Currently, most banks offer 4 percent or even lower return on their savings accounts. It, therefore, becomes important to look out for other better alternatives and investment options to make your money earn you money.
1. Bank fixed deposits (FD)
A bank fixed deposit (FD) is a popular choice for investing owing to its assured return and the safety involved. Under the Deposit Insurance and Credit Guarantee Corporation (DICGC) rules, each depositor in a bank is insured up to a maximum of Rs 1 lakh for both principal and interest amounts. As per the need, one may opt for monthly, quarterly, half-yearly, yearly, or cumulative interest options in them. The interest rate earned is added to one's income and taxed as per one's income slab. Currently, most banks offer interest rates between 6.5 percent and 7.5 percent for tenure ranging from 1 to 10 years.
2. Sweep-in fixed deposit
A sweep-in fixed deposit known by different names like money multiplier, 2-in-1 account, comes with a higher yield (between 6.5 percent and 7.5 percent currently) compared to a savings account, at the same time maintains the liquidity of a savings account. In a sweep-in deposit, any amount above a certain threshold limit in the savings account is automatically converted into an FD. The interest rate on offer could be similar to what is offered on a regular FD, but in a sweep-in FD some banks may not offer additional interest rate to senior citizens.
Also Read: Sweep-in deposit account gives higher interest than savings account: Will it suit you?
3. Post office schemes
Small savings schemes such as Public Provident Fund (PPF), National Savings Certificates (NSC), Senior Citizens Savings Scheme, Sukanya Samriddhi and so on are also popular investment options among fixed income investments. Based on the yield on government securities, the government sets the interest rate of small savings products at the start of every quarter of the financial year. While the returns may at times be higher than bank deposits, you should link them to your goals while investing as most of them are long-term products.
4. Debt mutual fund schemes
For earning better tax efficient returns, investors may consider debt mutual fund schemes, as the gains qualifies for indexation benefit after three years and is taxed at 20 percent. These schemes do not invest in equities rather it puts the investor's money primarily into fixed-interest generating securities like corporate bonds, government securities, treasury bills, commercial paper, and other money market instruments. Currently, for the medium duration bond funds, the 1-, 3-, 5-year market return is around 7 percent, 8.5 percent, and 9 percent, respectively. As per the recent Sebi categorisation rules, there are 16 categories of debt fund schemes. Depending on the duration of the underlying securities, the investor should choose the specific category of schemes.
5. Equity mutual fund schemes
Equity mutual funds predominantly invest in shares of companies. As per current Sebi mutual fund regulations, an equity mutual fund scheme must invest at least 65 percent of its assets in equities and equity-related instruments. The fund can be actively or passively managed. In an actively traded fund, the returns are largely dependent on a fund manager's ability to generate returns. Index funds and exchange-traded fund (ETFs) are passively managed, and these track the underlying index. Equity schemes are categorised according to market capitalisation or the sectors in which they invest. They are also categorised by whether they are domestic (investing in stocks of only Indian companies) or international (investing in stocks of overseas companies). Currently, for the large and mid-cap fund category, the 1-, 3-, 5-year market return is around 9 percent, 12 percent, and 15 percent, respectively.
6. Investing in gold
The returns from gold can be volatile for some time and then remain flat for several years. Currently, the 1-, 3-, 5-year market return is around 10 percent, 5 percent, and 2.7 percent, respectively. Owning gold in the form of jewellery has its own concerns like safety and high cost. Then there are 'making charges', which typically range between 6 percent and 14 per cent of the cost of gold (and may go as high as 25 percent in case of special designs). For those who want to buy gold coins, there is another option. One can also buy ingeniously minted coins. An alternate way of owning paper gold in a more cost-effective manner is through gold ETFs where buying and selling happens on a stock exchange (NSE or BSE) with gold as the underlying asset. Investing in Sovereign Gold Bonds is way of investing in paper gold.
7. Peer-to-peer lending
Similar to e-commerce websites such as Amazon and OLX, a peer-to-peer (P2P) platform is a marketplace for money lending activities. You can lend money to others in a more organised and structured manner using the P2P lending platform. The P2P platforms have the recovery process in place and one should understand it before using the services of the platform. Since this is an unsecured loan where there is no face-to-face interaction, a P2P lender needs to be aware of the risks involved. Currently, interest rate earned can be anywhere from 13 percent to 30 percent
8. Equity shares
Investing in stocks may not be everyone's cup of tea as it's a volatile asset class and there is no guarantee of returns. Further, not only is it difficult to pick the right stock, timing your entry and exit is also not easy. The only silver lining is that over long periods, equity has been able to deliver higher than inflation-adjusted returns compared to all other asset classes.
At the same time, the risk of losing a considerable portion of capital is high unless one opts for stop-loss method to curtail losses. In stop-loss, one places an advance order to sell a stock at a specific price. To reduce the risk to certain extent, you could diversify across sectors and market capitalisations. Currently, the 1-, 3-, 5 year market returns are around 13 percent, 8 percent and 12.5 percent, respectively. To invest in direct equities, one needs to open a demat account.
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