Financial security is a major area of concern for people from both the low and middle income brackets. In most cases however, people tend to focus on simply saving for a rainy day in order to create nest eggs and ensure that their future is trouble free. Following this line of thought is not problematic per say, but as the case is, people tend to miss out of the entire concept of wealth generation and growth. Saving money is just stacking away cash and not really turning it over in any sense. Therefore, investments become the de facto option for anyone looking to make their money work for them and not let it sit idle in a vault or safety deposit box.
When people think investment, they generally talk about equities and stock markets. However, the risks of playing the stock market are just as great as the rewards are. This poses a problem for the regular white collar salaried individual who would like to take a more conservative approach towards wealth generation. With financial security in mind, the risk appetite is not particularly aligned with the demands of traditional equity or forex trading.
Broadly speaking, there are two major reasons for investing in stable, low return options:
a) Short term (usually in the margin of 2-5 years) goals only involve capital protection and any return on capital, however meagre, is generally incidental.
b) Long-term (usually 10-20 years or more) goals usually involve and investments for this purpose focus on enhancing value while staying ahead of the inflation curve.
Low risk investing generally involves stable wealth generation instruments like bonds and diversified investment spreads like mutual funds. These investment options are stable, money invested is shielded from market fluctuations, returns are low but investment in almost every case is guaranteed. Let’s look at some of the options available today.
Insurance Plans with Guaranteed Returns
These cannot be largely considered investment vehicles, something which hasn’t dissuaded its immense popularity. At its foundation, they are fundamentally income insurance policies with a typical term of 10 years or more. They offer moderate wealth growth and guaranteed returns of approximately 4 to 5.5% at the end of the policy term. These plans are non-participatory, have basic insurance cover and provide the usual tax benefits under Section 80c of the Income Tax Act.
One of the biggest USPs for these kinds of insurance product is the fact that returns are guaranteed, something which attracts as much interest as bank savings accounts and post office instruments. They are very popular among middle income groups while also having a substantial customer base in the high income bracket because people with high-risk appetite use these instruments to hedge against uncertainties. Moreover, these plans shift the risk from the customer over to the insurer and even if interest rates fluctuate, it won’t affect customers by any margin.
Fixed deposits (FDs) are financial instruments which offer investors with low risk appetites an opportunity to put their money into an account with a higher interest rate as compared to regular savings accounts. However FDs do not offer any liquidity and unlike recurring deposit accounts (RDs) money can’t be withdrawn till the account reaches maturity. The interest rates vary between 4% and 11%. The maturity period can vary anywhere between 7 and 45 days and going up as high as 10 years. FDs also offer investors income tax and wealth tax benefits. However, earnings garnered from an FD account are not tax free and is taxed according to the income tax slab of the depositor. Here are a few additional details you need to look into before settling for investing in an FD account:
- Credit Profile – FDAs are rated according to their performance and ability to maintain their commitment to account holders. Choose one with either AAA or FAAA rating.
- Interest Rates – Higher rates are definitely preferable. However, do not compromise on credit rating when selecting an FDA and base your decision solely on interest rates.
- Interest Payout Frequency – FDAs usually pay out interests at specific intervals, whether it be annually, quarterly or in a lump sum at the end of the maturity period. If you are looking to gain the maximum out of your FDA, opt for the lump sum option payable upon maturity.
Most experts would disagree on the risk assessment aspect of mutual funds in terms of low risk guaranteed return investments. However, the fact is that there are certain mutual fund options which do provide stable but low and in some cases fixed return on investment.
- Monthly Income Plans – Under these plans, investors receive regular monthly income in the form of dividends. The rate of return generally fluctuates between 8% and 9%. Additionally, dividends paid are tax free.
- Systematic Withdrawal Plan – Similar to the MIP, the systematic withdrawal plan allows investors to withdraw and sell a fixed number of mutual fund units on a periodic basis. This is a relatively risker way of generating regular income but is a much safer bet than equity.
Government bonds are just as stable as FDs. A bond is a debt instrument which is secured by the government itself and also has a fixed rate of interest attached to it. However, bonds offer much greater liquidity as compared to fixed deposit accounts because certain types of bonds can be traded on the secondary market. Given how similar FDs are to such bonds, it’d be a good idea to use the same parameters to choose which government bonds, or for that matter, any debt instrument to buy. Interest rates and financial rating for the issuing agency or institution takes top priority.
Endowment Insurance Plans
Endowment plans are generally issued by insurance carriers and combine life insurance benefits along with a modified savings scheme. These contracts are designed to provide lump sum maturity benefits at the end of the policy term or upon the death of the life insured. Policy terms are usually limited to 10, 15 and 20 years and certain plans also provide assured payouts against the sum insured at critical life stages. In some cases, the insurer also declares yearly bonuses which however do not compound. Therefore, return on investment is generally low but such plans do offer stable returns.
Post Office Schemes
There are multiple options in term of post office savings schemes. They have varying tenures, tax benefits and interest rates but generate very low rate of returns. However, your money will always be free of risk and secure under these schemes. Post office schemes are perfect for long term investors who are not particularly concerned with major returns. Some of these schemes are:
- Kisan Vikas Patra (KVP)
- Public Provident Fund (PPF)
- Post Office Monthly Income Scheme (POMIS)
- National Savings Certificate (NSC)
- Post Office Term Deposit (POTD)
Every investment scheme has its own set of inherent risks. However, some offer stability more than other, albeit against low returns on investment. So in case your risk appetite is not high enough to go for the equity market, there are other options in the mix suited for your level of risk. However, as with all investment plans, you will need to do your homework, before you start investing your hard earned money.
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