The purpose of this blog post is to bring forth the best investment options available in India for young adults. Beginners can read this report to familiarize themselves with multiple investment vehicles available in India. The report will also highlight the thought process necessary to pick suitable investments for building wealth in long term. For quick answers, check the FAQs
Investment is essential to protect our money from the wrath of inflation. But not all investment options are structured to beat inflation. The inflation-beating investments are riskier than non-inflation-beating options. So, each one has its own pros and cons. An investor who knows about it can make the best investment choices.
An optimal mix of risky and non-risky options builds a balanced investment portfolio. This is called investment diversification. It helps investors to negate the potential downside risk by including non-linked investment options in the portfolio.
But this article is not about diversification. It is more about the thought process that goes behind picking an investment option. So, we’ll talk about both, the thought process and good investment alternatives.
Generally speaking, inflation-beating investment options are more volatile. Hence, one cannot afford to pick these at random in an unplanned way. Their purchases must be carefully analyzed and timed. Whereas, non-inflation-beating options are less volatile and are almost risk-free. Hence, one can buy them anytime without bothering too much about timing the purchases.
So, summarizing what we’ve read till now, looking at investment options from a bird’s eye view, they are of two broad types: inflation-beating, and non-inflation-beating.
|SL||Description||Beats Inflation||Cannot Beat Inflation|
|1||Return on Investment||High||Low|
|2||Risk of Loss||High||Low|
|4||Timing of Purchase||Preferable||Not Necessary|
Investment Options vs Mindset
An investor does not always invest for high returns. There could be other mindsets that are influencing an investment decision. Important is to first read and acknowledge the prevailing mindset. Once the mindset is known, suitable investment options shall be selected that compliments the current state of mind of the investor.
The above infographics depict five possible mindsets. It also compares them with their complementary investment option. To give more perspective, the infographics also allow one to compare the mindsets with investments, their potential return capability, the level of risk involved, and their inflation-beating ability.
How to read the infographic?
- Savings / Risk Averse: A person who is in a risk-averse mindset should buy only a savings plan. For me, a reliable savings plan is one that protects my money from getting spent easily. Traditionally, money is kept in a savings account, fixed deposits are called savings. But for me, they are too liquid and get spent too easily.
- Income Asset / Defensive: A defensive mindset is also risk-averse. But it is also eager for better returns. In this case, the investor should focus on income-generating assets. Such assets are inherently low-risk options but yield higher returns than savings options.
- Hybrid / Unsure: There are times when investors are not sure about their mindset. In such a case, they can choose a middle path. Hybrid investment plans combine risk and no-risk options. As a result, the risk-return matrix becomes balanced and acceptable for most types of investors.
- Equity / Autopilot: There are times when the investor is sure about their need for high returns. They are also aware that only equity will yield their expected returns. But either they lack the skill to research equity independently or they are busy elsewhere. Hence they prefer putting their equity plan on autopilot (managed by someone else).
- Equity / Involved: There are investors who like to remain involved with their investments. Even if they are busy, they find time for it as they like it. These are people who can analyze equity (stocks) by themselves. They remain involved in their equity research and purchase process. As a result, they earn higher returns than other investors.
So, now with more information about investment options. we can conclude the following:
|1||Savings||Risk Averse||Cannot Beat||Low (<4%)||Non-Volatile|
|2||Income Assets||Defensive||Cannot Beat||Low (<7%)||Less Volatile|
|3||Hybrid||Unsure||May Beat||Moderate (<10%)||Volatile|
|4||Equity#1||Autopilot||Will Beat||High (<16%)||Very Volatile|
|5||Equity#2||Involved||Not Necessary||High (>16%)||Most Volatile|
Thought Process [Video-Hindi]
From what we’ve read till now about investment options, broadly speaking, there are two types of investments. One that beats inflation and another that cannot beat inflation. Inflation-beating investments are riskier and hence must be invested in upon proper analysis. In such investments timing the buy and sell can alter the investment returns a lot.
