ummarised below are the short-term and long-term financial investment options available for Indian investors.
1. Savings Bank Account
Use only for short-term (less than 30 days) surpluses
Often the first banking product people use, savings accounts offer low interest (4%-5% p.a.), making them only marginally better than safe deposit lockers.
2. Money Market Funds (also known as liquid funds)
Offer better returns than savings account without compromising liquidity
Money market funds are a specialized form of mutual funds that invest in extremely short-term fixed income instruments. Unlike most mutual funds, money market funds are primarily oriented towards protecting your capital and then, aim to maximise returns.
Money market funds usually yield better returns than savings accounts, but lower than bank fixed deposits. With the flexibility to issue cheques from a money market fund account now available, explore this option before putting your money in a savings account.
3. Bank Fixed Deposit (Bank FDs)
For investors with low risk appetite, best for 6-12 months investment period
Also referred to as term deposits, this product would be offered by all banks. Minimum investment period for bank FDs is 30 days.
The ideal investment time for bank FDs is 6 to 12 months as normally interest on bank less than 6 months bank FDs is likely to be lower than money market fund returns.
It is important to plan your investment time frame while investing in this instrument because early withdrawals typically carry a penalty.
4. Post Office Savings Schemes (POSS)
Low risk and no TDS
POSS are popular because they typically yield a higher return than bank FDs. The monthly income plan could suit you if you are a retired individual or have regular income needs.
Besides the low (Government) risk, the fact that there is no tax deducted at source (TDS) in a POSS is amongst the key attractive features.
The Post Office offers various schemes that include National Savings Certificates (NSC), National Savings Scheme(NSS), Kisan Vikas Patra, Monthly Income Scheme and Recurring Deposit Scheme.
5. Public Provident Fund (PPF)
Best fixed-income investment for high tax payers
PPF is a very attractive fixed income investment option for small investors primarily because of -
1. An 11% post-tax return - effective pre-tax rate of 15.7% assuming a 30% tax rate
2. A tax-rebate - deduction of 20% of the amount invested from your tax liability for the year, subject to a maximum Rs60,000 for a tax rebate
3. Low risk - risk attached is Government risk
So, what's the catch? Lack of liquidity is a big negative. You can withdraw your investment made in Year 1 only in Year 7 (although there are some loan options that begin earlier).
If you are willing to live with poor liquidity, you should invest as much as you can in this scheme before looking for other fixed income investment options.
6. Company Fixed Deposits (FDs)
Option to maximise returns within a fixed-income portfolio
FDs are instruments used by companies to borrow from small investors. Typically FDs are open throughout the year. Invest in FDs only if you have surplus funds for more than 12 months. Select your investment period carefully as most FDs are not encashable prior to their maturity.
Just as in any other instrument, risk is an embedded feature of FDs, more so because it is not mandatory for non-finance companies to get a credit rating for this instrument.
Investors should consciously (either though a credit rating or through an expert) select the companies they invest in. Quite a few small investors have lost their life's savings by investing in FDs issued by companies that have run into financial problems.
7. Bonds and Debentures
Option for large investments or to avail of some capital gains tax rebates
Besides company FDs, bonds and debentures are the other fixed-income instruments issued by companies. As a result of an illiquid secondary market and a lack-lustre primary market, investment in these instruments is largely skewed towards issues from financial institutions.
While you might find some high-yielding options in the secondary market, if you do not want the problems associated with bad deliveries and the transfer process or you want to invest a large sum of money, the primary market is the better option.
8. Mutual Funds
Have you ever made an investment in partnership with someone else? Well, mutual funds work on more or less the same principles. Investors pool together their money to buy stocks, bonds, or any other investments.
Investing through mutual funds allows an investor to -
1. Avail the services of a professional money manager (who manages the mutual fund)
2. Access a diversified portfolio despite making a limited investment
Our primer Investing in Mutual Funds should educate you a lot more on the benefits of investing in mutual funds and strategies you could employ.
9. Life Insurance Policies
Don't buy life insurance solely as an investment
Life insurance premiums, depending upon the policy selected, include the costs of -
1) death-benefit coverage
2) built-in investment returns (average 8.0% to 9.5% post-tax)
3) significant overheads, including commissions.
This implies that if you buy insurance solely as an investment, you are incurring costs that you would not incur in alternate investment options.
It is, however, important to insure your life if your financial needs and profile so require. Use our Are You Adequately Insured planning tool to find out if you need life insurance, and if yes, how much.
10. Equity Shares
Maximum returns over the long-term, invest funds you do not need for at least five years
There are two ways in which you can invest in equities-
1. through the secondary market (by buying shares that are listed on the stock exchanges)
2. through the primary market (by applying for shares that are offered to the public)
Over the long term, equity shares have offered the maximum return to investors. As an investment option, investing in equity shares is also perceived to carry a high level of risk.
Learn more about building an equity portfolio in Investing in Equities
Illustrations: Vaibhav Shirke