Sources of Retirement Income 

6 Most Popular Investment Options

When investors look for the ‘best’ investment option, they want something that will earn them the maximum return with the least amount of risk. However, such an investment product does not really exist. This is because every investment has some risk attached to it, high or low.

You should not invest in something just to generate high returns because such products come with commensurate risk, and a higher chance of you losing the money that you have invested.

1. Public Provident Fund

The Public Provident Fund (PPF) is one of the most popular investment options in India because of its sovereign guarantee. Some of its features are:
a) Investment offers tax benefit under section 80C, interest earned and maturity are also exempt from tax.
b) The scheme has a lock-in period of 15 years.
c) Post maturity, the account can be extended in block of five years for any number of times.
d) The interest rate is reviewed by the Government every quarter. Currently, for the April-June 2018 quarter, interest rate offered is 7.6 percent a year.

2. Bank fixed deposits

Bank fixed deposits (FDs) is another popular investment option which offers fixed returns. One can invest in a bank FD by visiting his/her branch or via Net-banking. Here are some of its key features:
a) FDs are available in a wide range of tenures. Banks like the State Bank of India (SBI) and HDFC Bank offer FDs with minimum tenure of 7 days and maximum of up to 10 years. One can invest in any tenure depending on his/her time horizon at the rates  offered by banks.
b) Most bank FDs offer the option of premature withdrawal by paying a penalty. However, this should be checked at the time of opening the FD account.
c) A bank FD is insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) rules only up to Rs 1 lakh (principal plus interest) is insured per person per bank.
d) Currently, SBI is offering interest rate between 6.40 percent and 6.75 percent for FD tenures of 1 year to up to 10 years. Senior citizens get an extra 0.50 percent.

Bank FDs offer cumulative and non-cumulative options. In the cumulative option, the interest is re-invested and payable on maturity whereas, in the non-cumulative option, interest is payable periodically (monthly, quarterly or annually depending on the bank). Interest is added to your income and taxed as per your income tax slabs. Interest is subject to tax deducted source (TDS).

3. Mutual fund debt fixed maturity plans

Fixed maturity plans (FMPs) are close-ended debt funds offered by mutual funds. The maturity date of FMPs is fixed. Features of FMPs are:
a) These plans invest in various types of fixed income options such as bonds, bank certificate of deposits etc. which mature on or before the maturity date.
b) Unlike a bank FD where returns are fixed, FMP returns are not fixed or guaranteed.
c) FMPs have a tax advantage over bank FDs. Capital gains on debt FMPs, held for more than 36 months, qualify for long-term capital gains (LTCG) taxation. It is taxed at 20 percent post-indexation benefit. Also, if you have incurred long-term capital losses, you can set off the loss against the LTCG before calculating tax payable.

As LTCG from debt FMPs are taxed at 20 percent with indexation these, on an average, give better post-tax returns than bank FDs for individuals in the higher tax brackets.

4. Debt mutual funds

Apart from FMPs, which are close-ended debt funds, mutual funds also offer open-ended debt funds. These open-ended funds are considered less volatile than equity thereby offering stable returns as compared to equities.
a) They also invest in various debt instruments such as corporate bonds, treasury bills, government securities etc. These schemes are professionally managed by debt fund managers.
b) There are different types of debt mutual funds such as liquid funds/money-market funds, short-term income funds, gilt funds, corporate bond funds etc. c) These funds invest in various instruments of different time horizons and carrying different levels of risk. An investor can invest in these funds depending on his/her time horizon and risk appetite.

5. Equity-oriented mutual fund schemes

As the name suggests, equity-oriented mutual funds are those schemes that invest at least 65 percent of the scheme corpus in stocks of domestic companies.
a) They invest in stocks based on the mandate of the scheme and can be open-ended or close-ended. For instance, some schemes may invest only in stocks of large-cap companies whereas others may invest only in stocks of mid-cap companies. Then there are those that invest in both large-cap and mid-cap shares.
b) These schemes are professionally managed by equity fund managers. Returns of these schemes are market-linked and volatile. In last 5 years (2013-2018), large-cap MFs have delivered returns between 13 percent and 20 percent.
c) Financial advisors recommend that one should invest in equities for the long term, say a minimum five years or more, to beat inflation in the long run.
d) Equity mutual funds are a simple way to do this for a lay investor who cannot understand the intricacies of direct equity investing.

6. Direct equity

Aggressive investors who understand the workings of the stock market and are willing to take risks on their own could look at investing directly in equities.
a) Direct equities are considered risky because of the wide and quick price fluctuations (i.e., volatility) and one can lose one’s capital as well.
b) One needs to do due diligence before investing directly in shares of a company.

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