We’ve also seen that apart from inflation, another investment-related consideration is the investor’s mindset. Depending on the predominant mindset at the time of investing, one may either invest for growth, fixed income, liquidity of capital, or prefer a hybrid plan.
An investor who is aware of these two variables, inflation & mindset, will have a typical thought process while picking suitable investment options. Allow me to talk about five specific investment options that can complement the different mindsets of the investors.
5 Best Investment Alternatives
- Gold: Buy it with a saving mindset. As gold is a hard asset, it can be treated as a saving option. Do not buy gold for investment. Buy it with the mindset of capital protection. Hard assets are not easy to liquidate. Assets in electronic form can be sold at the click of a button. Moreover, the gold price can increase at a fair pace of 5-6% per annum over time.
- Real Estate Property (Income): It is also a hard asset. It also has the ability to yield regular income. When the purpose is to invest a big corpus, it becomes a safe bet. Buying a rental property will yield regular cash inflows. While investing big amounts of money, the focus shall be on income generation instead of high returns. The starting rental yield will be about 4% per annum, but it will grow over time. This thought process will reduce the risk of loss.
- Hybrid Mutual Fund: There are times when an investor is unsure about the purpose of investing. During such times, putting the money into a hybrid mutual fund is best. A mutual fund whose portfolio mix is 50-50 split between stocks and debt will be a fair choice. A hybrid fund can grow at a pace of 8.5% per annum.
- Equity Mutual Fund: If an investor’s priority is high return, the most preferred choice becomes equity. But equity demands investors’ attention and decision-making. Hence, if the person is busy or is not trained to take equity-related decisions, they must go the mutual fund way. Here one can consider ETFs, Reits, index funds, multi-cap funds, etc.
- Stocks: It caters to the requirement of high returns. But its limitation is that the market is full of low-quality stocks. Investors must do the stock analysis themselves to filter good stocks. It takes time to do the analysis. Moreover, direct stock investing also demands constant vigil on market movements.
Now, we know about investment options more specifically. Allow me to show a comparison between them in a tabulated form.
|1||Gold||Risk Averse||Savings||Hard Asset||Low (<4%)||Low|
|2||Real Estate||Defensive||Income||Hard Asset||Low (<7%)||Low|
|3||Hybid Funds||Unsure||N/A||Paper Asset||Moderate (<10%)||Moderately|
|4||Equity Funds||Autopilot||High Returns||Paper Asset||High (<16%)||High|
|5||Stocks||Involved||HIgh Returns||Paper Asset||High (>16%)||Very High|
Other Investment Options
I feel that the above five investment options can cater to all types of investment needs and mindsets. If you are interested to know about more alternatives please read further. The above five alternatives will suffice the requirement of the majority. But for some tailor-made requirements, the below investment alternatives can also be included in the portfolio.
#1. Small Saving Plans
- Public Provident Fund (PPF)
- National Savings Certificate (NSC)
- Sr. Citizen Savings Scheme (SCSS)
- Post Office Monthly Scheme (POMIS)
- Post Office Term Deposit (POTD)
- Kisan Vikas Patra (KVP)
- Sukanya Samriddhi Yojana (SSY)
- Sovereign Gold Bond Scheme (SGB)
- Gold Monetization Scheme (GMS)
Public Provident Fund (PPF)
A Public Provident fund is a retirement-linked investment plan. Generally, corporate employees are covered by Employee Provident Fund (EPF). But for self-employed people, the EPF is not available. Hence, PPF is popular among self-employed people. Individuals can open only one PPF account in their name. It is also possible to open a PPF account in the name of a minor child. Non-resident Indians are not allowed to open a new PPF account in India.
PPF is a 15-year deposit scheme. One can open a PPF account even with a small deposit of only Rs.500. There is a cap on the maximum amount one can deposit in PPF. The maximum amount is Rs.1,50,000 per financial year. It is possible to subscribe to PPF account through a lump sum deposit or through a recurring deposit. In the case of recurring deposits, annual installments cannot be more than 12.
