There are so many ways to invest your money but each of them have different returns and risks attached to them. We’ve summarized the ideal returns you can expect from different investments. Check them out before deciding which investment option is best for you:
There are 3 ways to make money on your investments:
- Interests: On investments like savings accounts, fixed deposit accounts, bonds, etc. you earn fixed interests after periodic intervals. With these types of investments, you know exactly how much money you’re going to earn on your investment. Unlike shares, these give you a regular source of income.
- Dividends: Some companies give a share of their profits to investors in the form of dividends. This is also a regular source of income like interests. But this depends solely on whether the company is making profits or not. If they aren’t then they are not liable to pay dividends.
- Capital Gains: This is the money earned by selling your investment like a stock, bond, mutual fund or ETF. If you sell an investment for more than what you paid for you’ll have a capital gain. If you sell it for less than what you paid for, you’ll have a capital loss.
Returns on traditional investments:
This commonly comes under the category of ‘fixed-income’ securities. Purchasing a bond means lending out your money to a company or government. In return, they promise to give you interest on your money and eventually pay back the money you had lent.
Bonds are particularly popular because of their safety. Buying bonds from a stable government or company mean your investment is pretty safe or “risk-free” in financial lingo. But obviously lesser or no risk means lesser potential returns.
As a result, the rate of return on bonds is generally lower than other securities.
Bonds issued by companies offer a higher interest rate than those issued by the government. This is because returns are directly proportional to the risk factor. Since governments usually never default, their bonds are considered risk free. Usually, Government bonds pay a return of 7% to 10% and the maturity can be anywhere from 3 months to 30 years.
2. Mutual funds:
Mutual funds are financial instruments that are professionally managed and that invest money on behalf of any investor in different securities.
A mutual fund could invest in stocks or in bonds or invest in both. The primary advantage of a mutual fund is that you can invest your money without needing the time or the experience in choosing investments.
Depending on the type of mutual fund you invest in your return varies. An equity-only mutual fund is risky but at the same time gives higher returns somewhere between 14-25%, a debt only mutual fund (Fund that invests in bonds) is safer but gives fewer returns somewhere between 8-9%.
When you purchase stocks (also called as shares or equities) you become a part owner of the business. Thus, you get to vote at shareholder’s meeting and also receive any profits made by the company – these profits are called as dividends.
Unlike bonds that are steady, stocks fluctuate on a daily basis. In the financial sense, they are volatile and bonds are fixed. Buying a stock doesn’t guarantee any returns. Many stocks don’t even pay dividends you can only make money on them when they increase in value and go up in price.
Compared to bonds, stocks provide relatively high potential returns. Of course, there is a price for this potential: you must assume the risk of losing some or all of your investment. This is because sometimes the stock might not increase in price and selling them might mean a loss for you.
You can expect an average return of 15% on stocks provided you stay invested for 3 years at least, pick the right stocks and invest regularly instead of buying stocks together at one go.
Also, read Nifty50, Sensex Say What to understand what people mean when they say ‘Markets are high’
4. Fixed Deposits:
Fixed deposits are financial instruments that are one of the oldest and safest ways to save money. A fixed amount of money is kept aside with a financial institution usually a bank for a fixed number of days or months or years. In turn, interest is earned on this money. The rate of interest differs anywhere between 6-7% depending on the duration of the deposit tenure and also the bank.
Returns on Alternative investments:
These investments include real estate, gold, futures, forex, bitcoins, and other specialized financial products.
These are generally high-risk/high-reward securities that are much more speculative than plain old stocks and bonds. Though they give big profits, they require some specialized knowledge. Usually, only expert investors with lots of money take such risks So it is safer to stick with the traditional investment options like stocks and bonds instead of venturing into risky territories!
Have any more questions on what kinds of returns you should expect, comment to let us know!