Smart Guide To Making Investments In India

India offers a wide range of investment opportunities for individuals with different financial goals, risk tolerances, and time horizons. The best investment options depend on an individual's specific circumstances and objectives. Here are some of the key factors to consider when investing in India:

- Financial goals: Determine your investment objectives, such as saving for retirement, buying a house, education, or simply growing your wealth.

- Risk tolerance: Understand your risk appetite and how much risk you are comfortable taking. This will influence the types of investments you choose.

- Time horizon: Consider your investment horizon. Are you investing for the short, medium, or long term? This will impact the suitability of different investment options.

- Diversification: Diversifying your portfolio across different asset classes, such as stocks, bonds, real estate, and cash equivalents, helps to spread risk and mitigate potential losses.

- Tax implications: Evaluate the tax treatment of different investment options. Some investments may offer tax benefits, while others may be taxed differently depending on factors like the holding period.

- Costs and fees: Be mindful of the costs associated with investing, such as expense ratios, management fees, and transaction costs. High fees can eat into your investment returns over time.

- Liquidity: Ensure you maintain sufficient liquidity to cover unexpected expenses and short-term financial needs. Some investments are more liquid than others.

With these factors in mind, here are some of the best investment options in India:

- Public Provident Fund (PPF): A government-backed savings scheme with a fixed interest rate and tax benefits. It has a long-term investment horizon of 15 years and offers guaranteed returns.

- Post Office Monthly Income Scheme: This scheme offers a regular monthly payout, making it attractive for those seeking a steady income. It has a five-year maturity period and is available through Indian post offices.

- National Pension Scheme (NPS): NPS is a long-term retirement-focused investment option that allows investments in equities, government securities, and corporate bonds. It offers tax benefits and provides a mix of asset classes to choose from.

- Sovereign Gold Bonds (SGBs): Issued by the Reserve Bank of India, SGBs are government securities backed by gold. They offer an opportunity to invest in gold without the need to hold physical gold, and they provide a fixed interest rate.

- Equity Mutual Funds: Equity mutual funds invest in a diversified portfolio of stocks and are managed by professional fund managers. They offer the potential for high returns but carry a higher level of risk.

- Unit-linked Insurance Plans (ULIPs): ULIPs combine life insurance and investment, providing both a cover and the opportunity to invest in equity and debt funds. They have a lock-in period of five years and offer tax benefits.

- Gold Exchange-Traded Funds (ETFs): Gold ETFs are similar to investing in physical gold but without the hassle of storing it. They require a demat account and offer the convenience of trading on stock exchanges.

- Initial Public Offerings (IPOs): IPOs offer the chance to invest in shares of a company when it goes public. They can provide substantial returns but carry higher risks and require careful analysis of the company's financials and prospects.

Low-risk investments: fixed deposits, public provident fund, and sukanya samriddhi yojana

India offers a range of low-risk investment options for those looking to grow their money steadily over time. Here is an overview of three such options: fixed deposits, public provident funds, and the Sukanya Samriddhi Yojana scheme.

Fixed Deposits:

Fixed Deposits (FDs) are a common type of simple investment in India, similar to a Certificate of Deposit (CD) in the US. With an FD, you deposit money for a fixed period, during which it earns interest. The interest rate typically depends on the length of the deposit term. One advantage of FDs is that they often allow your money to grow tax-free, although this may vary depending on the country's tax laws. In India, FDs are offered by banks and foreign financial institutions, providing a "guaranteed range" interest rate that remains stable throughout the investment term. While FDs offer stable and relatively safe investments, it is important to note that the money cannot be accessed during the deposit period.

Public Provident Fund:

The Public Provident Fund (PPF) is a voluntary savings-tax-reduction social security instrument offered by the Indian government. Introduced in 1968, the PPF has a main objective of mobilizing small savings for social security. Individuals who are residents of India are eligible to open a PPF account and benefit from tax-free returns. The scheme has a minimum yearly deposit requirement of ₹500, and the maximum amount that can be deposited annually is ₹1.5 lacs. The interest rate is announced each quarter by the Ministry of Finance, and the interest is compounded annually. The PPF account has a lock-in period of 15 years, after which the full amount, including interest, can be withdrawn tax-free. Premature withdrawals are permitted from the start of the seventh financial year, but they may incur penalties. The PPF also offers loan facilities and the option to extend the account with or without further contributions after maturity.

