|
Investment
Option |
Risks/Liquidity |
Returns
|
Taxation |
Suitability |
|
Bank
FDs |
Very
low risk and low liquidity. |
Low
returns, but assured. Depending on the tenure and bank, could be around
6-9% |
Since
returns are fully taxable, the post-tax returns will be still
lower. |
Good
for very low risk investors and those in the nil or low tax
brackets. As
interest rate scenario seems to be peaking, one could consider investing
in 3-5 year FDs. |
|
FMPs |
Low
risk and low Liquidity. |
No
assured returns but depending on tenure and the MF, could be around 6-9%.
(Ability to deliver the indicative returns). |
MFs attract much lower taxation
and hence give better post-tax returns vis-à-vis Bank FDs. |
Good
for low risk investors, but in high tax brackets. Good
for investing the debt portion of one’s
portfolio. |
|
Floating Rate
Funds |
Low
risk and high liquidity. |
Market linked. Today could be
around 5-7%. |
Lower
taxation of MFs makes Floating Rate funds
attractive. |
Good
for investing short-term money where one needs higher
liquidity. |
|
Debt
Funds |
Low
to Medium risk. High
Liquidity. |
Returns are market-linked.
Today could be around 5-7%, but susceptible to interest rate
risk. |
Lower
taxation of MFs makes such funds
attractive. |
Can
be avoided in a rising interest rate scenario but is good in a falling
interest rate scenario. |
|
Post Office
Schemes |
Low
risk and low Liquidity. |
MIS
scheme give 8% interest. Time
deposit 6.25-7.5%. |
Since
returns are taxable, the post-tax returns will be still
lower. |
Good
for very low risk investors and those in the nil or low tax
brackets. |
|
PPF |
Low
risk with very low liquidity (15-year lock-in period. Partial withdrawal
allowed after 6 years). |
8%
assured returns. |
Interest is tax-free.
Also
Sec 80C benefit. Hence a good scheme. |
Good
tax saving investment option. Good
for investing the debt portion of one’s portfolio. |
|
NSC |
Low
risk with low liquidity (6 years lock-in). |
8%
assured returns. |
Interest fully taxable. But
eligible for Sec 80C benefit. |
Not
very attractive vis-à-vis other options like 5-year Bank
FDs. |
|
Equity
|
High
risk and high liquidity. |
Market linked returns. Good
potential. |
Attractive tax treatment. No
Long Term Capital Gain Tax and 10% Short Term Capital Gains
Tax. |
Needs
high risk appetite. Ideal
for those investors who have a good corpus, good knowledge and time to
track the markets regularly. Care
should be taken to invest in good profit making companies. Penny stocks
should be avoided. |
|
Equity
Funds |
High
risk and high liquidity in open-ended funds. |
Market linked returns. Good
potential. |
Attractive tax treatment. No
Long Term Capital Gain Tax and 10% Short Term Capital Gains
Tax. |
Ideal
for small and common investors, but with high risk appetite.
SIP
and a long term investment horizon can cut down risk and increase the
probability of making good returns. Also,
one should build a well-diversified portfolio with say 50-60% money in 5-7
diversified funds, 25-35% money in 3-4 mid/small-cap funds and 10-15% in
3-4 sector funds. |
|
ELSS
Funds |
High
risk with low liquidity (3 years lock-in period). |
Market linked returns. Good
potential. |
Attractive tax treatment. No
Long Term Capital Gain Tax and 10% Short Term Capital Gains Tax. Also Sec
80C benefit. |
Good
tax saving investment option. Amounts beyond Rs.1 lakh limit could be
invested in open-ended funds. SIP
in ELSS would reduce the volatility risk. |
|
Balanced
Funds |
Medium to High risk.
High
Liquidity. |
Medium to high returns. Market
linked. |
Attractive tax treatment. No
Long Term Capital Gain Tax and 10% Short Term Capital Gains
Tax. |
Though convenient as both debt
and equity investment is covered under one fund, it may be better to
invest separately in equity and debt funds for better control.
|
|
ULIPs
|
Low
to High Risk depending on the investment option i.e. Pure Debt or Mixed or
Pure Equity. Low Liquidity (3-5 years lock-in period).
|
Low
to high depending on the investment option. Market linked
returns. |
Tax
free returns. Also
Sec 80 C benefit available. |
Not
an attractive option due to high charges, low flexibility and low
diversification. There are other better similar investment products like
MFs with low charges, high flexibility and high
diversification. As regards life cover, the same could be done through a
term policy. |
|
Endowment/ |
Low
risk and very low liquidity. |
Low
returns. Generally around 6-6.5%. |
Tax
free returns. Also
Sec 80 C benefit available. |
Not
an attractive option due to low returns. There are other better similar
investment products like PPF. As regards life cover, the same could be
done through a term policy. |
|
Real
Estate |
Variable risk and variable
liquidity depending on the type and location of
property. |
Market linked returns. Good
potential. |
No
tax advantages, except attractive tax benefits on the home
loans. |
High
initial investment required which could make one’s portfolio lopsided;
high transactions costs like title-search, registration brokerage etc.;
and cannot be partly liquidated. Therefore, real-estate MFs (expected in the near future) may be a better
alternative than direct property investment. If
investing directly, it is important to assess the potential and clear
title. |
|
Commodities |
High
risk with high liquidity. |
Market linked
returns. |
No
tax advantages. |
Highly
cyclical. |
|
Gold |
Low
long-term risk. But volatile in short term. High
Liquidity. |
Has
traditionally been a hedge against inflation. So returns could be around
inflation levels. |
No
tax advantages. |
Not
an attractive investment option. Can be used for portfolio diversification
to partly hedge against inflation. Gold
MFs are better than buying physical
gold. |