In India we have more than 20 investment options available under different categories: wealth accumulation vs income generation, one time investment vs recurring payments, debt vs equity and so on. With so many options available at one’s disposal it can be quite daunting for someone to choose the best one for themselves. I’ll be adding a quick summary of all the investment options available and mention the pros and cons to help you choose the best one as per your specific needs.
I am referencing a book published by Value Research team by name of Best Investments
Banking
The investment options available by Banks are as follows:
Savings Account
A bank account is a financial account with a banking institution. The purpose of a bank accounts is to safeguard your cash and bring financial transactions to the banking network. With most of the transactions occurring within the network and government’s push towards digital’s transactions, bank account is assumed to be a must for all individuals.
Pro of having cash in the bank account is high liquidity – one can easily make quick transactions using the cash balance in bank account, there is no (or very little) wait time before transaction). Along with liquidity bank account offers safety and a moderate interest (around 3.5-4% pa) on the balance maintained in the account.
On other hand these interest rates are usually less than inflation rate (~6%) and thus account holders are losing money in real terms. Thus, in an ideals scenario you should determine your liquidity needs and only keep that amount in banks. The remaining balance should be moved to other higher interest rate options available.
Bank Fixed Deposit
A bank fixed deposit (FD) or term deposit, is an option in which bank keeps a certain sum of money with itself for a specified period of time. You are not allowed to withdraw or transfer that money during the time period. The main appeal for this option is banks offer slightly better interest rates (~ 4-5.5%) than savings account. This interest rates again are still less than inflation and thus investors end up losing money in real terms.
Bank Recurring Deposit
Bank recuring deposit is similar to FD the only difference being instead of investing a lum-sum amount, investors can choose to deposit a fixed amount every month on recurring basis. The interest rates offered by bank and lock-in period are in lines with same offered for FD.
Most banks these days offers a wide variety of other options as well which include Mutual Funds, Debt Instruments and Broker Account for Stocks. These although being offered by Banks are quite different from savings account or FD and thus, I’ll cover them separately.
Post Office Schemes
Post Office Recurring Deposit
The Post Office Recurring Deposit (PORD) is a systematic savings plan, where you save small and equal sums of money each month for a period of 60 months. The savings attract fixed interest on capital (5.8% currently), which help investors generating assured sizeable savings over the fixed tenure of 5 years. The interest rates are usually close to inflation rate and thus investors don’t lose money in the longer run. The savings in PORD is guaranteed by the Government of India and thus can be assumed as risk free investment.
Post Office Term Deposit
The Post Office Time Deposit (POTD) is similar to a bank fixed deposit, you save money for a definite time period and earn a guaranteed return. The invested capital along with the compounded interest earned can be redeemed at the end of the tenure. The investment in POTD too is backed by government of India. Interest rates offered for the investment depends on the investment tenure (currently it ranges from, 5.5% for 1 year to 6.7% for 5 years). These rates are comparable to slightly better than the inflation and thus investors can expect to make a positive real return.
Post Office Monthly Income Scheme
The Post Office Monthly Income Scheme (POMIS) is a way to generate regular income from investment. You can deposit a fixed amount in POMIS and the interest earned is transferred back to depositor account every month. As there is a monthly cashflow generated in depositor’s account, this scheme is really good for someone looking to have a steady source of income. Currently, the interest earned on this scheme is 6.6% slightly better than inflation. A major limitation to the scheme is that maximum of ₹4.5 Lakhs can be deposited by an individual at a time, which amounts to maximum of ₹ 2,475 as monthly income.
Small Saving Schemes
Public Provident Fund
Public Provident Fund or more commonly known as PPF is a long-term savings instrument with a lock in of 15 years established by the central government with the objective to provide old- age income security. It offers assured returns (currently, 7.1%) and also has the exempt-exempt-exempt (EEE) status. The deposit made in the PPF account is exempted from income tax, interest earned on capital is exempted and finally the maturity amount if also exempted. This makes PPF a popular investment option, however there’s an upper limit of ₹ 1.5 lakh that can be invested per annum.
Sukanya Samriddhi Yojna
The Sukanya Samriddhi Yojana (SSY) is specifically designed for girl child. The parents of girls aged 10 or below can open an SSY account in the name of the girl child and need to deposit minimum ₹ 250 to maximum ₹ 1.5 lakh per annum. The capital is guaranteed by government of India and earns an interest of 7.6% (currently). The SSY scheme also has the EEE status, i.e. deposits, interest earned and maturity amount all are tax exempted.
Senior Citizen Savings Scheme
The Senior Citizen Savings Scheme (SCSS), is a deposit scheme introduced by the Government of India to provide guaranteed and regular income stream for senior citizens post- retirement. The scheme is applicable only for senior citizens and then can deposit capital of up to ₹ 15 lakh. The capital when deposited is applicable for tax deduction, however the interest earned is taxable (over ₹ 50,000). The interest offered currently stands at 7.4%.
National Savings Certificate
The National Savings Certificate (NSC) is another scheme backed by the government. It is available with tenure of 5 years with interest rate of 6.8%. There is no upper limit for deposit, but it is tax deductible only up to ₹ 1.5 which is combined with PPF. It means if an individual is investing ₹ 1.5 lakh in PPF, they will get no deduction in NSC investment. This along with lower interest rates makes NSC an inferior scheme compared to PPF.
Kisan Vikas Patra
Kisan Vikas Patra (KVP) is a safe small savings instrument backed by Government of India. It has a tenure of 124 months which is 10 years and four months, which at current offered rate (6.8% annual) will double the invested amount. The money raised in this scheme is dedicated to be used in welfare schemes for farmers. There is no upper limit to amount invested however there is no tax benefit on deposit or on the interest amount. There is also a lock in period of 2.5 years after which amount can be scheme can be encashed by paying a penalty.
Pradhan Mantri Vaya Vandana Yojana
Pradhan Mantri Vaya Vandana Yojana (PMVVY) scheme (though marketed as a pension) is essentially a fixed deposit with LIC and has a guaranteed interest rate of 7.4 per cent for a period of 10 years. It is marketed as a pension scheme as interest rate generated is paid out in monthly/ quarterly/ semi annually or annually. There is no tax deduction on capital contributed towards this scheme and interest earned is also taxable.
Floating Rate Savings Bonds 2020 (Taxable)
The Floating Rate Savings Bonds 2020 (Taxable), popularly known as the RBI 7.15% Bonds, offer a 7.15 per cent taxable rate of interest over a tenure of seven years. They are called floating-rate bonds as the interest rate on these bonds is reset every six months. There is a lock-in for a tenure of seven years with interest payments done at half yearly intervals.
I am referencing a book published by Value Research team by name of Best Investments
Hitesh Gulati, CFA 