Saving and Investment: In the last article, we had discussed inflation and its’ impact in our life and especially on our savings and investment. Here we will talk about various savings and investment tools available to park our money.
Popular Saving and Investment options are available in India:
- Fixed Deposits
- Equity Mutual Funds
- Real Estate
- Public Provident Fund
- National Pension Scheme
- Debt Mutual Funds
- RBI Bonds or Govt. Bonds
- Post Office deposits schemes and Govt. Schemes
The above list is not exhaustive and there may exist other saving and investment options that are not covered in this article. But for now, let us discuss each of the above in detail.
(1) Fixed Deposits or FD
This is one of the most favorite saving and investment options available to investors. As the name suggests it is a kind of deposit account in banks or in NBFCs (Non-Banking Finance Companies) that has a fixed time limit for maturity. The time limit for fixed deposits may vary from 15 days to a maximum of 10 years. This is unlike Savings and current accounts which offer liquidity but with lower or zero rates of return (Interest), while FDs are more lucrative in terms of a higher rate of interest. In the present situation rate of interest on FDs is around 6.50% to 8.50% per annum which varies from bank to bank.
Bank FDs are the safest investment tool for any individual as there is no risk to capital. Considering this above Bank FDs may an ideally suited option for risk-averse individuals like senior citizens whose primary aim is capital protection.
However, the rate of interest on FDs makes them pretty weak against the inflation rate because the net returns after adjusting inflation(also taxes) may be hardly 1-2% or zero or even slightly negative.
Share is one of the equal parts into which any companies capital is divided. Anybody who owns this share(s) becomes a shareholder of that company. Thus shares are an investment option for anybody interested to do so. Now the rate of return or growth of investment is directly related to the growth or profit of the company concerned. If the company grows and becomes more valuable, the share is worth more – so your investment is worth more too. However converse is also true, when the company is not able to perform well, this is also reflected in companies’ share price, which in turn affects our investment.
Investment in shares is highly liquid as they can be bought and sold very easily.
Historical data implies that annualized return from shares (or Share Market) has been more than 15% which is quite good when compared to the inflation rate having a net margin of around 7-8% over the inflation rate. But investment in shares is also risky as it is linked to the performance of the company which is not guaranteed and even there is the risk to invested capital.
However, shares offer a great opportunity for long term investors who are ready to wait for some years to see their investment grow manifold.
So investments in shares fare very well when compared to other investment options both in terms of liquidity and rate of return.
(3) Equity Mutual Fund
An Equity fund is a fund that invests its’ corpus in shares of companies. It can be a diversify fund investing across various sectors known as an actively managed fund or a passively managed (Index) fund. Equity Mutual funds are normally categorized based on the market capitalization of the company they invest in, e.g. Large Cap Fund, Mid Cap Fund, and small-cap fund, etc.
The main differentiating factor between shares and mutual fund is that, while investing in shares one directly purchases the share(s) of the company(ies), whereas in case of mutual fund investment amount is given to a fund and then fund in turn invests in shares. When someone invests in a mutual fund he/she gets a certain number of units (Known as Net Asset Value or NAV) of that fund. The price of the NAV varies according to the fluctuations of the share prices that the fund has invested.
Mutual funds offer liquidity for buying and selling their units. Only Mutual funds which offer Tax relies upon have a locked-in period of three years.
Mutual funds normally give annualized returns in the range of 12-15% and thus are good for generating good inflated adjusted returns with margin in the range of 5-8%.
Investment in mutual funds is risky when compared to fixed return generating instruments. But historical data suggest that returns from mutual funds are excellent over longer time horizons of 7-10 years.
These days systematic investment in Mutual funds, popularly known as SIP, is very famous. Through SIPs, one can invest in mutual funds at fixed intervals like weekly, monthly, quarterly. SIPs are a great source of building wealth in the long term.
(4) Real Estate
When it comes to investing Real Estate happens to be one of the most appealing options. The land is a limited resource and as the population increases, demand for real estate will keep on rising. Historically, the real estate sector has proven to be an appreciating asset, which produces reasonably good returns on investment. The average return on Indian real estate has been in the range of 8-10% per annum. However, this may vary for different kinds of locations and property types.
Investment in Real Estate has always been suggest by advisors for the sake of portfolio diversification. However, the problem with Real Estate Investment is its’ liquidity and maintenance cost. Also, there are no strong and transparent regulations whenever there are sales and purchase transactions. Moreover, the amount needed for investing in real estate is always higher especially for persons who are starting their careers. When compared to Inflation returns on Real Estate investment tend to beat inflation with a fairly good margin.
For ages, the Yellow metal has proved to be the most appealing asset not just for investment purposes only, as it has many emotional attachments in every family.
Even today, Gold has its place in a savvy investor’s portfolio and will continue to do so in the future also. Gold has been the best known as a safe investment asset. Not Only Gold provides safety and appreciation on investment but it also acts as a risk-minimizing tool in uncertain times.
Today Investment in Gold is not limited to buying jewelry or ornaments. There are various options available today which are detailed below:
- Gold Coins and bars
- Physical Gold like jewelry
- Gold Mutual Funds
- Gold Exchange Traded Funds
- Digital Gold
- Sovereign Gold Bonds (SGB)
The average rate of return on gold has been around 10% per annum in the last 10 years which makes it again a good investment option for beating inflation with 3-4% margin. All investment options to buy Gold offer immediate liquidity except Sovereign Gold Bond which has a minimum locked-in a period of 5 years.
