Financial instruments are tradable capitals each having its own exclusive structures. If you are a new investor, you have to first know the types of financial instruments available. Below are few short term financial instruments that provide good returns. Few like Savings accounts, fixed deposits are 100% safe as far as the capital is concerned. The others are dependent on the market fluctuation and the company performance.
A Bond is a Certificate of Debt delivered by a company or the government for the money you invest. The Bond promises the return of the invested money along with the fixed interest for a specific number of years. The duration can range anywhere between few months to 30 years. These Bonds can be traded and are safer when compared with stocks. When a company goes bankrupt, the bond holders are paid off before the stockholders.
Savings account is the safest and best way to invest your money. Withdrawal is easy and the money is mostly insured. Along with safety, this instrument provides a fixed interest amount.
Based on the amount of stocks of a company you hold, you become part owner of the company’s assets. When the company performs well, you will receive dividends from time to time and you can also sell these shares at a price higher than you originally purchased making yourself a good amount of profit. However, when the company does not perform well, the stock price goes down and you may face losing your invested money.
Mutual Funds are pooled funds received from several investors with the same investment goal and managed by a professional institution. The fund managers makes the decision to invest this pooled money in stocks, bonds and other money market instruments. Usually, the fund manager splits your money and invests in various financial instruments to reduce the risk. It provides good returns for your investment however, the market risks are still unavoidable. You will have to pay certain amount of fee and the profits are taxable.
Money market deposit accounts
These deposit accounts provide higher interest rates than the Savings Accounts. They are however safe and you can easily access your money. There is a limit to the number of times you can withdraw money during the investment period.
Certificates of Deposits (CDs)
CDs are similar to Savings Accounts but offer higher interest rates. A CD is provided for the amount of money you invest. The interest rates vary based on the number of years you invest. Usually, longer the investment period higher the interest rate. Premature withdrawals attract penalties.
Fixed Deposits (FDs) are lump sum amounts invested with the bank. They are safe and provide very good interest rates. The profit is however taxable. It is a safe way of investing money and is suitable for people who have long term investment plans.
There are also other financial instruments like National Pension System, Savings Certificates, Provident Funds, and Insurances and so on. that are suitable for individuals looking to make long term investments. These are best suitable for people who are looking to have a retirement cushion, pay for children’s education or want to buy a house.