TYPES OF INVESTMENT RETURNS

What is Investment?

In finance, the purchase of a financial product or other item of value with an

expectation of favorable future returns. In general terms, investment means the use
money in the hope of making more money. Investment is the commitment of
money or capital to purchase financial instruments or other assets in order to gain
profitable returns in the form of interest, income, or appreciation of the value of the
instrument. Investment refers to the concept of deferred consumption, which
involves purchasing an asset, giving a loan or keeping funds in a bank account with
the aim of generating future returns. Various investment options are available,
offering differing risk-reward tradeoffs. An understanding of the core concepts and
a thorough analysis of the options can help an investor create a portfolio that
maximizes returns while minimizing risk exposure.

Different types of Investments:

 Cash investments: These include savings bank accounts, certificates of

deposit (CDs) and treasury bills. .Certificate of deposit is a Debt instrument
issued by a bank that usually pays interest. Maturities range from a few
weeks to several years. Interest rates are set by competitive forces in the
marketplace. While treasury bills are Short-term securities with maturities of
one year or less issued at a discount from face value. These investments pay
a low rate of interest and are risky options in periods of inflation.

 Stocks: A type of security indicating partial ownership of a corporation.

Owners of stock are entitled to claim a portion of the company's assets and
 earnings. Buying stocks (also called equities) makes you a part-owner of the
business and entitles you to a share of the profits generated by the company.
Stocks are more volatile and riskier than bonds. The stock of a business is
divided into shares, the total of which must be stated at the time of business
formation. The price of a stock fluctuates fundamentally due to the theory
of supply and demand. Like all commodities in the market, the price of a
stock is sensitive to demand.

 Bonds : A debt instrument issued by corporations and governments to raise

capital. A bond is a formal contract to repay borrowed money with interest
at fixed intervals. Interest on the outstanding debt is paid to bondholders at
specific intervals, with the principal amount of the loan paid on the bond
maturity date. Thus a bond is like a loan: the issuer is the borrower (debtor),
the holder is the lender (creditor), and the coupon is the interest. Bonds
provide the borrower with external funds to finance long-term investments,
or, in the case of government bonds, to finance current expenditure. Bonds
and stocks are both securities, but the major difference between the two is
that (capital) stockholders have an equity stake in the company (i.e., they are
owners), whereas bondholders have a creditor stake in the company (i.e.,
they are lenders). Another difference is that bonds usually have a defined
term, or maturity, after which the bond is redeemed, whereas stocks may be
outstanding indefinitely.

 Mutual funds: A mutual fund is a professionally managed investment

product that sells shares to investors and pools the capital it raises to
purchase investments. This is a collection of stocks and bonds and involves
paying a professional manager to select specific securities for you. The
prime advantage of this investment is that you do not have to bother with
tracking the investment. There may be bond, stock- or index-based mutual
funds.
  Derivatives: These are financial contracts the values of which are derived
from the value of the underlying assets, such as equities, commodities and
bonds, on which they are based. Derivatives can be in the form of futures,
options and swaps. Derivatives are used to minimize the risk of loss
resulting from fluctuations in the value of the underlying assets (hedging).

 Commodities: The items that are traded on the commodities market are
agricultural and industrial commodities. These items need to be standardized
and must be in a basic, raw and unprocessed state. The trading of
commodities is associated with high risk and high reward. Trading in
commodity futures requires specialized knowledge and in-depth analysis.

 Real estate: This investment involves a long-term commitment of funds and

gains that are generated through rental or lease income as well as capital
appreciation. This includes investments into residential or commercial
properties.

What is Return?

In finance, rate of return (ROR), also known as return on investment (ROI), rate of
profit or sometimes just return, is the ratio of money gained or lost (whether
realized or unrealized) on an investment relative to the amount of money invested.
The amount of money gained or lost may be referred to as interest, profit/loss.
Types of Investment Returns

Interest:

Interest is a fee paid on borrowed assets. It is the price paid for the use of borrowed
money or, money earned by deposited funds. It can be defined as the compensation
paid by the borrower of money to the lender of money. When money is deposited
in a bank, interest is typically paid to the depositor as a percentage of the amount
deposited; when money is borrowed, interest is typically paid to the lender as a
percentage of the amount owed. The percentage of the principal that is paid as a
fee over a certain period of time (typically one month or year), is called the interest
rate. Most investments strategies recommend a very large portion of your net worth
be available in liquid savings. Assets that are in this form are typically placed in a
high-yield savings account, and returns are collected on a regular basis in the form
of interest payments. Investments in most banks and savings accounts are often
protected by the government to a certain extent and are among the safest
investments to be involved in.

Types of interests:

1. Compound interest - One of the most time-honored and basic investments is

simple compound interest on a savings account. Compound interest is very
similar to simple interest; however, with time, the difference becomes
considerably larger. This difference is because unpaid interest is added to the
balance due. The borrower is charged interest on previous interest.

Assuming that no part of the principal or subsequent interest has been paid,
the debt is calculated using the formula:

Compound Interest = P (1+r/100)n

 2. Simple interest - Simple interest is calculated only on the principal amount,
or on that portion of the principal amount that remains unpaid. The amount
of simple interest is calculated according to the following formula:

Simple interest = (P x N x R)/100

Sources:

Interest is earned from

• annuity payments received (taxable portion)

• bonds
• Guaranteed Interest Certificates (GICs)
• mutual funds
• policy dividends left on deposit
• savings accounts
• term deposits

Dividends

There are a large number of investments that offer their investors a portion of the
earnings a company realizes in a given year. These returns are known as dividends.
A distribution of earnings to shareholders, prorated by class of security and most
commonly Dividends are usually paid in the form of cash, store credits (common
among retail consumers' cooperatives) and shares in the company (either newly
created shares or existing shares bought in the market). The amount is decided by
the board of directors and is usually paid quarterly. Dividends must be declared in
the year they are received. Investments that provide dividend returns are among the
best long-term investments. Individuals who are close to retirement often make up
a large portion of their portfolio with investments that provide sizable dividends.
Investments that pay out dividends are typically labeled as stable and reliable, and
investors can generally count on receiving proceeds for many years to come.
Stocks and funds that pay dividends are often referred to as income investments.
Companies that pay dividends on a regular basis have typically been in business
for many years and show a very steady track record, which is very attractive to
many conservative investors.

Sources:

Dividends are earned from

• stocks
• mutual funds
• segregated funds
• corporations

Capital Gains

Capital gains are "profits" realized when a capital property is sold for more than
the purchase price .Capital gains returns are classified as any return on an
investment's principal. Most investment types that are offered on the market are
susceptible to capital gains. Some investments are specifically geared toward
capital growth, investing any and all gains back into the fund or company to
encourage growth. It is possible for income investments to experience capital gains
in addition to the dividend returns as the company grows. Growth companies and
funds are often preferred investment vehicles for younger investors due to those
investors' higher risk tolerance. Growth companies will often sharply reflect
current market trends, and growth is often minimal or negative in a recession.
a capital loss arises if the proceeds from the sale of a capital asset are less than the
purchase price.

Sources:

Capital gains can arise from

• bonds
• interest in a partnership or trust
• mutual funds
• real estate (other than a principal residence)
• segregated funds
• stocks