Options and futures
Options and futures are types of derivatives. By derivative I mean they derive their value from some underlying asset which could be anything (a stock, commodity). These are contracts formed between two parties where one party agrees to buy at a specified price and the other party agrees to sell at the specified irrespective of the market value of the asset. Either one of the parties will bear a loss.
They are mainly used for two purposes — Speculating and hedging. Speculating involves making a profit on the price change of security by predicting or making educated guesses in determining the direction of the price movement. Hedging refers to taking an opposite position to what you initially invested, so that you can reduce your risk, in case you have losses. Compared to hedging, speculation is risky and increase volatility in the market. Investment in these options should only be done by seasoned investors who have good knowledge of the underlying asset and the stock market.
Options are a bit different from futures, as they don’t have an obligation to buy or sell the underlying asset. Options are off two types — Call and Put. They don’t provide any tax benefits.
Commodity Trading
“A commodity is a basic good used in commerce that is interchangeable with other goods of the same type” — from investopedia.
Centuries back, commodity trading refers to the exchange of goods and assets. In the present scenario, trading does not happen in physical form instead of through different digital ways. These are some of the good ways to diversify the portfolio and provides us a hedging instrument in case of market volatility or recession. Commodities are categorized into four types
Metals — Silver, Gold
Energy — Crude Oil, Natural Gas
Agriculture — Rice, Wheat
Livestock and meat
There are multiple ways through which you can invest in commodities like futures (which is the most popular one), ETF’s, sector funds, and index funds.
Crypto Currency
A cryptocurrency is a digital or virtual asset, that derives its values from the faith of people. Cryptocurrency is decentralized networks and works on blockchain technology. The most popular cryptocurrency is Bitcoin. Other examples of cryptocurrency are Litecoin, Ethereum, etc. The cryptocurrency transactions are managed independently by different computers across the world that is why it is hard to perform any illegal transaction. Investing in these is risky as no government has legalized it.
Peer to Peer lending (P2P)
I bet most of you would not have heard about it, but these are relatively new investment options. This is a modernized version of the old way where people used to go to local lenders for money. So you can call them “whiskey on the rocks with a twist” This is a digitized method of lending money to one or more borrowers under a legal agreement.
There are several authorized online platforms that provide option of P2P lending. They are very similar to the bank where they take some part of the invested/loaned amount from both borrowers and lenders. P2P investment class can be used to build a regular passive income. There are risks of borrowers defaulting but they are mitigated by funding total borrowers amount with multiple investors where the cap of Rs 50000 is placed, which means a lender cannot lend more than this amount to a specific borrower.
The other ways in which risks are mitigated is by having lenders and borrowers from different geographical area, credit profiles, loan tenure, and interest rates. With this variety of borrowers, lenders have a lot of options to choose from based on their risk appetite. Also, P2P platforms do follow strict credit profile checks before onboarding a borrower. The minimum, amount that can be invested is Rs 500–750, and the maximum amount that can be invested across all platforms is Rs 5000000.
Investment into Start ups
To invest in startups, you may need a considerable amount of capital. This a long term which has very little chance of giving you exorbitant returns. The reason is most of the startups fail, but if it gets going it could give returns much more than stock markets. There are mainly 3 ways to invest in startups.
Firstly is through angel investing. Angel investors are the people, who guide you in the business along with putting their capital.
Secondly, we have Venture capitalists. Venture Capitalists are the firms that invest money in the pool of the startups on behalf of HNI (high network individuals). They have a big network of investors and startups through which money is channeled.
Thirdly we have crowdfunding, which is not an ideal option for startups as in this method they have to rely on the public to pool money. Crowdfunding is rarely being used, as to collect a large capital for a start-up they may have to reach thousands of people, and also there is a risk of the firm running away with the money of the people.
All these methods make you a shareholder in the company if the company grows the value of your stake will also grow and vice versa.
ESOP
An employee stock ownership plan is an employee benefit plan that gives employees a stake in the company’s growth. This is generally provided by the companies to attract and retain high-quality employees. They are also used by start-up companies to provide competitive packages to the employee and attract talent. Some companies allow investing in ESOP’s voluntarily to the employees. It provides motivation to the employees to contribute to its goal and remain with the company for a longer period of time. This also increases employee retention and reduces attrition. Employees get the stock options at the predetermined price which is lower than the market price so that when they sell it back they can earn huge profits.
Vesting refers to the period where stocks are being added to employee account and exercising of option happens after the vesting period is over, where the employee could sell the shares he has accumulated at the market price. There are some tax benefits to the employer in some cases. For the employees, if the shares are sold within 36 months of owning them, then the gains are added to your taxable income and taxed according to the tax slab. If sold after 36 months, then a 10% tax is applicable on the gains exceeding 1 lakh. For example, total profit — Rs 150000, Tax to be paid — Rs 5000 (10 % of 150000–100000).
Post office savings schemes
These schemes are provided by the Indian post offices and managed by India Post. The post offices provide saving avenues for common people. In total, they provide 9 schemes
- Post Office Savings
- National Savings Recurring Deposit
- National Savings Time Deposit
- National Savings Monthly Income
- Senior Citizens Savings Scheme
- Public Provident Fund
- National Savings Certificate (VIII Issue)
- Kisan Vikas Patra
- Sukanya Samriddhi Yojana
Pension plans
Pension plans are also called retirement plans. In these kinds of investment plans, policyholder invests either lump sum or fixed payments for a period of time (till it matures) and gets a constant income post-retirement. They help in securing the financial future and securing post-retirement uncertainties This should be a must for everybody and investment in these plans shall be started as early as 30 years of age, but even if you are in your 40’s or 50’s it's still not late. After post-retirement, you can take a part of the lump sum amount or choose not to do so and the rest of the amount is being re-invested which decides your fixed monthly corpus. These are different subcategories under pension plans which are provided by the insurance companies where you can customize policy tenure, add beneficiary or lifetime annuity.
