Invest Safely In India: A Guide To Smart Investing

India offers a wide range of investment opportunities, from traditional to modern, catering to diverse risk appetites and financial goals. Government-backed instruments, such as the Public Provident Fund (PPF), National Pension Scheme (NPS), and Senior Citizen Savings Scheme (SCSS), are considered safe and provide financial security. Other options include low-risk debt mutual funds, unit-linked insurance plans (ULIPs), bank fixed deposits (FDs), and gold investments. These choices offer varying levels of risk, returns, and tax benefits, allowing investors to build wealth while managing their risk exposure.

Government-backed schemes: Public Provident Fund (PPF), National Pension Scheme (NPS), Senior Citizen Savings Schemes (SCSS)

When it comes to investing safely in India, there are several government-backed schemes that offer secure investment opportunities with attractive returns. Here is an overview of three popular options: the Public Provident Fund (PPF), the National Pension Scheme (NPS), and the Senior Citizen Savings Schemes (SCSS).

Public Provident Fund (PPF)

The PPF is a government-backed savings scheme that offers guaranteed returns and tax benefits. It has a fixed tenure of 15 years, with partial withdrawals permitted after the first six years. Contributions to the PPF qualify for tax deductions under Section 80C of the Income Tax Act, 1961. The interest earned and maturity amount are also tax-free. The PPF currently offers an attractive interest rate of 7.1%, which is revised quarterly by the government.

National Pension Scheme (NPS)

The NPS is a government-supported retirement savings plan that offers diverse investment options, including equity and bonds. It is regulated by the Pension Fund Regulatory Authority of India (PFRDA) and is open to Indian citizens aged 18-70. The NPS provides tax benefits under Sections 80C and 80CCD, and pre-retirees can enjoy additional tax deductions on contributions. The scheme is beneficial for both pre-retirees and retirees, offering tax-free lump-sum withdrawals and continued deductions after retirement. The NPS also provides the option of a regular annuity plan, guaranteeing a fixed income stream.

Senior Citizen Savings Scheme (SCSS)

The SCSS is a government-backed savings scheme specifically designed for senior citizens over the age of 60. It offers attractive, fixed interest rates, typically higher than regular savings accounts, and provides tax benefits under Section 80C. The SCSS has a five-year tenure, which can be extended by up to three years with a penalty for premature withdrawal. Interest payouts are made quarterly, ensuring a steady income stream for senior citizens.

These three schemes offer secure and reliable investment opportunities for individuals looking for safe investment avenues in India. They are particularly attractive for those seeking long-term investment options with tax benefits and guaranteed returns.

Low-risk debt mutual funds

Debt funds are considered relatively safe investments compared to equities because they primarily invest in fixed-income securities like bonds and treasury bills. They offer lower risk and stable returns, making them suitable for conservative investors seeking steady returns. Here are some key points about low-risk debt mutual funds in India:

• Investment Horizon: Debt funds can be considered for an investment horizon of one day to up to three years. They are a good option for short-term investors.
• Returns: Debt funds offer better post-tax returns compared to fixed deposits (FDs) if you stay invested for at least three years. Liquid debt funds are ideal for parking emergency funds, as they provide better returns than savings accounts without taking on too much risk.
• Types of Debt Funds: There are various types of debt funds, including liquid funds, overnight funds, ultra-short-duration funds, money market funds, and short-duration bond funds. The choice depends on your investment horizon and risk tolerance.
• Risk Factors: While debt funds are among the least risky mutual funds, it's important to remember that they are market-linked products with no guaranteed returns. The main risk factors are interest rate risk and credit risk. Interest rate risk arises from unexpected increases in market interest rates, which can negatively impact long-term funds. Credit risk is the possibility of the debt fund's bonds defaulting on interest and principal payments.
• Taxation: Capital gains from debt funds are taxed based on the holding period. Short-term capital gains (holding period up to three years) are taxed at the investor's income tax slab rate, while long-term capital gains (holding period over three years) receive the benefit of indexation and are taxed at a rate of 20%.
• Benefits: Debt funds offer high liquidity, partial withdrawal options, flexibility in investment (lump-sum or Systematic Investment Plan (SIP)), stability due to allocation to debt instruments, and tax efficiency compared to traditional investment options.
• Factors to Consider: When choosing a debt fund, evaluate the credit quality rating of the underlying debt instruments, taxes on returns, and selecting funds based on your investment tenure.
• Example Funds: Some examples of debt funds in India include the Aditya Birla Sun Life Medium Term Plan Fund, HDFC Regular Savings Fund, ICICI Prudential Dynamic Bond Fund, UTI Medium to Long Duration Fund, and Nippon India Ultra Short Duration Fund.

Unit Linked Insurance Plans (ULIPs)

ULIPs offer a dual benefit of insurance and investment. A portion of your premium goes toward providing life insurance coverage, and the rest is invested in your chosen asset classes. The performance of these investments will determine the growth of your funds by the end of the policy period.

ULIPs are a good option for people looking for insurance protection and investment growth. They are also suitable for those with medium to long-term investment horizons, varying risk profiles, and individuals at different life stages.

