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Types of Asset – What Type of Asset to Invest In?

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Jul 25, 2022

“Don’t invest in something you don’t understand” is one of the famous quotes by Warren Buffet. This quote clearly explains that before you make your choice of investment, you must have a thorough understanding of all its aspects. 

Having so many options, it can sometimes become very confusing to pick the most suitable assets to invest in. But don’t worry! In this article, we will take you on a tour of the different investment options which might suit your needs. 

So now, let us dive deeper and talk about the different types of assets you can invest in. 

P2P Investment

Whenever we think about investment, the options that come to mind are FDs, equity stocks, etc. But these are either very risky or provide low returns that are even below the annual inflation rates. 

P2P is a new-age investment option that helps the lenders directly connect with the borrowers through an online platform where both the lenders and borrowers can execute loan transactions in a secured environment. It eliminates the need for intermediaries like banks which makes P2P platforms more accessible for the investors. Unlike banks, P2P lending platforms like LenDenClub have low operational costs and most of the interest income is passed on to the investors. The returns on P2P investment are generally higher than traditional fixed-income instruments like FDs, PPFs, bonds, etc. 

Moreover, these investments are not affected by the volatility in the market and carry relatively less market risk. All this makes it one of the best assets to invest in. Also, fintech platforms like LenDenClub apply a borrower screening process that runs checks across 200+ data points to reduce the default risk. 

Debt

Debt is a fixed-income investment option that provides you with interest at the rates fixed at the time of investing. While debt instruments provide stable returns, the returns are much lower than P2P investments. The returns on debt instruments do not change with the change in market prices, hence are more consistent and less risky. 

This type of investment is suitable for those who want a steady passive source of income. On the other hand, this investment option is not suitable for the people seeking to grow their capital. The low returns make them a moderately suitable option for wealth-seeking investors. 

Shares (equities)

Shares represent a part of the ownership of a company. These are issued by the companies in the market. These companies sell the company ownership to raise funds. The value of an equity share is affected by market volatility. 

Even though equity investments have the potential to yield extraordinary returns, they also carry a very high risk. Therefore, if you have a medium-high risk tolerance, you can opt for equity investments. Not just this, but shareholders can also earn in the form of dividends (a share of the company’s profit). 

Property

Owning a property can help you achieve capital gains. Any increase in the sell rates of your property and the rent can result in capital gains. However, you must note that this type of investment is not liquid. It is not an easy process to sell a property, and it takes time. Furthermore, you need to have a huge sum of money to invest in property

Mutual Funds

collect money from investors and invest in a variety of instruments like stocks, bonds, and commodities. Mutual funds are of different types – debt, equity and hybrid. The debt mutual funds invest only in debt instruments. Similarly, equity funds only invest in equity stocks, whereas hybrid funds are more diversified and invest in different types of instruments. 

The riskiness and the potential returns of a mutual fund depend on its type. If it is an equity mutual fund, both risk and returns will be high and vice versa in the case of debt funds. The risk and return of a hybrid mutual fund depend on the ratio of debt and equity in the fund. 

Hedge Funds

Hedge funds pool money from investors and find the best assets to invest in. Although these sound much like mutual funds, these funds invest in non-conventional assets like art, currency, commodities and real estate. Also, these funds use more aggressive investment strategies like leveraging and short-selling. 

The above-mentioned aspects make these funds even riskier than mutual funds and equity stocks. However, it also has the potential to provide extraordinary returns. Furthermore, they are highly illiquid, volatile and risky. 

How to Decide What Type of Assets to Invest in?

While there is no set formula for investment that you can follow, making the right choices requires a lot of research and evaluation. Before you place your hard-earned money into a financial instrument, you must understand the factors that might influence your decision. Skipping this step in your investment journey can make you regret it later. So, let’s see what factors you should consider before deciding what assets to invest in. 

Know Your Financial Objectives

First of all, identify the reason why you want to invest. It can be something specific like buying a car, a house or saving up for your children’s education or something as general as creating more wealth. Knowing your objectives beforehand can help you determine the time period for which you want to invest and the amount of risk you can afford to take.

For example, if you are planning to save for your children’s higher education 10 years later, the time horizon for which you can invest will be 10 years, and you will most likely have a low-risk tolerance. Similarly, if your objective is to create more wealth, your investment horizon can be anything depending on your convenience, and your risk tolerance can be medium-high. 

Determine the Time Period

Once you know your financial objectives, the next step is to determine the amount of time for which you are willing to park your money into investment instruments. This will also depend on the amount you are planning to invest. 

There are different instruments for different types of investors. The type of your investment largely depends on the amount of money you want to invest and the duration for which you want to invest. If you want stable returns over a long period of time, you can invest in FDs or PPFs. Similarly, if you want to invest for a short duration, you can invest in money market instruments. 

Evaluate Your Risk-Taking Capacity

Sure, no one wants to put their hard-earned money at risk, but it is worth noting that returns do not come without risk. Every investment carries a certain degree of risk. In some instruments, it might be negligible, while in others, there might be a lot of risks.

Therefore, it is important to first determine your risk tolerance before investing in real assets. In simple words, the amount of money you can afford to lose is your risk tolerance level. If you have a high-risk tolerance, you can go for equity shares, whereas for someone with a low-risk tolerance, options like P2P lending are the best.

Which is the Best Asset to Invest In?

While high returns sound very lucrative, you must not forget that these returns come at a considerable amount of risk. If you are someone who wants to earn a steady and consistent income and have a low-risk appetite, P2P is one of the best investment options for you. 

P2P investment not only provides you with high returns but is also free from high market risk and is highly liquid. You can start your P2P investment journey with LenDenClub. Here’s why LenDenClub is the best – 

  • An RBI-approved NBFC and AI-enabled platform that matches you with the most suitable borrowers.
  • Provides returns up to 12% and is free from market risk.
  • Allows Portfolio Diversification
  • Uses 200+ data points for borrower selection to shortlist only creditworthy borrowers and keep the default risk below 4%.
  • Secure transactions through an Escrow account closely monitored by RBI. 

Register with LenDenClub and start investing now.  

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