Most investors want to make investments in such a way that they get very high returns as fast as possible without the risk of losing the main money. This is the reason why many are always looking for the best investment plans where they can double their money in a few months or years with little or no risk.
But unfortunately, there is no combination of high return and low risk in an investment product. Perhaps in an ideal world but not today. In reality, risk and returns are directly related, go hand in hand, that is, the higher the return, the higher the risk and vice versa.
When selecting an investment path, you must match your own risk profile with the associated risks of the product before investing. There are some investments that carry high risk but have the potential to generate higher inflation-adjusted returns than other long-term asset classes, while some investments have low risk and therefore lower returns.
There are two categories into which investment products fall and are financial and non-financial assets. Financial assets can be divided into market-linked products (such as stocks and mutual funds) and fixed income products (such as Public Welfare Fund, bank fixed deposits). Non-financial assets, many Indians invest through this mode, are like physical gold and real estate.
Top 10 investment options
1. National Pension System (NPS)
The National Pension System (NPS) is an investment product focused on long-term retirement administered by the Regulatory and Development Authority of the Pension Fund (PFRDA). The minimum annual contribution (April-March) for an NPS Tier-1 account to remain active has been reduced from Rs 6,000 to Rs 1,000. It is a combination of stocks, fixed deposits, corporate bonds, liquid funds and government funds, among others. Based on your risk appetite, you can decide how much of your money can be invested in stocks through NPS. Read more about NPS.
2. Direct equity
Investing in stocks may not be a cup of tea for everyone as it is a volatile asset class and there is no guarantee of performance. Furthermore, it is not only difficult to choose the correct stock, but it is also not easy to program its entry and exit. The only silver lining is that, over long periods, capital has been able to generate higher returns than those adjusted for inflation compared to all other asset classes.
At the same time, the risk of losing a considerable portion or even all of your capital is high unless one opts for the stop-loss method to reduce losses. In stop loss, one makes a pre-order to sell a stock at a specific price. To reduce risk to a certain extent, it can be diversified across sectors and market capitalizations. To invest directly in capital, one needs to open a demat account. Banks also allow the opening of a 3 in 1 account. This is how you can open one to invest in stocks.
3. Debt mutual funds
Debt mutual fund schemes are suitable for investors who want constant returns. They are less volatile and therefore less risky compared to equity funds. Debt mutual funds invest primarily in fixed-interest-bearing securities, such as corporate bonds, government securities, treasury bills, commercial paper, and other money market instruments.
However, these mutual funds are not without risk. They carry risks such as interest rate risk and credit risk. Therefore, investors should study the related risks before investing. Read more about debt mutual funds.
4. Senior Citizens’ Saving Scheme (SCSS)
Probably the first option for most retirees, the Senior Citizens’ Saving Scheme (SCSS) is essential in their investment portfolios. As the name suggests, only seniors or early retirees can invest in this scheme. SCSS can be used from a post office or bank by anyone over the age of 60.
SCSS has a five-year tenure, which can be extended further for three years once the scheme matures. The upper investment limit is Rs 15 lakh, and one can open more than one account. The SCSS interest rate is paid quarterly and is fully taxable. Remember, the interest rate in the scheme is subject to review and revision every quarter.
However, once the investment is made in the scheme, the interest rate will remain the same until the maturity of the scheme. Seniors can claim a deduction of up to Rs 50,000 in a financial year under section 80TTB on SCSS earned interest. Read more about the savings scheme for the elderly.
5. Public Provident Fund (PPF)
The Public Welfare Fund (PPF) is a product that many people turn to. Given that the PPF has a long duration of 15 years, the impact of the capitalization of tax-free interest is enormous, especially in recent years. Plus, since earned interest and invested capital are backed by a sovereign guarantee, they make it a safe investment. Remember, the interest rate in PPF is reviewed every quarter by the government. Read more about the PPF here.
6. Investment funds
Capital investment fund schemes invest primarily in equity stocks. Pursuant to current mutual fund regulations of the Securities and Exchange Board of India (Sebi), a capital mutual fund scheme must invest at least 65 percent of its assets in equity and related instruments. An equity fund can be managed actively or passively.
