Most investors want to make
investments in such a way that they get sky-high returns as fast as possible
without the risk of losing the principal money. This is the reason why many
investors 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, it is a fact that investment products
that give high returns with low risk do not exist. In reality, risk and returns
are inversely related, i.e., higher is
the risk, and vice versa.
So, while selecting an investment
avenue, you have to match your own risk profile with the risks associated with
the product before investing. There are some investments that carry high risk
but have the potential to generate high inflation-adjusted returns than other
asset class in the long term while some investments come with low-risk and
therefore lower returns.
Here is a look at the top investment avenues Indians look at while
savings for their financial goals.
Direct equity
Investing in stocks is that over long
periods, equity has been able to deliver higher than inflation-adjusted returns
compared to all other asset classes. Further, it is advisable to pick the right
stock, timing your entry and also exit on proper advice or research. To reduce
the risk to certain extent, you could diversify across sectors. To invest in
direct equities, one needs to open a demat account.
Equity mutual funds
Equity mutual funds predominantly invest in
equity stocks.
Equity schemes are categorised according to market-capitalisation or the sectors in which they invest. Currently, the 1-, 3-, 5-year market return is around 15 percent, 15 percent, and 20 percent, respectively.
Debt mutual
funds
Debt funds are ideal for investors who want steady returns. They are are
less volatile and, hence, 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. Currently, the 1-, 3-, 5-year market return is around 6.5
percent, 8 percent, and 7.5 percent, respectively.
National
Pension System (NPS)
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.
Currently, the 1-,3-,5-year market return for Fund option E is around 9.5 percent,
8.5 percent, and 11 percent, respectively.
Public Provident Fund (PPF)
The Public Provident Fund (PPF) is one
product a lot of people turn to. Since the 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.
Bank fixed deposit (FD)
A bank fixed deposit (FD) is a safe choice,
especially in Public Sector Banks, for investing in India. The interest earned
is added to one's income and is taxed as per one's income slab.
Senior Citizens' Saving Scheme (SCSS)
Probably the first choice of most retirees,
the Senior Citizens' Saving Scheme (SCSS) 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. Currently, the interest rate that can be
earned on SCSS is 8.3 per cent per annum, payable quarterly and is fully
taxable. The upper investment limit is Rs 15 lakh, and one may open more than
one account.
RBI Taxable Bonds
The government has replaced the erstwhile 8
percent Savings (Taxable) Bonds 2003 with the 7.75 per cent Savings (Taxable)
Bonds. These bonds come with a tenure of 7 years. The bonds may be issued in
demat form and credited to the Bond Ledger Account (BLA) of the investor and a
Certificate of Holding is given to the investor as proof of investment.
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.
Gold
Possessing gold in the form of jewellery has its
own concerns like safety and high cost. Then there's 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, there's still an option. One can also buy ingeniously minted coins.
An alternate way of owning paper gold in a more cost-effective manner is
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.
What you should do
Some of the above investments are fixed-income while others are market-linked. Both fixed-income and market-linked investments have a role to plan in the process of wealth creation. While market-linked investments help in navigating the volatility and in the process generate high return, the 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.
