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.
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.
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.
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.
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.