In an actively trading fund, returns are highly dependent on the fund manager’s ability to generate returns. Index funds and exchange-traded funds (ETFs) are passively managed, and these track the underlying index. Stock schemes are classified according to market capitalization or the sectors in which they invest. They are also classified by whether they are national (investing in shares of only Indian companies) or international (investing in shares of foreign companies). Read more about mutual capital funds.
7. Fixed bank deposit (FD)
A fixed bank deposit (FD) is considered a comparatively safer option (than mutual funds or mutual funds) to invest in India. According to the rules of the deposit insurance and credit guarantee corporation (DICGC), each depositor in a bank is insured up to a maximum of Rs 5 lakh with effect from February 4, 2020, both for the amount of the capital and of interests.
Previously, coverage was a maximum of Rs 1 lakh for both principal and interest. Depending on the need, one can opt for the monthly, quarterly, semi-annual, annual or cumulative interest option on them. The interest rate earned is added to income and is taxed based on the income slab. Read more about bank fixed deposit.
8. Pradhan Mantri Vaya Vandana Yojana (PMVVY)
PMVVY is for people over 60 years of age or older to provide a guaranteed return of 7.4% per year. The scheme offers pension income payable monthly, quarterly, semi-annually, or annually, as chosen. The minimum pension amount is Rs 1,000 per month and the maximum is Rs 9,250 per month. The maximum amount that can be invested in the scheme is Rs 15 lakh. The tenure of the scheme is 10 years. The scheme is available until March 31, 2023. Upon maturity, the investment amount is repaid to the older person. In the event of the death of an older person, the money will be paid to the nominee. Read more about PMVVY.
Owning gold in the form of jewelry has its own concerns, such as safety and high cost. Then there are the ‘manufacturing charges’, which generally range from 6 to 14 percent of the cost of gold (and can go as high as 25 percent for special designs). For those who want to buy gold coins, there is still an option.
Many banks sell gold coins today. An alternative way to own gold is through paper gold. Investing in paper gold is more profitable and can be done through gold ETFs. Such investment (buy and sell) occurs on a stock exchange (NSE or BSE) with gold as the underlying asset. Investing in Sovereign Gold Bonds is another option to own gold-paper. An investor can also invest through gold mutual funds. Read more about gold sovereign bonds.
10. Real estate
The house you live in is for your own consumption and should never be considered as an investment. If you don’t intend to live in it, the second property you buy may be your investment.
The location of the property is the most important factor that will determine the value of your property and also the rent you can earn. Investments in real estate offer returns in two ways: capital appreciation and rents. However, unlike other asset classes, real estate is highly illiquid. The other big risk is getting the necessary regulatory approvals, which have been largely addressed after the arrival of the real estate regulator.
Read more about real estate.
Taxable RBI bonds
Previously, RBI used to issue 7.75% Savings Bonds (Taxable) as an investment option. However, the central bank stopped issuing these bonds with effect from May 29, 2020. These bonds were launched replacing the old 8 percent Savings Bonds of 2003 with the Savings Bonds (Taxable) of the 7.75 percent effective January 10, 2018. These bonds were valid for 7 years.
The Central Bank with effect from July 1, 2020 has launched the Floating Rate Savings Bond, 2020 (subject to taxes). The biggest difference between previous 7.75% savings bonds and the newly launched floating rate bond is that the interest rate on the newly launched savings bond is subject to a reset every six months. On 7.75% bonds, the interest rate was fixed throughout the duration of the investment. Currently, the bonds offer an interest rate of 7.15 percent. The first interest rate reset expires on January 1, 2021. Read more about RBI floating rate bonds.
What should you do
Some of the above investments are fixed income, while others are linked to the financial market. Both fixed income and market linked investments have a role to play in the wealth creation process. Market-linked investments offer the potential for high returns, but also carry high risks. Fixed income investments help preserve accumulated wealth to achieve the desired goal. For long-term goals, it is important to make the best use of both worlds. Have a judicious mix of investments with risk, tax and time horizon in mind.