Investors seek growth, liquidity, high returns and low risk. Can all these wishes be fulfilled by a single investment option? That is where investment options compete with each other and investors are always on the lookout for the perfect investment option. Wise investment calls for prioritizing criteria and investing accordingly.
Investors can choose among the following investment modes as per their preferences:
1. Bank and Company FDs
2. Pension funds
3 Provident fund schemes
4. Post office schemes
5. Special schemes (Girl child, senior citizen)
6. Gold investment options
7. Real estate investment
8. Equity shares and IPO investments
9. Equity Linked Savings Plan (ELSS) and MFs
10. Unit linked insurance plans (ULIPS)
A Critical Appraisal of Investment Options
When Corpus Building and Security is the Priority
Everyone wants to build a wealth corpus as a reservoir for the future. People want to earn returns that justify at least the time value of the money and want their money value to appreciate withtime. Investors seek corpus building investment funds that are low on risk and high on returns. Such options pay out a regular stable return or a lump sum amount at the end of the policy tenure and are risk-free.
Bank Fixed Deposits
These are perhaps the easiest corpus building investment mode, and anyone with net banking facility can open an FD account within seconds. Interest rates on bank FDs at present have fallen below 7 %. TDS is not deducted by the bank if returns on FDs are below Rs 10,000 per annum and investors can submit form 15G/H to banks for TDS exemption if their FDs are earning a total return below Rs. 2,00,000 per annum.
Bank FD returns need to be filed in ITR in other incomes category. Higher returns on FDs are subjected to increased taxation of 20% and even 30 %. So above a certain return taxation on FD returns are quite high and effective rate of return can be as low as 5%.
Bank FDs offer high liquidity as the tenure ranges from one month to five years and short-term FDs of one year fetch the highest FD interest rates,and people can start investing with amounts as small as Rs 1000. Fixed monies are more secure against fraud and theft than money lying in savings accounts, and people may keep fixing their monies to avail that safety. FDs can be easily liquefied before the end of tenure by losing a percent of return should the need arise.
Company fixed deposits provide higher returns which can be within 9 to 13 % though there are some risks and the lock in is more stringent.
Pension Funds, Provident Funds, Post Office Schemes and Special Scheme Funds
In these funds the lock-in period is more than five years till ten or fifteen years and extendable by three years, the investment amount is small, and investors can start with an investment as low as Rs 500. There is a cap on maximum investment that can be made in one single year, for example, PPF has a maximum investment cap of Rs. 1.5 lakh in one financial year and post office monthly scheme has minimum investment cap of Rs. 1500 and maximum of Rs. 4.5 lakh.
Though there is a lock in period yet, there may be a provision in the scheme policy to withdraw amounts intermittently in case of need, such as in PPF and NSS schemes. The returns on these schemes are at present ranging between 8-9 % and are stable and secure, and therisk factor is minimal. Presently the NSS pension scheme is offering best investment mode for people who want to build a pension corpus after retirement. Also, the returns on the schemes are tax-free.
Investors need to check their eligibility for investing in the schemes like age, investment caps, number of member caps and other specified limitsand also the tenure.
The NSS is available to people up to 58 years. Senior citizens can opt for Special schemes like senior citizen schemes for corpus building.
Another special scheme aimed at girl child Sukannya Samriddhi is eligible for girl child below ten years and matures when the girl attains 21 years of age is a good investment mode for building acorpus for the girl child. Special schemes also offer tax-free returns of around 8 to 9 %
When Growth and Wealth is the Priority
Gold, Real Estate, Equity Shares and IPOs
Such investment modes are accompanied by some risks which can be low, medium or high these include investment in Gold (bonds, ETFs, bars), real estate, equity shares. There is no cap and lock in applicable, and the investors can buy and sell their holdings freely. The returns are variable can dip or even rise very high like returns on investment in gold has recently seen a dip to -1.5% and rise up to 13 % over a five-year period.
Investment in real estate has been made attractive through loans and EMI options, yet in the present day certain real estate projects, even of reputed groups, have run into trouble and investors have not been able to get their properties yet, and matters are being disputed by courts for effecting best settlements.
Yet an owned property offers good returns in terms of rent and other uses and returns can be as high as 12 to 14 %. Investors need to be careful when putting in their money especially for obtaining their first permanent shelter and many are now seeking to purchase only finished projects even though they may require a bigger investment outlay than proposed ones.
Likewise, equity shares can also be traded freely and may dip but also offer sudden rise in returns as high as 12 to 15 %. Income on equity shares is non taxable. IPOs are first-time shares offered by companies and can really offer growth if chosen well.
Equity Linked Savings Scheme (ELSS) and Mutual Funds
ELSS are at present yielding high returns to the tune of 17 to 20% and are non taxable. ELSS are administered fund portfolios, and investments are made in well-chosen equity shares. Mutual fund returns are at present low as compared to ELSS and even the secure fund schemes. MF portfolios comprise equity as well as bonds. Administered portfolios have lock in periods of 3 to 5 years.
Unit Linked Insurance Plans (ULIPS)
These are not much in preference due to very long lock in periods and no significant returns in comparison to the other schemes of the present day. A ULIPS has a long time tenure and lock in for over 40 years being an insurance linked plan it lasts over the life of the policy holder, and minimum investment required is high. Also, intermittent withdrawal is a complicated and deductible process. People instead prefer to purchase pure insurance and investment schemes separately.
Naval Goel is Founder & CEO PolicyX.com