Often, the processes of identifying your investment goals, sorting out your budget, and coming to terms with your risk appetite are so simple that you may find yourself gaining momentum in your investment journey until you hit that final, resolute wall – which investment options should you choose? Frankly, with so many options available in the market, it is natural for you to find yourself facing the Paradox of Choice – there are too many options for you to pick one. However, before you find yourself paralyzed with the fear of making the wrong decision, pause, take a deep breath, and then understand what it is that you are looking at. In this article, we will explore various investment options and highlight their pros and cons so that you can make the right choice for your needs!
Stocks often seem exciting. With their high ROIs and the myriad of success stories one reads in the news (like tech students who became millionaires overnight after a well-performing start-up was sold to a global giant), stocks often seem like the best investment avenue possible. But here’s the thing: when you treat something like a get rich quick scheme, your decision is bound to be clouded by what you want, as opposed to the facts in front of you. Naturally, investing in stocks come with their own pros and cons. Some of these are:
- One of the biggest pros of investing in stocks is that they offer high ROIs, which is why so many young investors are interested in exploring this option.
- Stocks also pay in dividends, which is an investment income that shareholders are entitled to. As a result, investors can find themselves withstanding the impact of drops in shares, enjoy an extra income, and also buy more shares and increase their wealth.
- Though investors are keenly aware of the high ROIs that come with stocks, they often forget that there are no returns guaranteed. Based on their performances, companies see their stocks crashing within a matter of minutes.
- Stock prices often rise and fall dramatically, which makes them highly unsuitable for people looking for steady income generation.
- They are also unsuitable for those with low-risk appetite. If it is stability that you desire, then this investment option is not the right one for you.
A bond is essentially a debt asset that represents a loan that the investor has paid to a company. One of the most common forms of bonds are government bonds, however, there are also other types such as corporate ones. Bonds offer the security of a fixed income but do not offer the kinds of ROIs that one sees with assets belonging to the equities market. For clarity, imagine that you have purchased a company bond that has a par value of $1000 and a coupon rate of 5%. With this, you are entitled to earn $50 in interest income per annum. Of course, this type of investment also comes with its pros and cons.
- The prices of bonds tend to fluctuate far less than those of stocks, as their prices do not rise and fall in the same way that those of stocks do.
- With certain types of bonds, you can guarantee yourself income stability. If this is a goal that you want to achieve, then investing in government bonds, which are typically quite stable, can help you.
- Certain types of bonds offer liquidity and stability at the same time. An example of this is US Treasury Bonds.
- Bonds often offer lower long term returns when compared to stocks.
- When interest rates increase, the price of a bond drops. Thus, investors looking for long-term investments should steer clear of bonds as natural market fluctuations can have a negative impact on them.
Mutual funds are popular investment tools that use pooled money from investors for different assets. As an investor, you can decide whether you want to pool in your money in the debt or equity market and enjoy growth in your funds accordingly. One of the best ways of investing in mutual funds is by diversifying your portfolio to include both types of assets. This way, you can enjoy high growth as well as security at the same time. Of course, as is the case with all other investment options in this article, there are certain pros and cons that come with mutual funds.
- Mutual funds are often managed by professional fund managers, which means that the task of analyzing the market falls in the hands of an expert. Though you may think you want to manage your funds yourself, you may not have the time to do so as often as a professional does.
- Mutual funds use a pool of money that comes from different investors. Due to this, the individual investor’s risk is greatly reduced, making this a safe avenue for novices and seasoned investors alike.
- Investors must pay a fund management fee that ranges from 1-3% of the annual funds that are under management.
- The lack of control over the investment can be quite frustrating for some investors, however, when it comes to someone who is just starting their journey, this can also prove to be a boon.
Exchange Traded Funds
Similar to mutual funds, Exchange Traded Funds (ETFs) are traded on the stock market. While mutual funds are often valued at the end of the day, these funds are valued throughout the day while the markets are open.
- Dividends earned from ETFs are re-invested immediately, unlike mutual funds dividends that are subject to timelines for re-investments. This prevents the loss of money for the investor.
- ETF share prices are often lower than their value, making this investment option open to investors with limited funds as well.
- ETFs offer a lesser scope for diversification than mutual funds.
- The cost of investing in an ETF is higher than the cost of investing in a specific stock.
- ETFs offer lower dividend yields when compared with mutual funds.
At this point, as an eager investor, you must evaluate your own needs before picking any of these investment options to grow your wealth. Each of these investment options come with their fair share of ups and downs and you must see which of these points resonate with your goals the most before you invest.
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