INVESTMENT OPTIONS IN INDIA: RISK FREE ASSETS

Having already discussed about the risky assets investment options in India we will be moving towards the risk free investment options in this article. We all know various investment options available that gives good return. But believe me there are “n” no. of things that a good investor will look upon before putting his hard earned cash.

Let’s look upon the risk free assets investment options and some key factors that an investor should look upon to get what his money deserves.

NSC: National Savings Certificate (NSC)

• National savings certificate offers a fixed amount of interest.
• The Department of Post, Government of India issues NSC.
• NSC can be availed at various authorized post offices.
• The maturity period of NSCs is 6 years.
• The rate of return offered NSC is 8% per annum.
• NSC gives tax benefit under section 80 C. Minimum valid investment amount in NSC is Rs. 500.

If we talk practically, then NSCs can be considered as a risk free avenue of investment because of the reason that they are backed by the Government of India. The option is not available for NRI’s Investment.

Fixed Deposit

A fixed deposit is nothing but a risk free investment into the bank /corporate for a specific period of time and earns some interest as return. The rate of returns offered in fixed deposit is higher than what is offered by banks savings account.

• An investment into 5 year fix deposit is eligible for tax benefit under section 80 C maximum of Rs. 1, 00,000.
• The benefits under this investment option are open for NRIs as well. NRI can invest in Fixed deposits offered by national as well as private banks in India.

PPF

Started with the objective of providing income security to the workers in the unorganized sector and self employed individuals in their old age, PPF is a government backed, long-term small savings scheme initiated by the Central Government.

• It offers an interest rate of 8% per annum and offers tax benefit under section 80 C of up to Rs. 70,000.
• PPF has a lock in tenure of maximum 15 Yrs. However, it provides facility to withdraw 50% of the balance at the end of the fourth year, proceeding the year in which the amount is withdrawn or the end of the preceding year whichever is lower.
• However, with no benefits for foreign investors, the option is not available for NRI’s Investment.

Post office – MIS

• MIS – monthly income Scheme made especially for the purpose of providing regular pension to the investors.
• Under Post office MIS, the investor can enjoy 8% per annum interest paid on monthly basis. Post office MIS limits an investment of maximum Rs. 4.5 lakh and a maturity period is 6 years.
• It provides the facility to prematurely enchase after 1 year but before 3 years at the discount of 2% and after 3 years at the discount of 1%.
• The Post office MIS option is not open for NRI’s Investment.

Bonds

• Bonds is a form of financial instrument used for lending money to government or company and in return, enjoy a fix amount of interest on principal paid by the government or company.
• A bond is a debt instrument which is issued for a period of more than one year.
• The return offered by the corporate bonds is much higher than those paid on government bonds, backed by the risk factor.
• The company or the government borrows money and promises to pay a stated rate of interest for a defined period and then to repay the principal at a given date of maturity to the investor.
• The important note that must be taken care of by every investor before investing into bonds is the rating and the interest rate offered by the bond. The option is open for the NRI’s who can also invest into Bonds and can enjoy a good return.
• However, it also depends from issuer to issuer and the terms and condition varies. The eligibility criteria for the investors are clearly mentioned by the bond issuer. NRI’s can always refer to the offer document and invest into bond accordingly.

POINTS TO REMEMBER BEFORE YOU TAKE AN INVESTMENT DECISION

The key points that an investor must always keep in mind before putting his money for a good return includes the following:

Liquidity

One of the most important criteria for selection of Investment Avenue is Liquidity.

An investor must look upon the liquidity option according to the need for the return. An investor needing money in a time frame of 3-4 years should not invest into PPF since it comes with a minimum lock in of 5 Years. 

Risk Profile

The investor must choose the investment option based on the risk profile.

E.g. Equities is not a good option for a low risk investor. If looking for a safe investment option the government backed options should be preferred, which may offers a low return but involves a low risk at the same time. Risky asset class may cause a loss of principal amount.

Taxation

Looking at the tax treatment of any investment avenue before investing is really important. Since taxation can kill your real return on investment, it becomes really very important to keep in mind the taxation treatment at the time of investment.

E.g. A investor invests into fix deposit at 9% and falls under 30% tax bracket. The real yield will be just 6.22% which is equivalent to current inflation rate. In actual, the investor is not earning any returns post inflation.

Time Frame

As liquidity the time horizon is another important factor to look upon before Investment in any of the asset class.

E.g. Mutual fund or Fix deposit : could be a good option for short term investment debt;

where as real estate and regular investment into equities can be a good option for long term investment.