds) or debt-oriented mutual funds (with majority investment in debt funds).
Ideal for – Those who are comfortable with allocating some part of their investment to high-risk equity funds, while also enjoying the stability of debt funds.
- Public Provident Fund (PPF)
Public provident funds are one of the most preferred investment options for long-term retirement. Apart from being the safest investment option, PPF also has outstanding benefits like Triple Tax Exemption, i.e you get tax exemption three times – at investment, accrual and withdrawal.
PPF has a maturity period of 15 years with a relatively high interest rate of 7.1%. Through the power of compounding, you can get a high return on investment over 15 years.
Ideal for – People with a long-term financial goal looking for a low-risk, stable investment.
- Corporate Bonds
The corporate bond, which is a category of debt funds, is another high-yielding yet safe investment option. Corporate bonds are a debt-driven approach for companies to raise capital without affecting their shareholders. So when you buy a corporate bond, you are lending money to the company, which will be paid back to you with an interest.
It’s crucial to mention that corporate bonds are not risk-free, especially if you invest in low-rated securities. There’s always a risk of defaulters. Hence, you should choose the fund management services wisely.
Ideal for – Investor looking for a short-term and high yielding investment option with low risk.
- Index Funds
The index fund is a type of passive investment i.e, instead of actively buying and selling stocks (active investment), the index funds entirely invest in the index. The fund manager only needs to update the portfolio if the index weight changes or when stock/securities are added or deleted from the index.
As it is passively managed, index funds have lower management fees. It is also an investment option with high returns. Besides, the trading of securities is low, therefore, index funds generate less taxable income as compared to other actively managed funds.
Ideal for – People with an investment plan of more than 6-7 years. The index funds experience fluctuations in the initial years of investment, but over the span of 7 years, investors can get high returns of up to 12%.
- Exchange-Traded funds (ETF)
Exchange-traded funds are another example of passively managed funds that invests in a different portfolio of assets traded over the stock exchange. ETF ensures diversification by offering various types of investment securities and hence reduces the investment risk.
In addition, the ETF also offers transparency and convenience as you can sell/buy ETF shares by looking at the market price on the trading portal.
Ideal for – People with low financial literacy and limited time to analyse the market.
It goes without saying that none of the above mentioned financial products are risk-free. Every form of investment bears some risk. Therefore, you should always plan out your financial goal, risk tolerance and the window of investment first. If you struggle with keeping up with the market, the best option is always to let the financial experts handle your portfolio for you. After all, it’s always better to enter the market with the experts by your side.