Sukanya Samriddhi Yojana:

The Sukanya Samriddhi Yojana is a government-backed saving scheme targeted at the parents or legal guardians of girl children. Launched in 2015 as part of the Beti Bachao, Beti Padhao campaign, this scheme encourages parents to build a fund for their daughter's future education. The account can be opened anytime between the birth of a girl child and the time she turns 10 years old. The minimum initial deposit is ₹250, and subsequent deposits can be made in multiples of ₹100, up to a maximum of ₹150,000 per year. The scheme currently provides an interest rate of 8.2% (as of the Jan-Mar 2024 quarter) and offers tax benefits. The account can be opened at any India Post office or authorised commercial bank branch. The girl can operate the account after turning 10 and is allowed to withdraw 50% of the funds at age 18 for higher education. The account matures after 21 years from the date of opening, and deposits can be made for the first 15 years. If the girl is over 18 and married, normal closure of the account is permitted.

Medium-risk investments: debt funds, corporate bonds, and government bonds

Medium-risk investments are ideal for those seeking a balance between income generation and capital preservation. These investments offer moderate returns with controlled volatility, making them suitable for long-term investment horizons. Here's a detailed guide to medium-risk investments in India, focusing on debt funds, corporate bonds, and government bonds:

Debt Funds

Debt funds are a type of mutual fund that invests in fixed-income securities, such as bonds and treasury bills, issued by governments and companies. They are considered a relatively safe investment option due to their low volatility and steady income. When compared to traditional savings products, debt funds have the potential to deliver better returns. Additionally, they are highly tax-efficient, as income is only taxed when investors choose to redeem their units.

Some of the best debt funds in India include:

• ICICI Prudential Dynamic Bond Fund
• HDFC Regular Savings Fund
• Aditya Birla Sun Life Medium Term Fund
• Nippon India Ultra Short Duration Fund

Corporate Bonds

Corporate bond funds are a type of debt fund that lends a significant portion of their money (at least 80%) to companies with the highest credit rating. These companies are financially strong and have a high probability of paying lenders on time, making this a relatively low-risk investment option. Corporate bond funds tend to deliver better returns than bank fixed deposits of a similar duration. However, they can be affected by interest rate movements in the economy.

Top corporate bond funds in India include:

• Nippon India Corporate Bond Fund
• Axis Corporate Bond Fund
• ICICI Prudential Corporate Bond Fund
• HDFC Corporate Bond Fund

Government Bonds

Government bonds are considered a low-risk investment option, backed by the government and offering secure principal protection and guaranteed returns. They are ideal for those seeking savings and investment options with minimal risks. Government bonds are a stable choice for investors in India, providing a fixed interest rate and tenure.

Overall, medium-risk investments in India, such as debt funds, corporate bonds, and government bonds, offer a balance between potential returns and volatility. These investments are suitable for individuals with a moderate risk appetite and long-term investment horizons.

High-risk investments: stocks, mutual funds, and unit-linked insurance plans

High-risk investments are a suitable option for those with a higher risk appetite and long-term goals. Here are some of the high-risk investment options in India:

Stocks

Investing in stocks means purchasing ownership shares in a company. It is a high-risk, high-return investment option, with potential great upside potential but also high volatility. Proper market research is crucial before investing in stocks. Different types of stocks are available, such as growth stocks and value stocks, and some are better suited for long-term investment.

Mutual Funds

Mutual funds are investment vehicles that pool money from multiple investors to invest in assets like equities and bonds. They are managed by fund managers and offer diversification, making them suitable for both short-term and long-term goals. There are different types of mutual funds, including debt, growth, and hybrid funds. Mutual funds provide investors with the benefit of diversification and professional management, but they also come with costs such as expense ratios and exit loads.

