The primary question is, what are financial products and why exactly do you need them?
Financial products are those financial instruments which help serve the financial needs of savers, investors, insurers etc. If you want your money to grow instead of leaving it idle, you most probably will need, some sort of financial product. They are supposed to provide the investors, in this case, it’s you, with the financial security based on the risk return profile of the instrument. Now, the financial products are classified on the basis of their volatility, underlying assets, risk or return.
Types of Financial Products
- On the basis of time horizon of investment:
- Short term investment: Any investment for less than a year, can be called as short term investment.
- Medium-term investment: The span of investment is more than a year and up to 5 years mostly.
- Long term investment: Any investment for more than 5 years is termed as long term investment.
- On the basis of the type of investment:
- Primary security: The security which does not derive their value from any underlying asset are known as primary securities. e.g shares, bonds etc
- Secondary security: Those securities which derive their value from an underlying security are known as secondary securities. e.g. futures, options etc.
- Innovative securities: These securities are customised to serve a certain purpose. Mostly used by large corporate institutions, these securities are results of intricate financial engineerings. e.g. Credit default swaps etc.
One of the major reason to include a financial product in your portfolio is your risk appetite and your goals. Suppose you want to buy a house in 10 years. You can start investing in an instrument which will help you achieve this target in the desired time. You can refer to historical returns of that certain product to check if it in line with your financial appetite. Also, you will need to check the volatility of the returns over that time horizon. This volatility will define the risk involved in the financial product. You will then need to check whether it is acceptable amount of risk or not.
It is advised to the beginner investors, not to invest their money directly in any asset i.e primary securities. You can start investing in pooled securities like mutual funds and index funds. These instruments mitigate the risk involved in investment by diversification. Happy investing !