Understanding Investment Types
The word investment itself means investing money for the purpose of gaining more wealth or income. To invest is not to put money into an investment and expect a profit in return. Simply put, to invest means buying an asset with the aim of making a profit from the investment or in other words, purchasing an asset with an expectation to make an income from the investment. In addition to this, there are two other important concepts that must be understood when one decides to invest. These concepts are risk and return.
Any investment involves risks. However, the risks involved in different types of investments are varied. For instance, there are risks involved in some types of stocks and bonds, such as the investments in corporate bonds, common equity securities, commercial mortgages and mortgage-backed securities. Other common types of investments include commodity investments, such as agricultural bonds, money market funds, treasury bonds and certificate of deposits, as well as the more complex financial instruments.
As far as the risk factors are concerned, the most significant risk factor for any type of investment is the possibility of loss. It is impossible to eliminate risk completely. However, the key is to reduce the impact of risk on the returns. One way of doing this is by diversifying the portfolio. This means that, apart from general investments like commercial real estate, bonds, mutual funds, stock, money market, etc., one also needs to have other forms of investments that are designed to minimize the impact of risk on portfolio returns.
The other important concept of investment is return on investment (ROI). It is the percentage increase in value of an amount over a time period. A good example of a form of return on investment is the profit earned on the purchase of a particular security. There are different ways of achieving a good ROI. For instance, a top quality life insurance product that has a long term period and a low premium can be expected to give superior returns over the long term period, while a zero percent return life insurance product will not give superior returns if premiums are kept high and earnings are kept low.
There are some investment types that have a predictable return on investment, though not necessarily in a constant manner. Examples of these types are life insurance products that provide a fixed rate of interest and premium payments that are guaranteed to continue at a set rate for a certain period of time. Also, fixed interest investments do not fluctuate with time. One example of this type is certificates of deposit. Investments in commodities, stocks and bond issues are also examples of predictable returns. One major advantage of these investment types is that they tend to provide regular income, even after the initial purchase.
There are several different types of mutual funds, including equity indexed funds, bond index funds and real estate indexed funds. There are some advantages and disadvantages to each type of mutual fund depending on the needs of the investor. An investor may choose to invest his money in stocks, bonds and other securities, or he may choose to invest in different types of mutual funds. The important point here is that the investment portfolio must be examined for suitability, which means that the investment portfolio must be diversified to avoid monotony of income. A complete investment portfolio analysis should be carried out by experts to get a better idea of the possible returns.