In the distant past, traditional investment instruments such as term deposits ruled the roost. However, there’s been a tectonic shift in terms of investing habits, with a plethora of investment options available in the market today.
The prices of essential commodities keep rising, and it’s a challenge for the middle class to achieve their financial goals with just a monthly salary as their income source. Even for an entrepreneur with a variable income, inflation is hard to keep up with. Therefore, focused and long-term investing is the need of the hour if one has to create wealth.
In the distant past, traditional investment instruments such as term deposits ruled the roost. However, there’s been a tectonic shift in terms of investing habits, with a plethora of investment options available in the market today that not only offer higher returns but also are flexible and easy to sign up for.
Let’s look at some of the low to medium risk investment options that do not pinch your monthly budget.
Public Provident Fund (PPF)
This is the best-performing long-term savings scheme available for regular small investors today. At an annual growth rate of 8.1%, PPF offers the highest interest rate among all government-backed small saving schemes. Only two other such schemes offer higher returns at 8.6% — the Senior Citizens’ Savings Scheme for those aged above 60, and Sukanya Samridhhi Scheme for the girl child. You can invest an amount as small as Rs. 500 and go up to Rs. 150,000 in a financial year. You also get tax deductions for your investments under Section 80 (C). If you invest Rs. 150,000 at the current PPF rate for 15 years, you get a corpus of Rs. 44.4 lakh. PPF has a lock-in period of 15 years, but partial withdrawals are allowed after the sixth year. The trade-off for the absence of liquidity is the fact that this is not only the best-performing savings scheme for regular investors, but also that all your earnings from PPF are fully tax-exempt, making it the most tax-efficient savings scheme available.
National Savings Certificates
Alongside PPF, NSC offers the highest rate of return among government-backed small savings schemes. It returns you 8.1% compounded half-yearly for a tenure of five years. Due to the half-yearly compounding, the pre-tax returns on NSC are slightly higher than PPF. You can enter with a minimum amount of Rs. 100. There’s no upper limit to an investment in NSC. The NSC VIII Issue has a maturity period of five years, while it’s 10 years for the NSC IX Issue. While you’re not taxed upon investment and maturity, your interest earnings will be taxed during the investment tenure. Investments in NSC also qualify for tax deductions under Section 80 (C). Alongside PPF, this is the best long-term and tax-efficient investment scheme for regular investors.
Unit-linked Insurance Plan (ULIPs)
A product with dual benefit, ULIPs let you leverage the power of the stock market while also providing you life insurance. It’s not uncommon to see ULIP funds offering returns of 10% or more. ULIPs, however, come with a lock-in period of three years, and you also pay charges in the initial years of investment. The fund manager churns your money in the debt and equity market. In a rising market, the returns can easily dwarf the fixed charges. However, in a stagnant or falling market scenario, the charges will erode your fund value in the short term.
Mutual Fund – SIP (Systematic Investment Plan)
A very popular investment option due to its high returns capability over the long term, the sheer variety of funds available, and for its ability to cater to every kind of risk appetite. One of the most commonly availed and easy-to-invest option is the Systematic Investment Plan (SIP). Under this, the investor contributes a fixed amount every month until the expiry of the term desired by the investor. Based on the NAV (Net Asset Value) of the fund, a certain number of units are allocated on the basis of the contribution. These units can be sold or redeemed after the expiry of the lock-in period. Equity mutual funds are known to offer annualized returns in the range of 15-18%. Debt funds can provide pre-tax returns of 9-10% along with safety of capital.
Exchange Traded Funds (ETFs)
ETFs is fast gaining popularity in the Indian market. Here, a fund house creates an index fund consisting of stocks that are traded on exchanges just like stocks. For the investor, the mechanics of investment is similar to that of a mutual fund and can be traded like stocks during the trading hours. This is a long-term investing tool. Using ETFs in a short period of even five years could expose your capital to extreme volatility. Some of the top-rated ETFs in India have provided returns of around 12% in the last five years.
The author is , CEO, BankBazaar.com