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Investment Options

Today, there are several investment avenues for an individual to choose from. The investment products are either debt-based (where returns are fixed), or equity-linked (where returns are market-linked). Let’s look at these products in terms of their features. Bank fixed deposits (FDs). They offer fixed and assured returns, but with the interest income being fully taxable, the post-tax and inflation-adjusted returns are very low. Although they are fairly safe, spread your FDs over several banks rather than invest a big sum in one bank. The tenure varies from one month to 10 years. At best, FDs help you preserve capital. So, funds needed to meet goals in the next 2-3 years may be put into them.Bonds offered by the Reserve Bank of India (RBI) or the government are considered to be the safest fixed income investment options offering decent returns. As they are not very liquid, consider investing in them only up to the extent you are comfortable with. Infrastructure bonds, which provide tax deductions up to Rs20,000 under Section 80CCF, are a noteworthy investment opportunity in this space.

SMALL SAVINGS

These instruments mainly comprise fixed-income products such as Public Provident Fund (PPF), National Savings Certificate (NSC), time deposits or the Monthly Income Scheme (MIS). PPF, which comes with a 15-year tenure and an extension option, offers 8.6 per cent tax-free return. It remains your best bet to accumulate a tax-free corpus for meeting your long-term needs. NSCs and MIS suit those who want assured returns over the medium term. All these products are debt-based.

EQUITIES

To start investing directly in stocks, choose the ones that either have large market caps or feature in an index. They have high liquidity and are less volatile than others. Weigh stocks on the basis of ratios such as priceearnings, operating margins, return on equity and capital, among others. Stick with the company for the long term and do not exit - even in downturns - until the reasons for which the stock was bought do not exist anymore, or something has gone fundamentally wrong with the stock.

MUTUAL FUNDS (MFs)

The reasons for their popularity are simplicity, affordability, professional management, diversification and liquidity. There are equity MFs for those willing to bear greater risk, debt or gilt schemes for the riskaverse, and balanced schemes for those willing to take on a bit of risk. Most MFs offer systematic investment plans (SIPs), systematic withdrawal plans (SWPs), monthly income plans (MIPs) and the dividend reinvestment option to suit individual needs. Beginners can start investing in MFs through SIPs in either equity or debt schemes, depending on how far the goal is and the investor’s risk appetite. As equities tend to beat inflation over the long term, it makes sense to invest in them for longer term goals. Ideally, when you begin, go for large-cap or index funds. Select schemes that have performed consistently over the long term. Similarly, choose debt funds for your short- to medium-term goals.

GOLD

Buying coins and bars is the right way to go about investing physically in the yellow metal as, unlike in the case of jewellery, there is neither any wastage nor any making charges. Coins and bars have better resale value as they come with higher purity. But, the best way to invest in gold is through exchange-traded funds (ETFs), which is a cost-efficient way to access the bullion market. Similar to owning the units of an equity MF, units in an ETF can be easily bought or sold. One may also invest in gold MFs. Put away 10-15 per cent of your investable surplus in gold.

REAL ESTATE

Although real estate as an asset class is highly illiquid and requires a lot of capital, it is a useful hedge against inflation. Real estate prices are also less volatile than other investments. Also, if you invest in real estate - especially residential property - for the long term, the huge demand for quality housing in India will ensure that your capital values will appreciate substantially.

ALTERNATE INVESTMENTS

Certain investments, such as precious metals, structured products (financial derivatives), private equity, agricultural commodities, green funds, and art and wine are outside the traditional asset classes of equity or debt. As any organised market is absent for the trading of such products, liquidity is low and, therefore, the risk-return ratio is high.

BASIC KNOW HOW

Bank FDs offer fixed and assured returns, but with the interest income being fully tax-able, the post-tax and inflation-adjusted returns are very low. For beginners, investing in MFs can start with systematic investment plans (SIPs). While investing directly in stocks, choose the ones that either have large market caps or feature in an index. The best way to invest in gold is through exhange-traded funds (ETFs) route. While real estate as an asset class is highly illiquid and requires a lot of capital, it is also a useful hedge against inflation.

Next To Come: Proper Money Management