Question

What are the various investments that a firm can hold and what are the benefits of each one of them

Answer 1

Question:- What are the various investments that a firm can hold and what are the benefits of each one of them

Answer:-

An investment is an asset or item acquired with the goal of generating income or appreciation. In an economic sense, an investment is the purchase of goods that are not consumed today but are used in the future to create wealth. In finance, an investment is a monetary asset purchased with the idea that the asset will provide income in the future or will later be sold at a higher price for a profit.

• Investment is the act of putting money to work to start or expand a business or project or the purchase of an asset, with the goal of earning income or capital appreciation.
• Investment is oriented toward future returns, and thus entails some degree of risk.
• Common forms of investment include financial markets (e.g. stocks and bonds), credit (e.g. loans or bonds), assets (e.g. commodities or artwork), and real estate.

Investments and  Benefits

1) Public Provident Fund

2) Bank Fixed Deposits

3) Equity Mutual Funds

4) National Pension System (NPS)

5) Gold

6) Real Estate

7) Direct Equity

1) Public Provident Fund

A Public provident fund scheme is ideal for individuals with a low risk appetite. Since this plan is mandated by the government, it is backed up with guaranteed returns to protect the financial needs of the masses in India. The interest payable on public provident fund scheme is determined by the Central Government of India. It aims to provide higher interest than regular accounts maintained by various commercial banks in the country. Interest rates currently payable on such accounts stands at 7.9%, and is subject to quarterly updates at the discretion of the government.

The total interest accrued on PPF investment is also exempt from any tax calculations.Therefore, entire amount redeemed from a PPF account upon completion of maturity is not subject to taxation. This policy makes the public provident fund scheme attractive to many investors in India.

2) Bank Fixed Deposits

Bank fixed deposits (FDs) is another popular investment option which offers fixed returns. One can invest in a bank FD by visiting his/her branch or via Net-banking. FDs are available in a wide range of tenures. Banks like the State Bank of India (SBI) and HDFC Bank offer FDs with minimum tenure of 7 days and maximum of up to 10 years. One can invest in any tenure depending on his/her time horizon at the rates offered by banks. Most bank FDs offer the option of premature withdrawal by paying a penalty. However, this should be checked at the time of opening the FD account.

Bank FDs offer cumulative and non-cumulative options. In the cumulative option, the interest is re-invested and payable on maturity whereas, in the non-cumulative option, interest is payable periodically (monthly, quarterly or annually depending on the bank). Interest is added to your income and taxed as per your income tax slabs. Interest is subject to tax deducted source (TDS).

3) Equity Mutual Funds

Equity mutual funds predominantly invest in equity stocks. As per current Securities and Exchange Board of India (Sebi) Mutual Fund Regulations, an equity mutual fund scheme must invest at least 65 percent of its assets in equity and equity-related instruments. An equity fund can be actively managed or passively managed. In an actively traded fund, the returns are largely dependent on a fund manager's ability to generate returns. Index funds and exchange-traded fund (ETFs) are passively managed, and these track the underlying index. Equity schemes are categorised according to market-capitalisation or the sectors in which they invest. They are also categorised by whether they are domestic (investing in stocks of only Indian companies) or international (investing in stocks of overseas companies)

4) National Pension System (NPS)

Investors who wish to receive a pension in their retirement years can look to invest in the National Pension System (NPS). It is a defined contribution system where your contribution is invested in various assets - equity, bonds, government securities, and alternative investments as per your choice.The scheme offers two choices: Auto choice and Active choice. In auto choice mode, your contribution is divided among various assets based on your age (Life Cycle Fund). On the other hand, under the active choice, you decide the ratio in which funds are to be invested in different asset classes.The scheme matures when the investor turns 60 years of age. The lock-in period depends on the entry age of the investor. For example, if you start investing in NPS at the age of 25 years, then the lock-in period will be 35 years.The returns of NPS are market-linked. Amount of pension you will receive post-maturity will depend on the amount of corpus accumulated by you.

NPS offers tax benefit under section 80C for a maximum of Rs 1.5 lakh and an additional tax benefit of Rs 50,000 under section 80CCD (1B). However, at the time of maturity, only 40 percent of the corpus, if redeemed as a lump sum, will be tax-exempt. Pension received will be fully taxable as per your income. No tax is payable during the accumulation period.

5) Gold

Possessing gold in the form of jewellery has its own concerns like safety and high cost. Then there's the 'making charges', which typically range between 6-14 per cent of the cost of gold (and may go as high as 25 percent in case of special designs). For those who would want to buy gold coins, there's still an option.

Many banks sell gold coins now-a-days. An alternate way of owning gold is via paper gold. Investment in paper gold is more cost-effective and can be done through gold ETFs. Such investment (buying and selling) happens on a stock exchange (NSE or BSE) with gold as the underlying asset. Investing in Sovereign Gold Bonds is another option to own paper-gold. An investor can also invest via gold mutual funds.

6) Real Estate

People buy a house either for self-occupation or to earn rental income and capital gains from it. However, as per most financial advisors, investing in real estate to earn rental income is not considered as a good investment. Rental income earned from house ranges usually between 2-3 per cent a year.The appreciation in the prices of house property depends on various factors such as size, locality, location etc. Before making an investment in property, one must evaluate based on safety, liquidity, returns and other similar parameters.

7) Direct Equity

Investing in stocks may not be everyone's cup of tea as it's a volatile asset class and there is no guarantee of returns. Further, not only is it difficult to pick the right stock, timing your entry and exit is also not easy. The only silver lining is that over long periods, equity has been able to deliver higher than inflation-adjusted returns compared to all other asset classes.

At the same time, the risk of losing a considerable portion or even all of your capital is high unless one opts for stop-loss method to curtail losses. In stop-loss, one places an advance order to sell a stock at a specific price. To reduce the risk to certain extent, you could diversify across sectors and market capitalisations. To directly invest in equity, one needs to open a demat account.