Unit-Linked Insurance Plans (ULIPs)

ULIPs are financial products that combine life insurance coverage with market-linked investment options. They offer a dual benefit of insurance and investment growth potential. A portion of the premium paid goes towards life insurance, while the rest is invested in chosen funds. ULIPs have a lock-in period of 5 years and provide tax benefits under Section 80C and Section 10(10D) of the Income Tax Act. They offer investors the flexibility to switch between different funds and choose their investment mix based on their risk tolerance and goals. ULIPs may have various charges, including premium allocation, fund management, and policy administration fees.

Best investment options for long-term goals

When it comes to investing in India, there are multiple investment options to choose from. These can be classified into high, medium, and low-risk options, depending on the level of risk and potential returns. Here are some of the best investment options for long-term goals:

• Equities: Investing in the stock market is one of the best ways to create wealth over the long term. Examples include the Indian non-banking financial company Bajaj Finance, which has delivered an annualised return of over 44.1% in the last 15 years. To invest in direct equity, you need a demat account, and there is no minimum or maximum investment limit. Investments in direct equity are not eligible for tax deductions, and short-term capital gains are taxed at 15%. Long-term capital gains up to Rs 1 lakh are tax-exempt, while gains above Rs 1 lakh are taxed at 10%. It is a high-risk investment option.
• Equity Mutual Funds: These funds diversify your investments across multiple stocks and are managed by professional fund managers. You can invest through the ET Money app or website, with no limit on the investment amount. There is no mandatory lock-in period, but if you invest in ELSS (Equity Linked Saving Schemes), there is a three-year lock-in period. Equity mutual funds are not eligible for tax deductions, but ELSS offers a tax deduction of up to Rs 1.5 lakh per financial year. Capital gains are taxable, with STCG taxed at 15% and LTCG at 10% if above Rs 1 lakh. This is also a high-risk investment option.
• National Pension System (NPS): NPS is a long-term, retirement-focused investment product that mixes assets like equities, government and corporate bonds. You can decide how much of your money is invested in different asset classes based on your risk appetite. NPS is available through the ET Money app or website, with a minimum investment of Rs 1,000 annually for a Tier 1 account and no upper limit. It matures when you reach 60 years of age, and you can withdraw 60% of your corpus, while the remaining 40% is used to buy an annuity plan. NPS offers tax benefits, including deductions of up to Rs 1.5 lakh under Section 80CCD(1) and an additional Rs 50,000 under Section 80CCD(1B). It is considered a medium-risk investment.
• Unit-Linked Insurance Plan (ULIP): ULIPs combine life insurance and investment, with a part of your premium invested in asset classes and the remaining portion providing life insurance cover. ULIPs are available through life insurance companies, with a minimum investment of around Rs 1,500 per month and a maturity period of five years. Investments in ULIPs are eligible for tax deductions of up to Rs 1.5 lakh. ULIPs are considered a medium to high-risk investment option.
• Real Estate: Investing in real estate can provide profits through property appreciation and rental income. You can invest in residential or commercial property or through REITs (real estate investment trusts). There is no minimum or maximum investment amount, but investing in real estate typically requires a hefty sum. There is no fixed maturity date, and rental income is taxable as per the income slab. However, real estate offers tax benefits, such as interest on mortgage loans and property taxes. It is considered a medium to high-risk investment.
• Public Provident Fund (PPF): PPF is a government-guaranteed scheme offering guaranteed interest rates. It is a popular long-term saving option for retirement purposes, with a minimum investment of Rs 500 and a maximum of Rs 1.5 lakh per financial year. PPF has a maturity period of 15 years but can be extended. Investments in PPF are eligible for tax deductions of up to Rs 1.5 lakh, and it falls under the EEE category, meaning investment, interest, and maturity proceeds are tax-exempt. It is a zero-risk investment.
• Senior Citizen Savings Scheme (SCSS): SCSS is a post office savings scheme exclusively for senior citizens, offering a guaranteed return and providing regular income after retirement. The minimum investment amount is Rs 1,000, and the maximum is Rs 30 lakh. SCSS matures in five years but can be extended for three more years. It is eligible for tax deductions of up to Rs 1.5 lakh, but the interest earned is taxable as per your income tax slab. SCSS is a zero-risk investment.
• Sukanya Samriddhi Account (SSA): SSA is a government-backed saving scheme that offers a guaranteed return on your investment, promoting girl child welfare and education. The minimum investment is Rs 250, and the maximum is Rs 1.5 lakh per financial year. The scheme matures when the girl child turns 21 or marries after the age of 18. SSA is eligible for tax deductions of up to Rs 1.5 lakh and falls under the EEE category, making investment, interest, and maturity amount tax-exempt. It is a zero-risk investment.
• Kisan Vikas Patra (KVP): KVP is a small saving scheme backed by the government of India that offers a guaranteed return. It aims to promote long-term investing in rural areas. You can invest through a post office or nationalised bank, with a minimum investment of Rs 1,000 and no upper limit. KVP matures when your investment amount doubles, and there is no tax deduction under Section 80C. Interest earned is taxable as per your income tax slab. KVP is a zero-risk investment.
• Sovereign Gold Bonds (SGBs): SGBs are issued by the Reserve Bank of India (RBI) as an alternative to physical gold investment. The returns are linked to the price of gold and guaranteed by the Government of India. You can invest through leading public and private sector banks, with a minimum investment of one gram of gold and a maximum of four kilograms per financial year. SGBs have a maturity period of eight years, after which the maturity amount is completely tax-exempt. However, interest earned is taxable as per slab rates. SGBs are considered a

