At a time when interest rates are heading south and days of guaranteed returns seem to be over, finding an investment avenue of one’s choice has become difficult. One’s investment strategy also depends on one’s investment goal and the ability to take risk. The higher the risk, the more return one can expect and vice versa. In such a situation, it is common for investors to get confused about how and where to invest. Keeping all these things in mind, we have picked up 6 investment avenues to suit the requirement of every type of investor, which can be relied on in the current scenario:
1. Equity: In the present scenario equity still remains the most attractive investment option for investors having a long-term holding period. Despite the recent run-up, the potential for gains over the medium to long run remains very robust. “Besides higher returns, equity offers you the advantage of instant liquidity and flexibility in terms of redeeming in parts as per your requirement. Also, if you chose the equity mutual funds route, you can invest even small amounts of money. SIP option makes it easy to invest systematically over a longer period of time as well as benefit from rupee cost averaging,” says Ashish Kapur, CEO, Invest Shoppe India Ltd.
2. Arbitrage & Income Schemes of Mutual Fund: For investors not having a very long period of investing or not comfortable with volatility and risks of the equity market, arbitrage and income schemes of mutual funds could be considered. They do not offer any guarantees but usually you will get significantly higher post-tax returns in these funds compared to bank fixed deposits. These schemes are usually without a lock in and hence offer the same liquidity and redemption flexibility as equity investments do.
3. Tax-free Bonds: For investors who value safety over returns and have a long period of investments, tax-free bonds are a fairly attractive option. They offer guaranteed returns which are higher than bank deposits after adjusting for tax. “Although many of them are listed, but trading volumes are low. Therefore, the disadvantage of this option is that investors may not be able to redeem their investments in case they need money before the maturity date,” informs Kapur.
4. Public Provident Fund
PPF is believed to be the safest long-term investment product and is amongst the best investment options in India. It has many advantages. Investing in PPF is risk-free because it is backed by the Government of India. Moreover, the interest earned is also tax-free. A PPF account can be opened in any nationalized or private bank or the nearest post office. “The minimum annual investment amount is Rs 500, while the maximum is Rs 1,50,000. An individual can invest more than that, but can’t claim tax benefit. The money gets locked for 15 years and you can earn compound interest from this account. The only drawback is that PPF has a tenure of 15 years, though you can withdraw money before 15 years, subject to certain conditions. For investors with low or moderate risk profile and limited or no other retirement benefits, PPF currently appears to be the best option as returns are to a large extent guaranteed and withdrawals after the mandatory holding period are tax-free,” says Rahul Agarwal, Director Wealth Discovery.
5. National Saving Certificate
National Saving Certificate (NSC) is a saving bond by the Indian government, primary used for small savings and tax saving. NSC is a risk-free investment option. It is part of the Indian postal service. NSC has a fixed term of 5 years. The rate of interest is currently 7.9% compounded annually. Investment up to Rs 1,00,000 per annum qualifies for tax rebate under Section 80C of the Income Tax Act. There is no maximum limit for investment and the minimum limit is Rs 100. Saving certificates can also be used as collateral security to get a loan from banks. The interest received is taxable. NSC is a good investment option with low risk and for shorter investment horizons up to 5 years.
6. Company Fixed Deposits
Company FDs are a better investment option for enterprising investors who are willing to take some risk. The risk taking is rewarded in terms of higher returns in comparison to bank FDs. “In order to attract investors towards their fixed deposits, companies offer higher returns. At present the highest return offered by company fixed deposits is close to 11% per annum. Company fixed deposits, however, are not fully secured as they are not backed by the government. In general the fixed deposit tenure ranges between 12 months to 60 months. The rate of interest varies from company to company and is related to the creditworthiness. A more creditworthy company would offer less interest and vice versa,” informs Agarwal.
Investors, therefore, must do their due diligence before investing in company FDs. Following are a few things that investors should be extremely careful about:
Credit profile: This helps determine whether the company will honor all capital and interest payments. Therefore, higher-rated FDs (AAA/FAAA) should be preferred. Companies which are having credit rating below AA should not be considered for investing.
Interest rate: A higher rate of return on company FDs is obviously preferable. However, make sure you do not compromise on the credit rating for a higher return.
Interest payout frequency: FDs are known to offer interest payouts at varying frequencies – monthly, quarterly, annually or a one-time payment on maturity. You must opt for the one that meets your needs. The one-time payment or ‘on maturity’ option generates the highest return, due to the effect of compounding.