It is one of the most important lessons in investing: Risk and return are directly correlated. Lower the risk, lower the returns, and high returns come with high risk. This is why to generate high returns you have to invest in market-linked investments as against fixed-income products.
Here are four high-return market-linked investment options you can choose from.
1. Direct stocks
Investing in shares or stocks means one is taking exposure in the equity asset class. Investing in shares that are traded either on the Bombay Stock Exchange (BSE) or National Stock Exchange (NSE) refers to the secondary market. You need to open a demat account with a brokerage house to start investing in them.
You can diversify across sectors and market capitalisations to hedge against the risk of investing directly in stocks.
Risks: Equities by nature are inherently volatile in terms of returns and the risk of losing a considerable portion of capital is also high. However, over long periods, equity has been able to deliver higher than inflation-adjusted returns among all asset classes.
For a company’s shares to be listed on any exchange, the shares have to be initially made available to the public through an initial public offering (IPO), i.e., the primary market. A public issue is an offer made to the public to subscribe to the share capital of a company at a certain issue price. Once this is done, the company allots shares to the applicants as per the prescribed rules and regulations. On the listing date, it becomes a part of the secondary market and investors can buy or sell them.
Risks: Applying to IPOs does not confirm allotment. You may not even get a single share you applied for in the IPO. Further, on the listing date, the price discovery happens among the investors, who themselves are bereft of any trading history of the stock. Remember, the IPO price is not the bottom price, and the share may double or lose a big percentage even on the listing date.
Also read:Top 5 investment options that can help senior citizens earn monthly income during retirement
3. Small-, mid-cap equity mutual funds
Among the various types of equity funds based on the market capitalisation of stocks they invest in, the mid-cap and small-cap schemes are prone to higher volatility and hence have the potential to deliver high returns.
As per the Securities and Exchange Board of India (Sebi) norms, mid cap schemes are mandated to invest in companies that are between 101 and 250 in market capitalisation. These companies can be leaders of tomorrow. That’s what makes them great bets. Small cap schemes invest in very small companies or their stocks. As per the Sebi mandate, small cap schemes must invest in companies that are ranked below 250 in terms of market capitalisation. The minimum investment in equity and equity-related instruments of mid-cap and small-cap companies has to be maintained at 65 percent of the scheme’s total assets.
Risks: Since both these categories of schemes bet on mid-and small-sized companies, they carry a higher risk and therefore, have potential for high returns. Before you decide to invest in a mid-cap fund, remember that it cannot form the foundation of your portfolio. It should be included only to the extent permitted by your risk profile to enhance the returns.
4. Equity-linked savings scheme (ELSS)
“Equity-Linked Savings Scheme (ELSS) is an equity mutual fund investment that invests at least 80 per cent of its assets in equity and equity-related instruments. ELSS can be open-ended or close ended. Investments in an ELSS qualify for tax deductions under Section 80C of the Income Tax Act within the overall limit of Rs 1.5 lakh. The amount you invest in ELSS is deducted from your taxable income, which helps you lower the amount of income tax you are liable to pay. Investments in ELSS are subject to a three-year lock-in period,” according to the Association of Mutual Funds in India (Amfi).
If your objective is to be invested for the long term and also save some tax along the way, ELSS schemes could be a good bet.
Risks: The ELSS scheme may not generate benchmark-beating returns once the lock-in ends. Review the scheme and evaluate the reasons for its bad performance and then decide to either continue or exit it.