Many investors wish to structure their investments in a manner to reap the highest yields as soon as possible without risking losing the principal amount. This is why investors are constantly looking for the best investment plans that will allow them to multiply their funds in just a span of a few months or even years without risk or hassle.
But, a high-return, low-risk mix in an investment product is not available. Risk and return are closely linked in that they are closely linked, i.e., the higher returns are riskier and the reverse goes for risk.
When choosing an investment route, you must match your risk-taking profile to the risk associated with the investment prior to making a decision. Certain investments are high-risk but also could yield greater inflation-adjusted returns than the other asset classes in the long-term, while some investments are low risk and thus lower returns.
There are two buckets in which investments fall, and these are non-financial and financial assets. Financial assets can be classified into market-linked items (such as mutual funds and stocks) or fixed-income ones (like Public Provident Fund, and bank fixed deposits). Non-financial investments – the majority of Indians are investing in this way similar to real estate and physical gold.
Here’s a look at the investment options that Indians should consider when they are saving to meet financial goals.
1. Direct Equity
The idea of investing in stocks may not be everyone’s cup of tea since it’s an asset class that is volatile and there’s no guarantee of earnings. Additionally, it is not just challenging to select the correct stock, but timing your exit and entry is difficult. There is a silver lining that for long time periods equity has been able to provide more than inflation-adjusted yields in comparison to other types of assets.
In the same way, there is a chance of losing a large part or all of your capital is very high unless you choose an option to stop losses to reduce losses. When using stop-loss, you place an order in advance to buy a share at a specified price. To limit the risk to an extent, you can diversify across markets and sectors
capitalizations. For direct investment in equity, you need to establish a Demat bank account.
Banks also permit the opening of an account that is 3-in-1. Here’s how to create one for investing in shares.
2. Equity mutual funds
Equity mutual fund schemes primarily are invested in equity securities. In accordance with the latest Securities and Exchange Board of India (Sebi), Mutual Fund Regulations the equity mutual fund must invest at a minimum of 65 percent of its assets in equity or related instruments that are equity-related. Equity funds can be managed actively or managed passively.
In an actively-traded fund, returns are heavily dependent on the fund manager’s capacity to generate returns. Index funds as well as exchange-traded funds (ETFs) are managed by a passive method they closely follow the index on which they are based. Equity schemes are categorized according to market capitalization or the sectors in which they invest. They are also classified according to the country they invest in (investing in stocks of solely Indian corporations) and international (investing in the stocks of overseas companies).
3. Mutual funds with debt
Debt mutual funds are ideal for investors looking for consistent returns. They are more stable and, consequently, more secure than equity funds. The majority of debt mutual funds invest in fixed-interest-generating securities like government bonds, corporate bonds securities, Treasury bills, commercial papers, and other instruments in the market for the money.
But, these mutual funds aren’t risk-free. They are subject to risks, such as credit risk and interest rate risk. Investors should therefore research the risks associated with investing before making a decision.
4. National Pension System
The National Pension System (NPS) is a long-term retirement-focused investment product that is managed through the Pension Fund Regulatory and Development Authority (PFRDA). The minimum annual (April-March) contribution required for the NPS Tier-1 account to stay active is now reduced from 600 to 1,000. It’s a blend of fixed deposits, equity corporate bonds, fixed deposits, liquid funds, and federal funds in addition to others. Based on your risk-aversion you will be able to determine the number of your funds that can be invested in equity through NPS.
5. Public Provident Fund (PPF)
Because PPF has a long tenure which is fifteen years in duration, the effect on tax-free interest compounding is enormous, particularly in the latter years. Additionally, as the interest earned as well as the principal invested is backed by a sovereign guarantee, it ensures that it is a safe investment. Keep in mind that the interest rate on PPF is checked every period by the federal government.
6. Bank fixed deposit (FD)
A fixed-rate bank account is considered to be a more secure (than mutual funds or equity) option to invest in India. In accordance with the rules of the credit and deposit guarantee company (DICGC) regulations, every depositor at a bank is protected up to a maximum limit of 5 lakh at the time of beginning on the 4th of February, 2020. This applies to both the principal amount and the interest.
