Top Investments That Give The Best Returns
We’re going to jump right to the crux of the matter: The truth is that the best returns are accessible when investors are willing to accept some amount of risk in order to pursue incremental returns.
Background on High Return Investments
Why is this so? This is because investments that are directly linked to economic growth, have a better ability to offer directly proportional returns. For example, if you invested in a neighbourhood aunty’s lemonade startup that went on to become India’s biggest lemonade company by market share, you would partake in the startup’s growth story. However, there would be the risk of the lemonade startup staying local, never really taking off and eventually fading away from popularity.
Moreover, most people have neither the investment capital volume, nor the access and expertise to find and sift through countless little companies. Of course some people do have the necessary crores of rupees and the necessary access, and these investors are known as private investors or private equity investors.
For the rest of us, with regular salaries and investment capital of 4 to 6, or maximum 7 digits, options such as mutual funds, equity investments and bonds present a reasonable and accessible opportunity to earn potentially high returns. In return, investors shoulder the risk of investing in market-listed companies either directly, via equity/stocks and bonds, or indirectly, via mutual funds, or even exchange traded funds.
4 Potentially High Return Investment Options To Evaluate
Investing directly in the stock market is automatically more risky than investing indirectly because it calls for a certain amount of expertise. That said, one might also be able to access higher returns. Additionally, stocks and bonds may be high risk or low risk in themselves.
1. Stocks/ Equity
How it works:
When you invest in equity, you invest in the shares of companies when the stock price is low and sell your shares when the price reaches a point that delivers your earnings target.
You can invest in companies that are already listed or you can invest in IPOs where you partake in the listing of the company by buying initial shares, before it is listed.
- Investors need to select stocks carefully. They need to evaluate the potential of various sectors and companies and preferably develop a portfolio that straddles several sectors and companies so as to minimize their risk – by this strategy, they should be able to offset low or lacking growth in some stocks from better returns on other stocks.
- Selection techniques must be researched, understood and assimilated. Metrics like PE ratio and tools like technical analysis can really help the investors strategize their stock market investments better.
- Risk management basics include setting a stop loss and evaluating the companies’ financials and ability to deliver earnings in the future.
- Risk is a constant when investing in stocks
- Market capitalization is one way to evaluate risk:reward ratio, where small cap companies are the riskiest and large cap companies are comparatively the least risky.
- Value stocks are also seen as less risky than growth stocks
How it works:
Investors buy bonds from bond issuers who issue a bond certificate that binds them to return the investor’s capital by a specific date with a specified amount of interest. The bond issuing company becomes a debtor to the investor, who becomes the creditor.
Bonds can also be bought and sold on the stock market.
- Similar kind of research that one would conduct, while investing in stocks of a company: check the companies’ financials for at least three years and their ability to make good on their debt. If the company is issuing bonds to raise capital for a specific expansion project, some research into the project is definitely warranted.
- Bonds with a fixed interest are clearly lower risk
- Since the government is seen as less likely to run off with the public’s money, government bonds are typically seen as less risky
Investing indirectly takes the burden of expertise off your shoulders but some accountability does still rest with you. Depending on how you choose, you can still access potentially handsome earnings.
3. Mutual Funds
How it works:
Your capital is pooled with that of other investors and a fund manager, along with his or her team, chooses stock market investments of various categories as per the risk appetite and other specifics of the fund in question. For example a real estate fund would specifically park and juggle investor capital among real estate projects and allied products and services. Similarly, a low risk fund would have a higher proportion of bonds/ debt and a large cap fund would track large cap stocks.
Investors buy units of a mutual fund at a certain price and their earnings are determined by the difference between the price they buy at and sell units at.
- Mutual fund investments are subject to market risk – read the offer document carefully before investing. Yes. Really. Read it.
- Look for market capitalisation and risk level and ensure these match what you are comfortable with.
- Keep a track on your investments to time your entry and exit correctly (investors typically won’t exit when the market is down)
- Try to keep your entry price low by using the SIP mode of investing that averages out your entry price (for mutual fund units) by buying a fixed number of units at regular intervals.
- Just like with stocks, large cap funds are seen as comparatively low risk and vice versa for small cap funds.
- Debt-equity proportion is a good indicator of the fund’s risk appetite
4. Exchange Traded Funds
How it works:
This one is slightly more complex. ETFs/Index funds have characteristics of stocks and mutual funds. They pool investor capital like mutual funds but can be traded in the stock market like stocks. They invest investor capital in the same companies listed on any index (like Nifty 50) in the same proportion that it exists in the index. As a result, investors access growth that corresponds to the benchmark index.
- Investors need to time their entry and exit perfectly.
- Historical performance should be evaluated.
- Truth be told, the ETFs do not necessarily keep pace with the benchmark index and may deliver higher or lower returns.
- Additional risk exists from the fact that the ETF price itself fluctuates.
Conclusion: Investors should evaluate and choose wisely from among these investments that open the doors to potentially higher earnings. They should filter them according to their own risk appetite and the costs involved such as brokerage fees, expense ratio paid to fund houses for managing capital, fees paid to experts and so on.