Here are five investment options for salaried individuals to meet their various financial goals depending on their time horizon and risk appetite.
The fixed income of salaried individuals gives them an edge over their non-salaried counterparts in planning expenses and saving regularly for various financial goals. However, this relative income certainty often leads many of them to become complacent in choosing the right instruments for their various financial goals.
Here I will list 5 investment options for salaried individuals to meet their various financial goals depending on their time horizon and risk appetite.
1. Bank Fixed Deposits
Bank fixed deposits guarantee interest income and principal repayments at booked rates regardless of any changes in the card rate during the tenure. Deposits opened with scheduled banks also qualify for the deposit insurance program provided by DICGC, a subsidiary of RBI. This insurance covers your FDs, RDs, and deposits in your savings and current accounts for up to 5 lakh per bank, per depositor in case of bank failures.
Presently, some small finance banks and private sector banks are offering highest FD slab rates of 7.5-9% p.a., which is around 200-300 bps higher than highest FD slab rates offered by other private sector banks. Hence, those wishing to avail higher interest rates from bank FDs with maximum level of capital and income protections can spread their fixed deposits across multiple banks offering higher interest rates in such a way that their cumulative deposits including savings, recurring, fixed and current accounts do not exceed Rs 5 lakh in each of those banks.
Those wishing to save tax under Section 80C can also open tax saving fixed deposits having a lock-in period of 5 years. While the deposit amount qualifies for tax deduction, their interest income is taxed as per the tax slab of the depositor.
Opt for fixed deposits for your short-term goals if you seek maximum possible income certainty and capital protection on your investments.
2. Equity Mutual Funds
Equity funds have to invest at least 65% of their corpus in equities and equity related instruments. As equities outperform inflation and fixed income instruments over the long run by a wide margin, equity mutual funds are best suited for retail investors who want to benefit from long term wealth creation potential of equities but lack the expertise or time of directly investing in them. Moreover, equity funds also include ELSS (Equity Linked Savings Schemes), popularly known as tax saving mutual funds, which qualifies for tax deduction under Section 80C and have the shortest lock in period of 3 years among all investment options available under this Section.
One can start investing in equity mutual funds with just Rs 5,000 in case of lump sum and Rs 1,000 for additional/ subsequent investments. The minimum investment amount for SIPs is usually Rs 1,000. In case of ELSS, the minimum amount is Rs 500 per month via SIP.
Prefer equity mutual funds over fixed income investments for financial goals maturing after 5 years.
3. Debt Mutual Funds
Debt mutual funds invest primarily in market-linked fixed income instruments like government securities, corporate bonds, money market instruments, etc. Exposure to fixed income instruments makes debt funds less volatile than equity mutual funds. On the other hand, exposure to market-linked fixed income securities allows most debt fund categories to generate higher returns than bank fixed deposits. Note, investors seeking a higher degree of capital protection should opt for short term debt funds like low duration, ultra-short duration and short duration funds. While these funds are market linked and do not ensure income certainty, the risk of capital erosion is very less. Debt papers held by them have shorter maturity profiles than other debt fund categories, which makes them less prone to capital erosion and interest rate risk. Those with higher risk appetite and longer investment horizon can opt for debt funds having longer duration profiles.
Opt for short term debt mutual funds for your short-term financial goals if you wish higher returns than bank fixed deposits.
4. Public Provident Fund
Among all fixed income investment options, PPF is one of the safest options due to the accompanying sovereign guarantee from the government. Investment in PPF qualifies for tax deduction under Section 80C. The interest component and maturity amount are also tax free, giving it an edge over bank fixed deposits and other small savings schemes.
The biggest shortcoming of PPF is its lack of liquidity. It comes with a 15 years lock in period with premature closures, partial withdrawals and loan against PPF allowed on few pre-laid conditions. The interest component is compounded annually while its interest rate is reviewed every financial quarter by the Ministry of Finance. Currently, PPF is offering 7.1% p.a. returns for the 2nd quarter of FY 21.
5. Voluntary Provident Fund
VPF is just an extension of the EPF scheme. It allows EPF subscribers to voluntarily invest over and above their mandatory EPF contribution up to 100% of their basic salary and dearness allowance. Similar to EPF, contributions to VPF qualify under tax deduction under Section 80C. Their interest rate is also the same as EPF, which is revised annually. Being an extension of EPF, all the EPF rules regarding partial withdrawals, taxation, nomination, etc apply to VPF as well.
Opt for PPF or VPF for your long-term financial goals if you have a low risk appetite or are seeking diversification through asset classes covered by the sovereign guarantee.
(The author is Director & Group Head-Investments, Paisabazaar.com)