Various types
of Investment Options
By
this time you are better informed on the why invest proposition and the real-rate
of return, Now, you may want to understand more about the common investment
options available to us in India, its effects, taxability, risk and typical
return levels associated with each instrument.
These
are short-to-medium-term interest bearing, debt instruments offered by banks.
And are low-risk, low-return instruments. There is usually an early withdrawal
penalty. Fixed deposits, recurring deposits etc. are some of these.
Average
rate of return is usually between 6-9%, depending on duration/instrument.
Returns are taxable.
These
are fixed income (debt) instruments issued for a period of more than one year
with the purpose of raising capital. The central or state government,
corporations and similar institutions sell bonds. A bond is generally a promise
to repay the principal along with fixed rate of interest on a specified
maturity date.
The
average rate of return on bonds and securities in India has been around 10-12% p.a.
Returns are taxable.
Public Provident Fund (PPF)
One
of the best instruments available. Must have in your investment portfolio.
Scheme can be opened with SBI, leading Pvt. Banks, and Post offices. This is a
long term investment vehicle with a term 15 years. Max deposit in a year Rs.
70,000 with the current rate of return fixed at 8%. It's a good idea to first
max this Rs. 70,000 limit every year before putting surplus money into other
investments.
Why?
For one, because of the longer term you can unleash the miracle power of
compunding to good effect here. Besides its a tax saving instrument, completely
safe, risk-free government guaranteed instrument. Returns too are currently,
tax free.
This
is another popular scheme among those who need some regular monthly income, say
e.g. Senior Citizens. You may not need the regular monthly income, but you
could put that regular stream of cash to other investment avenues, such as mutual
funds.
Again
a risk-free instrument you can invest with at Post Offices. Maturity period is
of 6 years, with current rate of interest fixed at 8% compounding. Automatic
credit facility of monthly interest to a linked savings account at the post
office. There is a bonus 5% payable on maturity, so effective compounding
return goes over 10%. Returns are taxable.
Investment
in shares of companies, is investing in Stocks. Stocks can be bought/sold from
the exchanges (secondary market) or via IPOs – Initial Public Offerings
(primary market).
However
unlike Bonds or Certificate of Deposits, investing in stocks isn't risk free.
The market returns over the long term is dependent on the company's business
performance - after all buying a share is a part ownership in the company! If
you are going to trust your investment with a company for the longer term, you
need to be reasonably sure the company will stay in business for next 10-15
years, and profitably! Investing in shares is not for everyone, requires hard
work, a lot of discipline and patience to make a success of it. Else all the
analysts would be sitting at home
Having
said that, history shows us that investment in quality stocks have proven to be
the ideal long term investment. On an average an investment in stocks in India has
provided returns of 15-25% p.a. over the medium to long term. Dividend Income
and Long Term Capital gains (>1 year) in India are currently, tax free.
These
are open and close ended funds operated by an investment company which raises
money from the public and invests in a group of assets, based on a published
set of objectives.
Investing
in Mutual Funds provide benefits of diversification (investments spread over a
larger number of stocks and thus lesser risk)and professional money management
-they have the team of researchers and analysts to pick the best stocks for
you.
The
rate of return again is market-performance related; generally substantially
more than what is earned in fixed deposits. Each mutual fund has a rate of
return dependent on how well its stock-picks have performed in the market.
Good
Mutual funds in India
have given a return of 15–20% p.a. over the long term. Dividend Income and Long
Term Capital gains (>1 year) in India are currently, tax free.
