BEST INVESTMENTS WITH HIGH RETURNS

Risk and return are directly related. Lower the risk, lower will be the returns, while with high returns comes high risk. To generate high returns, one has to invest in market-linked investments as against fixed-income products.

An asset class that has the potential to deliver high returns is equity. Several studies done in the past have shown that compared to other asset classes, equities have delivered higher inflation-adjusted return over longer term.

Besides equity, there are other asset classes such as real estate and gold that may show spike in prices after a long stagnation period. However, these may lag behind equities because of factors such as lack of liquidity, ease of purchase, and so on.

Here are few high return investment options you can choose from.

1. Direct equity

Investing in shares or stocks means one is taking exposure in the equity asset class. Investing in shares that are traded either at Bombay Stock Exchange (BSE) or National Stock Exchange (NSE) refers to secondary market. One needs to open a demat account with a brokerage house to start investing in them.

One may 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. The only silver lining is that over long periods, equity has been able to deliver higher than inflation-adjusted returns among all asset classes.

2. Initial public offering

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. According to an ET Online story, the primary market emerged as a money spinner for investors in 2017-18, with 65 per cent of the newly listed companies trading well above their issue prices, giving returns of up to three times.

Risks: Applying to IPO's does not confirm allotment. One may not even get a single share applied in 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.

3. Equity funds: Mid and Small Cap schemes

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.

According to the Securities and Exchange Board of India's (Sebi) latest mandate, mid-cap schemes should invest in 101st -250th companies in terms of full market capitalisation, while small-cap schemes should  invest in the 251st company onwards in terms of full 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 in order to enhance the returns. 

4. Equity-linked savings scheme (ELSS)

ELSS is a type of mutual fund, which is similar to any diversified equity mutual fund that routes investments. The minimum investment in equity and equity-related instruments has to be at least 80 percent of total assets. It, however, comes with some intrinsic features. It stands apart from a normal mutual fund as it carries a tax benefit on the amount invested and thereby has a lock-in period for funds invested for a period of 3-years .

ELSS schemes may have a small- and mid-cap bias. Fund managers may like to take advantage of the three-year lock-in period to exploit value stories in various sectors. If your objective is to be invested for the long term and also save some taxes 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. 

5. Real estate

Real estate prices are less volatile compared to other investments. At times, it is also useful as a hedge against inflation.

Risks: Real estate prices tend to remain stagnant for a considerable period of time and then show spikes where prices go up sharply in a short period and then again remain more or less flat. As an asset class it has low liquidity and to invest in it one requires high amount of capital.

6. Peer-to-peer platforms

Peer-to-peer (P2P) lending is a relatively recent option and is a form of crowd-funding used to raise loans which are paid back with interest by bringing together people who need to borrow, from those who want to invest. For the funds that you invest, the interest rate may be set by the P2P platform or mutual agreement between the borrower and lender.

Risks: Since this is an unsecured loan where there is no face-to-face interaction, a P2P lender, i.e., the investor needs to be aware of the risks involved such as default on the part of the borrowers.

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