(6) Public Provident Fund or PPF
PPF account is the very popular investment scheme regulated by Govt. of India. The Investment period in PPF is 15 years which can be extended by another 5 years twice. The rate of interest in the scheme is decided by Govt. on a quarterly basis. which is normally in the range of 7.50-9.00%. PPF account is popular because it is one of the safest investment products. Because the government of India guarantees investments in the fund
The best part of returns in PPF is that interest is given on the PPF account totally exempted from income tax and hence net yield on investment increases with a good margin. Therefore return on PPF also beats inflation with a 2-3% margin. Also invested amount in PPF is exempted from taxable income under section 80C of Income-tax.
Withdrawal from PPF account is permitted after a period of 15 years, however, one may opt for availing loan after a period of 5 years.
(7) National Pension Scheme or NPS
National Pension System (NPS) is a government-sponsored pension scheme. This pension scheme is open to employees from the public, private, and even the unorganized sectors with the exception of those from the armed forces. The scheme encourages people to invest in a pension account at regular intervals during the course of their employment. After retirement, the subscribers can take out a certain percentage of the corpus. As an NPS account holder, you will receive the remaining amount as a monthly pension post your retirement.
A portion of the NPS goes to equities (this may not offer guaranteed returns). However, it offers returns that are much higher than other traditional tax-saving investments
NPS offers two accounts: Tier-I and Tier-II accounts. Tier-I is a mandatory account and Tier-II is voluntary. One cannot withdraw the entire money from the Tier-I account till retirement. Even on retirement, there are restrictions on withdrawal on the Tier-I account. If somebody has been investing for at least 3 years, he/she may withdraw up to 25% for certain purposes. The subscriber is free to withdraw the entire money from the Tier-II account.
(8) Debt Mutual Funds
Debt mutual funds invest the majority of their corpus in fixed-income or fixed-interest generating opportunities and instruments. Gilt fund, monthly income plans (MIPs), short term plans (STPs), liquid funds, and fixed maturity plans (FMPs) are some of the investment options in debt funds.
Debt funds are ideal for investors who want regular income but are risk-averse. Debt funds are less volatile and, hence, are less risky than equity funds. When compared with traditional fixed income products like Bank Deposits, and exploring for steady returns with low volatility, debt Mutual Funds could be a better option, as they are more tax-efficient and therefore earn better returns. In terms of the safety of capital, they score higher than Equity mutual fund.
The rate of return in debt mutual fund is from 8-10%, which has a margin of around 2-3% over the average inflation rate. This margin further improves when we take into account better tax treatment of Debt mutual funds.
(9) RBI Bonds or Govt. Bonds
In the recent past interest rated on deposits of banks has been declining continuously. In such a scenario, RBI’s bonds may seem attractive, given the rate on offer is 7.75% per annum for a period of 7 years. However, the inflation-adjusted return on the bonds is hardly 1%. The minimum amount of investment in these bonds is Rs 1000 and there is no upper limit. The RBI Savings Bonds are one of the safest investment options as it is issued by the RBI on behalf of the Government of India. Investments in these bonds are not eligible for tax benefit under section 80C of the Income Tax Act. Interest income, too, is taxable as per the investor’s income tax slab rate. There is a locked-in period of 7 years for any investment in these bonds. However, the lock-in condition is relaxed for senior citizens. For the investors in the age bracket of 60-70 years, 70-80 years, and above 80 years, the lock-in period is 6,5 and 4 years respectively.
(10) Post Office deposits schemes and Govt. Schemes
A post office offers different types of deposit schemes. These are also known as small savings scheme. These schemes are back by the central government. Some of these schemes such as NSC also offer tax-saving benefits under section 80C of the Income-tax Act.
The interest rates offer on these schemes are reviewed and fixed quarterly by the government. These rates range from 6.00-7.50% for various schemes.
Some of the schemes are details below:
Sukanya Samriddhi Yojana (SSY) – Parents or legal guardians can open only one account per girl child and a maximum of two accounts in the name of two different girl children. An account can be open up to the age of 10 years only from the date of birth. The account can be closed after the completion of 21 years ago.
Post office time deposit – The post office also accepts time deposits, which are similar to a bank FD. A Term Deposit (TD) can be place for any of the four tenures- 1, 2, 3, and 5 years.
Post Office Monthly Income Scheme(POMIS) – POMIS only offers monthly interest payments to investors. Interest shall be payable to the account holder on completion of a month from the date of deposit
Senior Citizen Savings Scheme (SCSS) – Senior citizens aged 60 years or above can invest in this scheme to earn regular interest income. There is a lock-in period of 5 years for the principal but premature withdrawal is allowed after the completion of one year after paying a penalty. Currently, the maximum that can be invested in this scheme by any individual has capped at Rs 15 lakh.
Post office savings account – Like a bank savings account, one can also open a savings account with a post office, and interest is paid on the balance in the savings account by the post office.
As we have seen above in this article we have discussed Saving and Investment Impact on our life. In our future posts, we will discuss them in detail.