Most investors want to make investments in such a way that they get sky-high returns as quickly as possible without the risk of losing principal money. This is the reason why many are always on the lookout for top investment plans where they can double their money in few months or years with little or no risk.
However, a high-return, low-risk combination in a investment product, unfortunately, does not exist. In reality, risk and returns are directly related, they go hand-in-hand, i.e., the higher the returns, higher the risk and vice versa.
While selecting an investment avenue, you have to match your own risk profile with the associated risks of the product before investing. There are some investments that carry high risk but have the potential to generate higher inflation-adjusted returns than other asset class in the long term while some investments come with low-risk and therefore lower returns.
There are 2 buckets that investment products fall into and they are financial and non-financial assets. Financial assets can be divided into market-linked products (like stocks and mutual fund) and fixed income products (like Public Provident Fund, bank fixed deposits). Non-financial assets - many Indians invest via this mode - are the likes of physical gold and real estate.
Heres a look at 10 investment avenues Indians look at while saving for financial goals.
1. Direct equity
Investing in stocks might not be everyones cup of tea as its a volatile asset class and there is no guarantee of returns. Further, not only is it difficult to pick the right stock, timing your entry and exit is also not easy. The only silver lining is that over long periods, equity has been able to deliver higher than inflation-adjusted returns compared to all other asset classes.
At the same time, the risk of losing a considerable portion or even all of your capital is high unless one opts for stop-loss method to curtail losses. In stop-loss, one places an advance order to sell a stock at a specific price. To reduce the risk to certain extent, you could diversify across sectors and market capitalisations. To directly invest in equity, one needs to open a demat account.
Banks also allow opening of a 3-in-1 account. Heres how you can open one to invest in shares.
2. Equity mutual funds
Equity mutual fund schemes predominantly invest in equity stocks. As per current the Securities and Exchange Board of India (Sebi) Mutual Fund Regulations, an equity mutual fund scheme must invest at least 65 percent of its assets in equity and equity-related instruments. An equity fund can be actively managed or passively managed.
In an actively traded fund, the returns are largely dependent on a fund managers ability to generate returns. Index funds and exchange-traded fund (ETFs) are passively managed, and these track the underlying index. Equity schemes are categorised according to market-capitalisation or the sectors in which they invest. They are also categorised by whether they are domestic (investing in stocks of only Indian companies) or international (investing in stocks of overseas companies). Read more about equity mutual funds.
3. Debt mutual funds
Debt mutual fund schemes are suitable for investors who want steady returns. They are less volatile and, hence, considered less risky compared to equity funds. Debt mutual funds primarily invest in fixed-interest generating securities like corporate bonds, government securities, treasury bills, commercial paper and other money market instruments.
However, these mutual funds are not risk free. They carry risks such as interest rate risk and credit risk. Therefore, investors should study the related risks before investing. Read more about debt mutual funds.
4. National Pension System
The National Pension System (NPS) is a long term retirement - focused investment product managed by the Pension Fund Regulatory and Development Authority (PFRDA). The minimum annual (April-March) contribution for an NPS Tier-1 account to remain active has been reduced from Rs 6,000 to Rs 1,000. It is a mix of equity, fixed deposits, corporate bonds, liquid funds and government funds, among others. Based on your risk appetite, you can decide how much of your money can be invested in equities through NPS. Read more about NPS.
5. Public Provident Fund (PPF)
Since PPF has a long tenure of 15 years, the impact of compounding of tax-free interest is huge, especially in the later years. Further, since the interest earned and the principal invested is backed by sovereign guarantee, it makes it a safe investment. Remember, interest rate on PPF is reviewed every quarter by the government. Read more about the PPF here.
6. Bank fixed deposit (FD)
A bank fixed deposit is considered a comparatively safer (than equity or mutual funds) choice for investing in India. Under the deposit insurance and credit guarantee corporation (DICGC) rules, each depositor in a bank is insured up to a maximum of Rs 5 lakh with effect from February 4, 2020 for both principal and interest amount.
