Small Investments In India: Where To Begin?

India offers a range of investment opportunities for those looking to make small investments. These include low-risk investments such as fixed deposits, public provident funds, and national savings certificates, which are ideal for risk-averse individuals seeking capital preservation and stable returns. Medium-risk investments like mutual funds, debt funds, and dividend-paying stocks offer a balance between growth and stability. High-risk investments, including direct equities, equity mutual funds, and hedge funds, carry higher potential returns but also come with significant volatility. Diversification across different investment options is key to managing risk and optimising returns.

Low-risk investments: Fixed Deposits, Public Provident Fund, National Savings Certificate, etc

Low-Risk Investments in India

Low-risk investments are ideal for individuals with low-risk tolerance, such as retirees, who want to prioritise capital preservation and stability. Here are some of the best low-risk investment options in India:

Fixed Deposits (FDs)

Fixed Deposits are a safe investment option, where investors can put away a lump sum of money and earn interest at a pre-defined rate. FDs are not dependent on equities, so their value does not fluctuate regularly, making them a less volatile choice. The interest accrued on FDs is also unaffected by market risks. The duration of FDs can range from seven days to ten years, and they are offered by banks, post offices, and Non-Banking Financial Companies (NBFCs). Senior citizens are typically offered higher interest rates and no penalty for early withdrawals. Additionally, tax-saving FDs can result in tax savings of up to ₹1.5 lakh per year.

Public Provident Fund (PPF)

The Public Provident Fund is a voluntary savings-tax-reduction social security instrument offered by the Central Government of India. It aims to mobilise small savings for social security during uncertain times by offering reasonable returns and income tax benefits. Individuals who are residents of India are eligible to open a PPF account, and non-resident Indians (NRIs) can continue their existing accounts until maturity. The minimum yearly deposit is ₹500, and the maximum is ₹1.5 lakh per financial year. The interest rate is currently 7.1% per annum, compounded annually, and paid in March. The lock-in period is 15 years, but premature withdrawals are allowed after the fifth year for specific purposes, such as medical treatment or education.

National Savings Certificate (NSC)

The National Savings Certificate is a secure, fixed-income investment scheme offered by the Government of India through post offices. It provides reliable returns and significant tax benefits under Section 80C of the Income Tax Act, making it popular among risk-averse investors. NSC offers a guaranteed interest rate of 7.7% per annum, which is generally higher than FDs. The maturity period is five years, and there is no maximum limit on the purchase of NSCs. The minimum investment amount is ₹1,000, with subsequent investments in multiples of ₹100. NSC is a good option for those seeking capital protection, tax deductions, and steady interest income.

Medium-risk investments: Mutual Funds, Debt Funds, Corporate Bonds, etc

Medium-risk investments are a great way to balance potential returns and volatility, making them ideal for long-term investment horizons. Here is an overview of some popular medium-risk investment options in India:

Mutual Funds

Mutual funds are a type of investment vehicle that pools money from multiple investors to purchase a diversified portfolio of assets, such as equities and bonds. In India, mutual funds offer a range of investment options, including debt, growth, and hybrid funds. They provide a good balance between risk and return, making them suitable for investors with different financial goals and risk tolerances.

When investing in mutual funds, it is important to consider factors such as the fund's performance, expense ratio, and investment horizon. Additionally, investors can choose between direct and regular plans, depending on whether they want to invest through a third-party agent or directly from the fund house.

Some popular moderate-risk mutual funds in India include:

• HSBC Equity Savings Fund
• ICICI Prudential Income Optimizer Fund
• HDFC Regular Savings Fund
• ICICI Prudential Dynamic Bond Fund
• Aditya Birla Sun Life Dynamic Bond Retail Fund

Debt Funds

Debt funds are a type of mutual fund that invests in fixed-income securities, such as corporate bonds, treasury bills, government securities, and money market instruments. They are considered a relatively safe investment option due to their low volatility and steady income. Debt funds are an attractive choice for risk-averse investors or those seeking higher returns than traditional savings products like bank deposits.

When investing in debt funds, it is important to consider factors such as taxes, investment tenure, and the credit quality rating of the underlying assets. Additionally, while debt funds offer high liquidity and flexibility, investors should be aware of potential risks, such as interest rate risk and credit risk.

Some popular debt funds in India include:

• Aditya Birla Sun Life Medium Term Plan Fund
• ICICI Prudential Dynamic Bond Fund
• SBI Magnum Gilt Fund
• Nippon India Ultra Short Duration Fund

Corporate Bonds

Corporate bonds are debt instruments issued by companies to raise capital for various purposes, such as business expansion or purchasing equipment. They are typically medium to long-term investments with maturities longer than one year. Corporate bonds offer higher coupon rates than government securities (G-secs) and are considered a good investment option for those seeking regular and higher returns.

When investing in corporate bonds, it is important to consider factors such as credit rating, coupon rate, and tenor. Additionally, corporate bonds have moderate to high liquidity, and their value is inversely proportional to interest rates. That is, their value increases when interest rates fall and decreases when interest rates rise.

Some advantages of investing in corporate bonds include:

• Higher returns compared to government bonds
• Low risk and not affected by inflation
• Priority over stockholders in case of bankruptcy
• Good for portfolio diversification

National Pension System (NPS)

The National Pension System is a government-backed, long-term investment option that offers market-linked returns. It is a voluntary, defined contribution pension system, which means that the subscriber's retirement benefit is based on the amount contributed to their account and the returns generated over time. The NPS provides a good balance between equity and fixed income investments, making it suitable for those seeking moderate returns with a long-term investment horizon.

Real Estate

Investing in real estate is another medium-risk investment option in India. While it requires a significant amount of capital, the potential returns can be substantial. Investors can generate income through rent or by selling the property. However, it is important to consider various charges and taxes associated with buying and selling real estate, such as registration fees and property taxes.