• Flexibility to switch funds: ULIPs don't lock you into one investment strategy. You can switch between different ULIP funds based on your investment objectives and risk tolerance.
• Protecting your child's future: Child ULIP plans come with a "Waiver of Premium" feature, which ensures that your policy remains active and future premiums are waived off in the event of disability, critical illness, or death.
• Long-term investment: ULIPs have a 5-year lock-in period, encouraging disciplined and long-term investment.
• Transparency: ULIPs provide detailed statements showing the charges applied, the amount invested, and the insurance coverage you have.
• Liquidity: After the initial 5-year lock-in period, you can make partial withdrawals to meet any financial needs.
• Tax benefits: Investing in ULIPs can help you avail tax deductions under Section 80C of the Income Tax Act. The maturity proceeds are also tax-free under Section 10(10D).
• Align the ULIP plan with your long-term financial goals and investment horizon.
• Compare the features and benefits of different ULIP plans.
• Evaluate policy tenure flexibility and choose from hybrid, equity, or debt ULIP plans.
• Be aware of various charges, including initial charges, premium allocation fees, fund management fees, and surrender charges.
• Review the historical performance of the ULIP plan over the last three to four years.
• Ensure the insurance company has a solvency ratio of at least 1.5, indicating financial stability.

Overall, ULIPs offer a combination of life insurance and investment instruments, making them a safe investment option in India.

Bank Fixed Deposits (FDs)

• Interest Rates: FDs offer varying interest rates depending on the bank or financial institution. Senior citizens often enjoy higher interest rates compared to individuals below 60 years of age. It's important to compare interest rates and choose a reputable bank with competitive rates.
• Tenure: FDs provide flexibility in terms of tenure, with options ranging from short-term (7 days) to long-term (up to 10 years). Investors can choose the tenure that aligns with their financial goals and investment horizon.
• Withdrawal and Penalties: Premature withdrawal of funds before the maturity date is possible but typically incurs financial repercussions and penalties. Early withdrawal may result in forfeiting a portion of the interest earnings.
• Tax Implications: In India, the interest earned on FDs is taxable. However, tax benefits may be available for certain types of FDs, such as tax-saving FDs, where investors can claim deductions up to a specified limit.
• Eligibility and Documentation: Individuals interested in opening an FD account must meet eligibility criteria and submit necessary documents for identity and address proof. Some banks may also require age proof for senior citizens and minors.
• Types of FDs: There are several types of FDs available, including standard FDs, senior citizen FDs, tax-saving FDs, cumulative FDs, non-cumulative FDs, and flexi FDs. It's important to understand the features and suitability of each type before investing.
• Safety and Returns: FDs are considered a safe investment option as they offer guaranteed returns. The deposited amount is protected, and investors can expect to receive their principal and interest upon maturity.
• Loan against FD: Investors can avail of loans against their FD, using the FD as collateral. This can be useful for meeting financial emergencies without prematurely liquidating the FD.
• Suitability: FDs are well-suited for inexperienced and risk-averse investors who prioritize capital protection and stable returns over high-risk, high-return investments.

Sovereign Gold Bonds (SGBs)

Eligibility and Issuance

SGBs are issued by the Reserve Bank of India (RBI) on behalf of the Central Government. They are restricted for sale to resident Indian entities, including individuals, Hindu Undivided Families (HUFs), Trusts, Universities, and Charitable Institutions. The minimum permissible investment is 1 gram of gold, while the maximum limit is 4 kg for individuals, 4 kg for HUFs, and 20 kg for trusts and similar entities per fiscal year. The bonds are denominated in multiples of grams of gold, with a basic unit of 1 gram.

Interest and Returns

SGBs offer a fixed interest rate of 2.50% per annum on the initial investment, paid semi-annually for 8 years. The interest amount is taxable as per the provisions of the Income Tax Act, 1961. The returns on SGBs are linked to the current market price of gold.

Maturity and Redemption

The maturity period of SGBs is 8 years. Investors have the option to exit the bond from the 5th year onwards on interest payout dates. The redemption price is based on the simple average closing price of gold of 999 purity in the previous three working days, as reported by the India Bullion and Jewellers Association Ltd (IBJA).

Tax Benefits

SGBs offer tax benefits to investors. While there are no tax deductions under Section 80C for lump-sum deposits, the capital gains tax applicable to individuals is exempted upon redemption. Additionally, long-term capital gains qualify for indexation benefits until 23 July 2024.

Tradability

SGBs can be traded on recognised stock exchanges, such as the National Stock Exchange or Bombay Stock Exchange, within a specific date at the issuer's discretion. They can also be used as collateral for loans, with banks treating them as gold loans and setting the loan-to-value (LTV) ratio accordingly.

Purchase Process

SGBs can be purchased through authorised agents or brokers, or online through commercial banks' websites. The Know-Your-Customer (KYC) norms are the same as those for purchasing physical gold, and the same documents (such as PAN Card, passport, driving license, etc.) are required for verification.

Frequently asked questions