Earlier, the coverage was maximum of Rs 1 lakh for both principal and interest amount. As per the need, one may opt for monthly, quarterly, half-yearly, yearly or cumulative interest option in them. The interest rate earned is added to ones income and is taxed as per ones income slab. Read more about bank fixed deposit.
7. Senior Citizens Saving Scheme (SCSS)
Probably the first choice of most retirees, the Senior Citizens Saving Scheme is a must-have in their investment portfolios. As the name suggests, only senior citizens or early retirees can invest in this scheme. SCSS can be availed from a post office or a bank by anyone above 60.
SCSS has a five-year tenure, which can be further extended by three years once the scheme matures. The upper investment limit is Rs 15 lakh, and one may open more than one account. The interest rate on SCSS is payable quarterly and is fully taxable. Remember, the interest rate on the scheme is subject to review and revision every quarter.
However, once the investment is made in the scheme, then the interest rate will remain the same till the maturity of the scheme. Senior citizen can claim deduction of up to Rs 50,000 in a financial year under section 80TTB on the interest earned from SCSS. Read more about Senior Citizens Saving Scheme.
8. Pradhan Mantri Vaya Vandana Yojana (PMVVY)
PMVVY is for senior citizens aged 60 years and above to provide them an assured return of 7.4 per cent per annum. The scheme offers pension income payable monthly, quarterly, half-yearly or yearly as opted. The minimum pension amount is Rs 1,000 per month and maximum Rs 9,250 per month. The maximum amount that can be invested in the scheme Rs 15 lakh. The tenure of the scheme is 10 years. The scheme is available till March 31, 2023. At maturity, the investment amount is repaid to the senior citizen. In the event of death of senior citizen, the money will be paid to the nominee. Read more about PMVVY.
9. Real Estate
The house that you live in is for self-consumption and should never be considered as an investment. If you do not intend to live in it, the second property you buy can be your investment.
The location of the property is the single most important factor that will determine the value of your property and also the rental that it can earn. Investments in real estate deliver returns in two ways - capital appreciation and rentals. However, unlike other asset classes, real estate is highly illiquid. The other big risk is with getting the necessary regulatory approvals, which has largely been addressed after coming of the real estate regulator.
Read more about real estate.
Possessing gold in the form of jewellery has its own concerns such as safety and high cost. Then theres the making charges, which typically range between 6-14 per cent of the cost of gold (and may go as high as 25 percent in case of special designs). For those who would want to buy gold coins, theres still an option.
Many banks sell gold coins now-a-days. An alternate way of owning gold is via paper gold. Investment in paper gold is more cost-effective and can be done through gold ETFs. Such investment (buying and selling) happens on a stock exchange (NSE or BSE) with gold as the underlying asset. Investing in Sovereign Gold Bonds is another option to own paper-gold. An investor can also invest via gold mutual funds. Read more about sovereign gold bonds.
RBI Taxable Bonds
Earlier, RBI used to issue 7.75% Savings (Taxable) Bonds as an investment option. However, the central bank has stopped issuing these bonds with effect from May 29, 2020. These bonds were launched by replacing the erstwhile 8% Savings (Taxable) Bonds 2003 with the 7.75 per cent Savings (Taxable) Bonds with effect from January 10, 2018. These bonds had tenure of 7 years.
The Central Bank with effect from July 1, 2020 has launched Floating Rate Savings Bond, 2020 (Taxable). The biggest difference between earlier 7.75% savings bonds and the newly launched floating rate bond is that the interest rate on the newly launched savings bond is subject to reset in every six months. In the 7.75% bonds, the interest rate was fixed for the entire duration of the investment. Currently, the bonds are offering interest rate of 7.15%. Read more about RBI floating rate bonds.
What you should do
Some of the above investments are fixed-income while others are financial market-linked. Fixed income and market-linked investments have a role to play in the process of wealth creation. Market-linked investments offer the potential of high returns but also carry high risks. Fixed income investments help in preserving the accumulated wealth so as to meet the desired goal. For long-term goals, it is important to make the best use of both worlds. Have a judicious mix of investments keeping risk, taxation and time horizon in mind.
(With inputs from Preeti Motiani)
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