Types of Investments

Posted on: Tuesday, June 19th, 2012
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The financial concept of investment comprises commitment of funds in financial assets, in the hope to gain maximized returns in future in the form of dividend, interest and / or capital gain. The professed goals of any investment are return maximization and risk minimization. The major types of investments can be categorized as financial, business, personal, institutional, and real.

Financial Investment is the commitment of funds through collateralized lending or making a deposit into a secured institution. These investments include bank deposits, life insurance policies, provident fund, government bonds and public sector bonds that are considered risk free investments and investments in public or private sector institutions through shares, debentures, and mutual funds that are considered risky investments.

Business investments are entrepreneurial investments where income is generated through processing, conversion and value addition. Investment in fixed assets of a business like land, building, plant, machinery, furniture, fixtures, captive facilities like power or water plants and assets such as raw-material, working progress, finished goods, accounts receivable, bank balance all constitute business investment.

Personal investment goals of investors such as need of life cover more than returns, superannuation benefits, saving schemes, loan coupled schemes and other such investments that are more people oriented are referred to as personal investments.

Institutional investments are generally made by investors that are financial intermediaries of all sorts. The sources of investable funds are accrued largely from individual investors and to a small extent from corporate and other investors. Traditional institutional investments constitute government bonds, securities, municipal bonds, mortgage securities and the like where risk is maybe 0% but the return is eventually lower or lowest. On the other hand, for better and higher returns venture capital is an investment outlet whereby equity investments are made in hi-tech, R&D strong and novelty enterprises. Once the enterprise establishes itself, the venture fund might disinvest and book capital appreciation. Leveraged buyout is another investment operation wherein an institutional investor acquires a controlling interest in an existing company’s equity and the assets of the acquired company are used as collaterals for the borrowed capital. Later, the institutional investor may sell out the company or part of the business retaining the core-business. This is a hi-tech ‘financial re-engineering requiring great calibre.

Real investments are investment in real assets like real estate, infrastructure or investments in gold and silver bullion and precious stones. It also includes investments in the form of souvenir collectibles like art, antiques, coins and stamps. Real investments are considered inflation-hedges, unlike monetary assets, bank deposits, govt.-bonds, etc. Real estate gives the highest of returns and if it is an urban land, the value tends to grow faster every year.

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