Different Types of Returns on Investments Explained

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When you begin your investment journey, one of the first questions you’ll have on your mind may be this - What investments should I add to my portfolio?

The fact that there are so many different investment options to choose from only adds to this dilemma. But with a few pointers to guide you, you can make the right investment choices for yourself. Typically, most investors consider factors like these to choose their investments:

  • The reasons for investing
  • The level of risk in an investment
  • The tenure of the investment
  • The amount of returns that can be expected from that asset

But there is one more important area that’s often overlooked. And that is the nature of the returns. You see, different investments give you different types of returns, and you need to factor this in before you invest in an asset or a scheme.

Wondering what the types of returns are? Let’s take a look.

Capital gains vs. investment income

The returns you get from your investments can broadly be categorized as a capital gain or as an investment income. The very nature of these returns is different. So, depending on what your investment goals are, you’ll find that one of these types of returns may be better suited to your needs than the other.

A capital gain, as the name implies, refers to an increase in the original capital that you invested in the asset.

Investment income, on the other hand, is simply any kind of earnings or income that your investment gives you.

Want to know more about these types of returns? Let’s get into the details then, so you can understand these returns better.

1. Capital Gains

Capital essentially refers to the amount that you invest in the asset, or the amount for which you buy an asset. The signature feature of capital gains from an investment is a rise in the value of that asset. The investment value rises over the tenure of the investment, and at the end of that period, the asset’s value is higher than its original purchase price.

Let’s look at a couple of examples to understand capital gains or capital appreciation better.

Example 1:

  • You purchase 100 shares of a company at Rs. 50 per share.
  • So, your initial investment, or your capital is Rs. 5,000 (Rs. 50 x 100 shares).
  • 1 year later, the share price of that company rises to Rs. 75.
  • So, your investment is now worth Rs. 7,500 (Rs. 75 x 100 shares).

Given this scenario, you can see that the capital you initially invested has grown after one year, by Rs. 2,500. This is a case of capital gain or capital appreciation. And if you were to sell your 100 shares 1 year after your investment, you would realize that gain of Rs. 2,500.

Example 2:

  • You buy a house a little on the outer edge of a city for Rs. 40 lakhs today.
  • 10 years later, you find that the area has developed a great deal, and the value of real estate in that area has shot up.
  • The house that you purchased a decade earlier is now worth Rs. 80 lakhs.
  • So, your investment value has practically doubled over 10 years.

As you can see, the value of the asset has itself increased. If you were to sell the house property now, you would gain Rs. 40 lakhs. That is the capital gain from this investment.

2. Investment Income

When you think of the word ‘income,’ you’ll no doubt be reminded of the earnings that people receive as a part of the regular job in which they are employed, right? But that’s not the only kind of income out there. Your investments can also give you regular and reliable income to fall back on.

Investment income is any earnings that you get from the scheme or asset that you invested in. Typically, the capital you invested may or may not remain the same, but you get periodic payouts over the investment tenure.

As in the previous case, let’s look at a couple of examples to understand investment income better.

Example 1:

  • You purchase 100 shares of a company at Rs. 50 per share.
  • So, your initial investment, or your capital is Rs. 5,000 (Rs. 50 x 100 shares).
  • You hold these shares for around 5 years.
  • And each year, the company pays a dividend at the rate of Rs. 10 per share.

So, over the course of your investment tenure, you will earn an annual dividend of Rs. 1,000 (Rs. 10 x 100 shares). This dividend is a kind of investment income.

Now, if you decide to sell your share holdings at the end of 5 years, you may also enjoy capital gains, depending on the share price at that point in time. For instance, if the share price at the end of 5 years is R. 80, you could sell your holdings for Rs. 8,000 (Rs. 80 x 100 shares), thereby gaining Rs. 3,000 from the sale.

Example 2:

  • You buy a house a little on the outer edge of a city for Rs. 40 lakhs today.
  • You keep the house for 10 years.
  • And during that period, you decide to rent it out for Rs. 15,000 per month.

Here, over the course of your investment tenure, you will consistently earn rent of Rs. 15,000 per month. This rent is also a kind of investment income.

And if you decide to sell your house at the end of 5 years, you will also enjoy capital gains if the value of the property has increased. For instance, if the house property is worth Rs. 90 lakhs at the end of 10 years, you could sell the house for a capital gain of Rs. 50 lakhs.

Interest from investments

In addition to dividend and rental income, there’s another major kind of income that you can earn from your investments. And that is ‘interest.’ There are several investments that offer interest over the investment period. Check out some of them here.

  • Interest from fixed deposits
  • Interest from recurring deposits
  • Interest from bonds
  • Interest from National Savings Certificate
  • Interest from Senior Citizens Savings Scheme

Income from life insurance policies

Did you know that your life insurance policy could also be a source of additional income or replacement income? There are some kinds of life insurance plans that offer you investment income.

Income plans, for example, give you periodic payouts that you can use as a source of secondary income. This is in addition to the signature life cover that life insurance plans offer. The ABSLI Assured Income Plus plan is one such example of an income plan. You only need to invest in this plan for a short period, and you get to enjoy guaranteed income for 20, 25 or 30 years.

There are also pension plans that give you annuity payouts, which can come in handy during the retirement phase. Take the ABSLI Guaranteed Annuity Plus, for instance. This policy gives you guaranteed income for life, along with a choice of different annuity options.

The difference between capital gains and investment income

The examples above may have made the differences between capital gains and investment income clear enough. Let’s quickly recap the key differences, so you can get better clarity on the types of returns you get with investments.

Particulars

Capital appreciation/gains

Income from investments

The point at which the returns are earned

Capital gains are only realized when you sell your investment for a profit

Investment income can be enjoyed as long as you hold the investment or asset

Taxation1

When realized, a rise in investment value is taxed under the head ‘capital gains. ’

Depending on the period of holding and the nature of the asset, the gains can be Long Term Capital Gains or Short Term Capital Gains.

Income from investments is generally either taxed under the head ‘income from other sources,’ or is tax-free, depending on the investment scheme and the asset.

Ideal investor profile

An investment that gives capital gains is better suited for investors looking to invest for the long term.

An investment that gives you regular income is ideal for investors looking for an additional source of income, or for people who want to replace their main source of income, like those approaching retirement.


Conclusion

So, now that you know the main types of returns you can get from your investments, you’re better positioned to choose the right kind of investments for your portfolio. And before you invest in an asset or a scheme, always make sure you have one eye on how the returns are taxed, so you can ensure that your net returns are optimal.

Read next: 5 WAYS TO GENERATE EXTRA INCOME

Want to know more about which investments can give you some extra income? We have a blog that gives you all the details you need.

Read it here

SHORT-TERM INCOME, LONG-TERM INCOME, OR LIFELONG INCOME: CHOOSE WHATEVER SUITS YOU BEST

The ABSLI Vision LifeIncome Plus Plan gives you a wide variety of choices for your benefit options. You can choose to receive payouts for as few as 10 years, or for as long as 30. You can even opt to receive payouts till the age of 100!

That’s not all. You also get cash-in-hand, even when you’re paying premiums. Sounds too good to be true?

Know More

1Tax benefits are subject to changes in tax laws. Kindly consult your financial advisor for more details.

ABSLI Assured Income Plus (UIN: 109N127V04) is a non-linked non-participating individual life insurance savings plan.

ABSLI Guaranteed Annuity Plus ( UIN: 109N132V01) is a Non-Linked, Non-Participating, Single Premium General Annuity Plan

ABSLI Vision LifeIncome Plus (UIN: 109N131V01) is a non-linked participating individual life insurance savings plan.

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