Financial literacy - investment options

24 May 2021

Curtain Hug

Investment Options –

1. Fixed deposits - Fixed Deposit is the safest investment avenue depending on where you have invested. FDs help you grow your savings. They also offer stability and safety of principal amount. Interest on FD is 5-6%. You have reasonable flexibility, assured returns and high stability. FDs can be done with recognized banks and eligible non-banking financial companies (NBFCs) which are allowed to collect deposits.

2. PPF - The Public Provident Fund (PPF) scheme was started by the National Savings Organization in 1968 to promote small savings. It is an extremely popular long-term investment avenue. The avenue offers an investment option with decent returns together with income tax benefits under Section 80C.

3. Post office MIS - Another traditionally popular investment avenue is Post Office Monthly Income Scheme Account (MIS). You can invest in multiples of 1500. The maximum investment limit is `4.5 lakh in single account and 9 lakh in joint account. A Post Office MIS account can be opened in the name of minor and a minor of 10 years and above age can open and operate the account. A Post Office MIS account can be prematurely en-cashed after one year but before 3 years at a discount of 2% of the deposit. If you en-cash and after 3 years, then the discount becomes of 1% of the deposit. Discount means deduction from the deposit.

4. Government Securities (G-Secs) - Government securities are bonds, both short- and long- term, issued by the Government of India to raise funds for their expenditures. The government pays a specified coupon or interest rate on these bonds that may be payable annually or semi-annually or for any other specified frequency. There is a Sovereign Guarantee. G-Secs are guaranteed by the Government of India. Hence, they carry almost zero credit risk. G-Secs allow you to lock in attractive interest rates for tenures ranging from 91 days to 40 years. Such long-term interest rate assurance is unparalleled because even banks FDs offer a maximum tenure of 10 years.

5. Sovereign Gold Bonds - One of the latest investment innovations is SGBs or Sovereign Gold Bonds. The Sovereign Gold Bond Scheme was launched by the government in November 2015. Investing in gold is much easier and more convenient now with SGBs. As an investor, you can earn an assured interest rate (2.5% per annum at present). You also eliminate risk and cost of storage. The redemption is linked to the gold price prevailing at the time of redemption. Also, SGBs are exempt from the capital gains tax, if held till maturity.

6. Mutual Funds - A mutual fund offers investors the opportunity to pool their money with other investors. Together, this pool of money is managed by fund managers, who take the decision to buy and sell on investors’ behalf. Mutual funds invest in stocks, bonds or other securities, in line with the fund objective. You can do regular or one-time investments in mutual funds. In return for your investment, you get a certain number of mutual fund units that can be redeemed (sold back to the AMC) in future. mutual fund schemes would be broadly classified in the following groups: a.) Equity Schemes b.) Debt Schemes c.) Hybrid Schemes d.) Solution Oriented Schemes e.) Other Schemes

7. Insurance products - Life insurance is often thought to be for giving financial protection. Over the years, life insurance has branched out from that role. Today, life insurance can be categorized as a pure risk coverage plan i.e. pure insurance, and the other, which is a combination of insurance and investment.

8. Direct equity/shares/stocks - Stocks are a type of financial instrument that gives holders a share of ownership in a company. Stocks also are called equities. Investors buy stocks for various reasons. They buy stocks for capital appreciation, which occurs when a stock rises in price/value. They buy stocks for dividend payments, which come when the company distributes some of its earnings/profits to stockholders. There are three types of stocks – Growth stocks, Income stocks , Value stocks.

9. Bonds/ Debentures - A bond is a debt security. The bond issuer is obliged to pay interest (the coupon) to the bondholder. Unlike shares, bonds offer guaranteed return. Bonds usually have a defined term, or maturity, after which the bond is redeemed. This makes the entry and exit time defined. On the other hand, stocks may be outstanding indefinitely.