In summary, medium-risk investments in India offer a range of options, including mutual funds, debt funds, corporate bonds, the National Pension System, and real estate. These investment options provide a balance between potential returns and volatility, making them suitable for long-term financial goals and investors with a moderate risk appetite.

High-risk investments: Direct Equities, Equity Mutual Funds, FOREX Trading, etc

High-risk investments are financial opportunities that carry a significant likelihood of loss or failure. While they offer the potential for high returns, they also come with a higher level of uncertainty. Here are some examples of high-risk investments in India:

Direct Equities

Investing in the stocks of volatile or emerging companies can be risky due to their unpredictable future performance. These companies often operate in industries with higher volatility and market uncertainties. However, they offer significant growth potential, making them attractive to investors seeking higher returns.

Equity Mutual Funds

Equity Mutual Funds are suitable for aggressive investors with long-term investment horizons, typically seven years or more. These funds invest in high-risk, high-potential small and mid-cap stocks, which can experience high volatility in investment value over the short to medium term. While these funds carry higher risk, they also offer the potential for substantial returns.

Some examples of Equity Mutual Funds in India with high returns include:

• Nippon India Small Cap Fund
• Edelweiss Mid Cap Fund
• ICICI Prudential Small Cap Fund
• Tata Midcap Growth Fund

FOREX Trading

Foreign Exchange Trading (FOREX) involves buying and selling currencies in the global foreign exchange market to make a profit. Currency fluctuations can lead to significant gains or losses, making FOREX trading a high-risk investment. Inexperienced traders, in particular, should be cautious due to the hazardous nature of this investment.

Gold investments: Gold bonds, Sovereign Gold Bonds, etc

Gold is a traditional low-risk investment option in India, valued for its inflation-hedging capabilities and cultural significance. Gold investments in the country are now available in various forms, including digital gold, ETFs, and gold mutual funds.

Gold Bonds

Gold bonds are a type of investment where you lend money to a company or government entity, and they promise to pay you back with interest, usually at a fixed rate, over a set period. Gold bonds are considered a low-risk investment option, especially when backed by the government, as they offer reliable returns with minimal risk.

Sovereign Gold Bonds (SGB)

The Sovereign Gold Bond Scheme (SGB) is a government security issued by the Reserve Bank of India (RBI) on behalf of the Government of India. It was launched in November 2015 under the Gold Monetisation Scheme to reduce gold imports, which were causing a forex crisis. The scheme was discontinued in 2024 due to the rising expense for the government.

The SGB has a tenor of 8 years, with an early redemption option after 5 years. The minimum permissible investment is 1 gram of gold, and the maximum subscription limit is 4kg for individuals and Hindu Undivided Families (HUF) and 20kg for trusts, universities, and charitable institutions. The interest rate is fixed at 2.5% per annum, payable semi-annually. The issue price of the bond is based on the average price of gold of 999 purity from the previous 3 business days before the subscription period. The redemption price is calculated similarly using the average price from the 3 business days before repayment.

SGBs are restricted for sale to resident Indian entities, including individuals, HUFs, trusts, universities, and charitable institutions. Know-your-customer (KYC) norms are the same as those for purchasing physical gold, and documents such as Voter ID, Aadhaar card, PAN or TAN, or Passport are required. The bonds can be purchased through banks, post offices, or online securities brokers, allowing investors to hold them in dematerialized form.

SGBs are listed and traded on Indian stock exchanges, providing liquidity and allowing eligible investors to buy or sell through their demat accounts. They can also be transferred to another eligible investor without redemption through the RBI. Additionally, the bonds can be used as collateral for loans, and the loan-to-value (LTV) ratio is set equal to the ordinary gold loan mandated by the RBI.

Retirement plans: National Pension System, Public Provident Fund, etc

Retirement plans are an essential part of financial planning, especially with the rising cost of living, inflation, and increasing life expectancy in India. Here is a detailed look at some popular retirement plans in India:

National Pension System (NPS)

The National Pension System is a government-backed pension scheme that aims to provide retirement income to all citizens. Launched in 2004, the NPS offers a unique unbundled architecture with specialised intermediaries like Point of Presence (PoP), Pension Fund, Central Recordkeeping Agency, and Annuity Service Providers. The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and offers tax benefits under the Income Tax Act 1961. The NPS has two types of accounts:

• Tier I Account: This is a mandatory, non-withdrawable pension account for government employees, with tax benefits and a minimum contribution of ₹500.
• Tier II Account: This is an optional, voluntary savings account with no tax benefits and a minimum contribution of ₹1000. Withdrawals are permitted at any time.

The NPS provides flexibility in terms of investment choices, allowing subscribers to choose their investment mix across equity, corporate bonds, and government bonds. It is also portable, allowing individuals to transfer their account across employment and geography.

Public Provident Fund (PPF)

The Public Provident Fund is a government-backed, safe investment option that offers high returns. It is a low-risk investment where individuals can accumulate savings and receive risk-free returns, which are revised and paid by the government every quarter. The PPF falls under the EEE (Exempt-Exempt-Exempt) tax structure, providing tax benefits on contributions, accrued interest, and maturity proceeds. It has a lock-in period of 15 years, with the option to extend in blocks of 5 years. Individuals can open a PPF account at designated banks or post offices, with a minimum contribution of ₹500 per year.

Other Retirement Plans

Other popular retirement plans in India include the Employee Provident Fund (EPF), a mandatory contribution scheme for organised sector employees, and the Senior Citizen Savings Scheme (SCSS), offering a safe and stable investment option for senior citizens. Additionally, individuals can explore market-linked retirement plans offered by insurance companies, which provide market-linked returns and a guaranteed income post-retirement.

Frequently asked questions