Best investment options for medium-term goals

Medium-term investment goals are those that are 3-5 years away, such as saving for a wedding, a house down payment, or home renovation. These types of investments can beat inflation with minimal volatility. Here are some of the best medium-term investment options in India:

National Savings Certificates (NSC)

A post office savings product backed by the government of India, NSCs work like a 5-year fixed deposit. They offer guaranteed interest, but the entire amount is only payable at maturity. The minimum investment amount is Rs 1,000, with no upper limit. NSCs mature in 5 years and are eligible for tax deductions under Section 80C for up to Rs 1.5 lakh. Interest earned for 4 years is also eligible for deduction, but total interest earned at maturity is taxable as per the investor's income slab. NSCs are a risk-free investment option.

Post Office Time Deposit

Post offices in India offer fixed deposits, known as National Savings Time Deposits, with better returns than banks. The minimum investment is Rs 1,000, and there is no maximum limit. Investors can choose a maturity period of 1 to 5 years. A 5-year time deposit is eligible for tax deductions under Section 80C for up to Rs 1.5 lakh. Interest earned is taxable as per the investor's income slab. Post Office Time Deposits are considered a low-risk investment option.

Debt Funds for Medium-Term

There are three types of debt mutual funds that offer a good balance of risk and return for medium-term goals: Banking & PSU Funds, Corporate Bond Funds, and Short Duration Funds. These funds are available through the ET Money App or website, with a hassle-free process and zero commission. Most funds have a minimum investment of Rs 500 or lower, with no maximum limit. There is no lock-in period, so investors can redeem their investments at any time. Long-Term Capital Gains (LTCG) and Short-Term Capital Gains (STCG) are taxed as per the investor's income slab. Debt funds are considered low to medium risk.

Hybrid Funds

Hybrid funds invest in more than one asset class, typically a combination of equity and debt. This allows investors to benefit from the growth potential of equity and the stability of debt in a single fund. Hybrid funds are available through ET Money with a hassle-free, zero-commission process. Most funds have a minimum investment of Rs 500 or lower, with no maximum limit. There is no mandatory lock-in period, and investors can redeem their investment at any time. LTCG and STCG earned on hybrid funds are taxed based on their orientation. Debt-oriented hybrid funds are taxed as per slab rates, while equity-oriented hybrid funds have STCG taxed at 15% plus cess and LTCG taxed at 10% plus cess if total gain exceeds Rs 1 lakh. Hybrid funds are suitable for a wide range of investors, including beginners, those with medium-term goals, retirees seeking regular income, and individuals looking for asset allocation solutions.

Frequently asked questions