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- Further Investment Choices
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When investors look for the 'best' investment option, they want something that will earn them the maximum return with the least amount of risk. However, such an investment product does not really exist. This is because every investment has some risk attached to it, high or low.
You should not invest in something just to generate high returns because such products come with commensurate risk, and a higher chance of you losing the money that you have invested.
Here are nine investment options with varying degrees of risk that are considered good options in India:
1. Public Provident Fund
The Public Provident Fund (PPF) is one of the most popular investment options in India because of its sovereign guarantee.
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Some of its features are:
a) Investment offers tax benefit under section 80C, interest earned and maturity are also exempt from tax.
b) The scheme has a lock-in period of 15 years.
c) Post maturity, the account can be extended in block of five years for any number of times.
d) The interest rate is reviewed by the Government every quarter. Currently, for the April-June 2018 quarter, interest rate offered is 7.6 percent a year.
e) The scheme also offers loan and partial withdrawals. Click here to know how the rules for loan and withdrawals work.
Click here to know the lesser know features of PPF.
2. Bank fixed deposits
Bank fixed deposits (FDs) is another popular investment option which offers fixed returns.
One can invest in a bank FD by visiting his/her branch or via Net-banking. Here are some of its key features:
a) FDs are available in a wide range of tenures. Banks like the State Bank of India (SBI) and HDFC Bank offer FDs with minimum tenure of 7 days and maximum of up to 10 years. One can invest in any tenure depending on his/her time horizon at the rates offered by banks.
b) Most bank FDs offer the option of premature withdrawal by paying a penalty.
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However, this should be checked at the time of opening the FD account.
c) A bank FD is insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) rules only up to Rs 1 lakh (principal plus interest) is insured per person per bank.
d) Currently, SBI is offering interest rate between 6.40 percent and 6.75 percent for FD tenures of 1 year to up to 10 years. Senior citizens get an extra 0.50 percent.
Bank FDs offer cumulative and non-cumulative options.
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In the cumulative option, the interest is re-invested and payable on maturity whereas, in the non-cumulative option, interest is payable periodically (monthly, quarterly or annually depending on the bank). Interest is added to your income and taxed as per your income tax slabs. Interest is subject to tax deducted source (TDS).
3. Mutual fund debt fixed maturity plans
Fixed maturity plans (FMPs) are close-ended debt funds offered by mutual funds. The maturity date of FMPs is fixed. Features of FMPs are:
a) These plans invest in various types of fixed income options such as bonds, bank certificate of deposits etc.
which mature on or before the maturity date.
b) Unlike a bank FD where returns are fixed, FMP returns are not fixed or guaranteed.
c) FMPs have a tax advantage over bank FDs. Capital gains on debt FMPs, held for more than 36 months, qualify for long-term capital gains (LTCG) taxation. It is taxed at 20 percent post-indexation benefit.
Also, if you have incurred long-term capital losses, you can set off the loss against the LTCG before calculating tax payable.
As LTCG from debt FMPs are taxed at 20 percent with indexation these, on an average, give better post-tax returns than bank FDs for individuals in the higher tax brackets.
4. Debt mutual funds
Apart from FMPs, which are close-ended debt funds, mutual funds also offer open-ended debt funds.
These open-ended funds are considered less volatile than equity thereby offering stable returns as compared to equities.
a) They also invest in various debt instruments such as corporate bonds, treasury bills, government securities etc. These schemes are professionally managed by debt fund managers.
Investment types and terminology
b) There are different types of debt mutual funds such as liquid funds/money-market funds, short-term income funds, gilt funds, corporate bond funds etc. c) These funds invest in various instruments of different time horizons and carrying different levels of risk. An investor can invest in these funds depending on his/her time horizon and risk appetite.
Click here to know different types of mutual funds.
5. Equity-oriented mutual fund schemes
As the name suggests, equity-oriented mutual funds are those schemes that invest at least 65 percent of the scheme corpus in stocks of domestic companies.
a) They invest in stocks based on the mandate of the scheme and can be open-ended or close-ended.
For instance, some schemes may invest only in stocks of large-cap companies whereas others may invest only in stocks of mid-cap companies.
Then there are those that invest in both large-cap and mid-cap shares.
b) These schemes are professionally managed by equity fund managers.
Returns of these schemes are market-linked and volatile. In last 5 years (2013-2018), large-cap MFs have delivered returns between 13 percent and 20 percent.
UK Investment for Beginners: What Returns Should You Expect?
c) Financial advisors recommend that one should invest in equities for the long term, say a minimum five years or more, to beat inflation in the long run.
d) Equity mutual funds are a simple way to do this for a lay investor who cannot understand the intricacies of direct equity investing.
There are equity-linked savings schemes (ELSS) which offer tax-benefit under section 80C of the Income-tax Act. These schemes have lock-in of 3 years which is shortest in the entire tax-saving instruments basket.
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Aggressive investors who understand the workings of the stock market and are willing to take risks on their own could look at investing directly in equities.
a) Direct equities are considered risky because of the wide and quick price fluctuations (i.e., volatility) and one can lose one's capital as well.
b) One needs to do due diligence before investing directly in shares of a company.
c) Investors might also find it difficult to know when to enter and exit the stock market depending on domestic and global factors. Currently, returns from Sensex in last 1, 2 and 5 years are: 13.63 percent, 16.94 percent, and 11.47 percent, respectively.
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Buying and selling of shares can be done through demat account only. Click here to know how to open demat account.
7. National Pension System (NPS)
Investors who wish to receive a pension in their retirement years can look to invest in the National Pension System (NPS).
It is a defined contribution system where your contribution is invested in various assets - equity, bonds, government securities, and alternative investments as per your choice.
a) The scheme offers two choices: Auto choice and Active choice.
In auto choice mode, your contribution is divided among various assets based on your age (Life Cycle Fund). On the other hand, under the active choice, you decide the ratio in which funds are to be invested in different asset classes.
b) The scheme matures when the investor turns 60 years of age.
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The lock-in period depends on the entry age of the investor. For example, if you start investing in NPS at the age of 25 years, then the lock-in period will be 35 years.
c) The returns of NPS are market-linked. Amount of pension you will receive post-maturity will depend on the amount of corpus accumulated by you.
NPS offers tax benefit under section 80C for a maximum of Rs 1.5 lakh and an additional tax benefit of Rs 50,000 under section 80CCD (1B).
However, at the time of maturity, only 40 percent of the corpus, if redeemed as a lump sum, will be tax-exempt.
Pension received will be fully taxable as per your income. No tax is payable during the accumulation period.
One can buy in gold in various forms-physical, paper, and digital.
These forms include jewellery, bullion, sovereign gold bonds, digital gold etc.
a) According to an Economic Times report, gold bought on Akshaya Tritya 10-20 years ago has given double digit returns.
b) The returns in recent years, however, have diminished.
c) Gold prices usually go up during times of uncertainty.
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Financial advisors recommend one should invest only a certain limited percentage in gold to hedge against other risks and not much beyond this limit.
Click here to know how much gold you should have in your portfolio and why you should not invest too much in gold.
People buy a house either for self-occupation or to earn rental income and capital gains from it. However, as per most financial advisors, investing in real estate to earn rental income is not considered as a good investment. This is because:
a) Rental income earned from house ranges usually between 2-3 per cent a year.
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b) The appreciation in the prices of house property depends on various factors such as size, locality, location etc.
c) Before making an investment in property, one must evaluate based on safety, liquidity, returns and other similar parameters.
Click here to know what principles to follow before buying your dream house.