The coverage used to be at a maximum of Rs. 1 lakh, which included principal and interest. Based on the requirements the customer can choose a quarter-yearly, monthly annual, or an option to accumulate interest. The interest accrued is added to an individual’s income and taxed as the income level of one’s choice.
7. Senior Citizens” Saving Scheme (SCSS)
Perhaps the first option for many retired people and retirees, the Senior Citizens Saving Scheme is a must in their portfolios of investments. It is named after the fact that only seniors or early retirees are eligible to invest in the scheme. SCSS is available at an office in a post office or bank by anyone over the age of 60.
SCSS offers a five-year duration that can be extended by three years when the scheme reaches its expiry date. The maximum amount of investment allowed is 15 lakh and you can open multiple accounts. The interest rate of SCSS is due each quarter and is tax-free. Be aware that the interest rate of SCSS is subject to revision and review each quarter.
If the investments are made into the scheme, the interest rate will remain the same until the expiration date of the program. Senior citizens are entitled to a deduction of up to $50,000 in the course of a financial year as per section 80TTB. the interest earned by SCSS.
8. Pradhan Mantri Vaya Vandana Yojana (PMVVY)
PMVVY is a scheme for seniors with a minimum age of 60 to guarantee them a return of 7.4 percent per year. It provides pensions that are payable monthly, quarterly, half-yearly, or annually, as per the choice. The minimum amount of pension is Rs. 1,000 per month, and the maximum is Rs 9.250 per month. The maximum amount that can be deposited into the scheme is 15 lakh. The term that scheme has run for 10 years. The scheme runs until March 31st, 2023. When the scheme is finished the amount invested will be paid by the older citizen. If there is a death of an elderly person the investment amount is given on behalf of the beneficiary.
9. Real Estate
The property you reside in is meant for personal use only and should not be considered for investment purposes. If you don’t intend to stay in the house The second property you purchase could be an investment.
The place on the property’s location is the most significant aspect that determines the worth of your property and as well the rent it could earn. Real estate investments yield benefits in two ways namely rental and capital appreciation. But unlike other types of assets real estate is liquid. Another major risk lies in obtaining the necessary regulatory approvals. This is mostly addressed since the arrival to the attention of the regulatory body for the industry.
Possessing gold in the form of jewelry is not without its own issues like safety and price. There are also the making costs that typically vary between 6-14 percent of the price of gold (and could be up to 25 percent for particular designs). If you’re looking to purchase gold coins, you have a choice.
There are many banks that sell gold coins these days. Another option to own gold is to purchase gold on paper. The investment in paper gold is cheaper and is possible by using ETFs for gold. This type of investment (buying or selling) occurs through an exchange (NSE or BSE) using gold as the primary asset. It is possible to invest in Sovereign Gold Bonds is another alternative to owning paper gold. Investors may also invest in Gold mutual funds.
RBI Taxable Bonds
Prior to that, RBI used to issue 7.75 savings (Taxable) Bonds to provide an alternative to investing. However, this central bank ended the issue of these bonds as of May 29, 2020. These bonds were introduced to replace the old savings (Taxable) Bonds 2003 with the 7.75 percent savings (Taxable) Bonds with effect on January 10, 2018. The duration of these bonds was seven years.
The Central Bank with effect from July 1st, 2020 will launch the Floating Rate Savings Bond in 2020 (Taxable). The major difference between earlier 7.75 savings bonds and the recently launched floating rate bonds is the fact that the interest rate of the new savings bond can be adjusted during the course of every 6 months. The 7.75 percentage bond rates were fixed throughout the whole duration of the bond. The bonds currently offer an interest rate of 7.15 percent.
What you need to do
A few of the investments mentioned above are fixed income while some are linked to financial markets. Market-linked and fixed-income investments can contribute to the creation of wealth. Market-linked investments can offer the possibility of high returns, however, they come with high risks. Fixed income investments aid in the preservation of wealth in order to reach the goals you want to achieve. To achieve long-term goals, it is essential to make the most efficient use of both. Choose a wise mix of investment options while keeping taxation, risk, and the time horizon in mind.