It may sound strange, but a new mall or an upcoming township often takes precedence over other investment options in India. It is not without reason though, most people want financial security from their investments, and real estate typically provides it. The rising prosperity and democratisation of information have, however, led to increased awareness and investment money is slowly moving away from physical assets like real estate and gold. People are getting to know the benefits of investing in financial assets like mutual funds, which had a misplaced perception of being high-risk options.
Investment options can be categorised into two broad categories—financial assets and non-financial assets. Financial assets can be further divided into market-linked products (mutual funds, stocks), and fixed-income products (fixed deposits, public provident fund). Gold and real estate are the major non-financial assets. All these investment products have distinct risk profiles and generate different returns. Let us take a look at different investment products and rank them in increasing order of the risk involved.
The returns generated by physical assets have come under the scanner lately, but the security of actually owning an asset cannot be ignored. Among non-financial investment options, real estate is given preference over gold by Indian investors. The slowdown in the real estate sector has impacted the returns generated through realty investments in recent years. In the long run, realty investments tend to give handsome returns as a growing population and fragmentation of land has made it a scarce commodity. If the location is good, real estate investments deliver returns through capital appreciation as well as rentals. The only problem with realty investments is that it is highly illiquid. Gold is relatively liquid, in fact, it is on par with cash, but the price of gold is guided by numerous national and international factors.
Senior Citizens Savings Scheme
As the name suggests, the services of the scheme can only be availed by senior citizens and early retirees. SCSS can be availed by anyone above 60 from a bank or a post office. The scheme is best suited by retirees seeking to invest their retirement corpus in a less risky product. SCSS ensures regular income, high safety, and tax savings. The scheme is backed by the government and quarterly interest payments act as reliable income after retirement.
Bank Fixed Deposit
The bank fixed deposit is a form of fixed income financial asset and is a very popular option in India. The investor can decide the duration of interest payment from monthly, quarterly, half-yearly, yearly or cumulative interest payments. In a bank fixed deposit, each depositor is insured for up to a maximum of 100,000 rupees for both the principal and interest amount. Though a safe investment option, interest earned on fixed deposits tend to decrease when the Reserve Bank of India starts slashing the repo rate, like the current era. RBI has slashed the repo rate in the last three consecutive monetary policy meetings, which will definitely affect the returns from fixed deposits. The interest earned is added to your income and taxed as per the income slab.
Public Provident Fund
If your goal is to save tax, have a long investment tenure and need a secure option, the public provident fund is the perfect fit. The annual interest is backed by a sovereign guarantee and since, it has a duration of 15 years, the benefits of compounding boost returns in the later years. All this has made PPF a preferred option for many investors.
National Pension System
The scheme is a voluntary, defined contribution retirement savings scheme formulated with an aim to promote retirement planning among people. The scheme is partially tax-free and maximum 60 percent of the corpus can be withdrawn, while the annuity is paid on the balance 40 percent. The investment is a mix of equity, fixed deposits, corporate bonds and government funds among others. You can decide the quantum of money to be invested in equities through the scheme, depending on your risk profile. One of the major positives of the scheme is the extremely low fund management charges.
Mutual funds can be categorised largely in two categories—equity funds and debt funds. According to the Securities and Exchange Board of India rules, an equity mutual fund should deploy 65 percent of its capital in equity and equity-related instruments. Debt funds are relatively less risky as they are less volatile. Debt fund managers invest in fixed-interest generating instruments like corporate bonds, government securities, treasury bills, and commercial papers. On the flipside, equity funds are more volatile but tend to deliver higher returns. Equity funds can be actively managed or passively managed. Returns from an actively managed fund are largely dependent on the fund manager’s ability to generate returns. In the long run, investing in mutual funds ensures steady returns with relatively lower risk. The wide variety of fund options offered by portals like Finserv MARKETS too has contributed to increasing awareness of mutual funds.
Investing directly in stocks is a complex activity. Stock trading is a dynamic process, which needs in-depth knowledge and proper planning. The chances of losing your investment in stock markets are very high. The only positive is stock markets deliver inflation-beating returns in the long term and if the investment is successful. It is always better to enter equity markets through professionals like mutual fund managers, who have a fairly better idea of stock markets. Mutual Funds also have the advantage of the economies of scale as they deploy a large amount in several companies.
While choosing an investment option, you should be clear about your risk profile. It is a fact that high return paying instruments always carry a higher risk. Other factors like the tenure of the investment and the level of liquidity required should also be considered. Some financial products like public provision fund and the national pension fund are very secure but their liquidity is very low. If you are not an active investor, it is better to leave financial planning to professionals. At Finserv MARKETS, you can get financial planning tips at a click of the mouse and can also invest in various financial products such as insurance plans and mutual funds.
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