Investors whether in India or across the globe prefer to invest in a less risky or safe investment avenue. Some of the types of financial instruments traded in financial markets include equities, bonds, mutual funds, etc. Instruments that are traded in financial markets are considered as a risky investment avenue as investors may cash out on their money at any point of time. Financial instruments are subjected to different kinds of risks like market risk, credit risk, liquidity risk, etc. However, at this juncture, one of the important points to be considered is whether this phenomenon is actually true?
These risks can be reduced to a certain extent if investors are cautious about the market movements and take the required steps as and when required. Investors’ main objective is to earn maximum returns at a specified level of risk. One such way to create a safe investment avenue by minimizing risk is through diversification of the investment portfolio. This refers investing the available funds into different financial instruments to minimize the risk.
The following points help to understand the parameters to be considered while investing in some of the financial instruments:
- Equities provide benefits like capital appreciation and dividends; hence it is a viable option. However, investors should be cautious and keep a close watch on the markets so that they can sell their share investments at the right time and save themselves from losses.
- Bonds are the next financial instrument. Bonds in today’s date are an important constituent of an investment portfolio as they provide periodical cash flow. Bond investors also get back their principal amount during maturity of the bond. However, investors must consider bond ratings to ensure the credibility and possibility of default of the bond issuer. Investors generally prefer to invest in tax-free bonds as the income earned is exempted from tax.
- The next avenue is mutual fund. It is a safer option as compared to equities and bonds. Mutual funds pool savings from small or big investors and are managed by professionals. Mutual funds diversify their investment into different financial instruments thereby reducing risk. On the contrary, individual investors are unable to invest in different sectors, industries, companies, etc., with limited funds at a given point of time.
- Public Provident Fund (PPF) is a tax-free instrument used for saving. The interest income generated is exempted from tax. However, this investment avenue is used for a long-term basis where the investor’s money gets locked during that period.
However, there have been many instances where individuals have ended up in losses by investing in financial instruments. This is because they expect to have instant returns on their investment. Such expectation leads an investor to make wrong decisions with the hope to multiply their investments. Investors also face losses due to wrong selection of asset. As a result, investors need to understand various concepts with regard to financial markets like fundamental analysis, technical analysis, yield to maturity, etc., with an objective of minimizing risk.
At ITM University Online MBA program, one can learn the various techniques of forming a portfolio with an objective of earning maximum returns. Through this program students can hone their skills so that they can use these techniques in both professional as well as personal life to make money either in financial markets either in India or abroad.