Once a PPF account is open, it is mandatory for the depositor to deposit the said amount every month/quarter/year without fail. In case of failure, penalties are applicable.
Interest calculation on PPF deposit is done each month. Though the interest is calculated every month, the interest gets added to one PPF account only at the end of the financial year.
One can draw the partial amount (50% Max) from one’s PPF account only from the seventh ear. Only one withdrawal can be made in one financial year. At the end of the 15th year, one can close the PPF account. It is also possible to extend the PPF account with five-year blocks.
PPF deposit also saves income tax under section 80C. The accumulated PPF funds that is withdrawn after the expiry of 15 years are completely tax-free. At present (Dec’22), the interest rate prevailing on PPF account deposits is 7.1% per annum.
National Savings Certificate (NSC)
Like PPF, NSC is also managed by the government of India. One can buy National Savings Certificates (NSC) from Indian post offices. NSC are generally issued with a lock-in period of 5 years. Interest calculation is done on half yearly basis for NSC. Only Indian individuals are allowed to buy national saving certificates. If somebody becomes an NRI after purchasing the NSC, they can continue to hold the certificate till maturity.
NSC comes in many denominations. These certificates are available in small denominations of Rs.100, Rs.500, Rs.1000, Rs.5000, and Rs.10,000. NSC deposit also saves income tax under section 80C. But the interest is taxable, though no TDS is deducted. It is possible to transfer NSC from one person to another. These days it is possible to hold NSC in Demat form. At present (Dec’22), the interest rate prevailing on NSC deposits is 6.8% per annum.
Senior Citizen Saving Scheme (SCSS)
SCSS is available as an investment option only for senior citizens (above 60 years of age). It is possible to open an SCSS account in the post office. Open a personal SCSS account or a joint account with a spouse in the post office. SCSS comes with a lock-in period of five years. After the expiry of five years, it is possible to extend the tenure by another three years. But this extension is allowed only once.
The maximum amount one can invest in SCSS is Rs.15 lakhs. It is possible to open multiple SCSS accounts but the sum total of all investments should not cross 15 lakhs. The interest calculation is done on a quarterly basis for SCSS. NSC deposit also saves income tax under section 80C. But the interest is taxable, though no TDS is deducted. At present (Dec’22), the interest rate prevailing on SCSS deposits is 7.6% per annum.
Post Office Monthly Income Scheme (POMIS)
This investment option is tailor-made to provide monthly income for the depositor. The lock-in period for POMIS is 5 years. The minimum amount that can be invested in POMIS is Rs.1,500 and the maximum amount is Rs.4.5 lakhs. But in the case of a joint account, the maximum amount can be Rs.9 lakhs.
It is possible to make a premature withdrawal from POMIS but only after the first year. In case of premature withdrawal penalty is applicable. At present (Dec’17), the interest rate prevailing on POMIS deposits is 6.6% per annum payable monthly.
Post Office Term Deposit (POTD)
Like commercial banks, Post Office offers term deposits. Though the duration of term deposits of a post office can only be one two three, or five years. The minimum amount of money that can be held in the post office term deposit account is Rs.200. There is no maximum limit. It is important to note that the interest calculation is done on a quarterly basis for POTD. POTD also saves income tax under section 80C. At present (Dec’22), the interest rate prevailing on POTD deposits are as follows:
|I Year Deposit||5.50%|
|2 Year Deposit||5.70%|
|3 Year Deposit||5.80%|
|5 Year Deposit||6.70%|
Kisan Vikas Patra (KVP)
The maturity period of KVP is 115 months (9 years, 5 months). But it is possible to encash the KVP after the lapse of 2.5 years. One can buy KVP from Indian Post Office or from selected banks. KVP is available in denominations of Rs.1,000, Rs.5,000, Rs.10,000, and Rs.50,000. There is no maximum limit to investment in KVP. It is possible to transfer a KVP certificate from one person to another. KVP does not provide any income tax benefit under section 80C. Interest earned under KVP is also taxable. At present (Dec’22), the interest rate prevailing on KVP deposits is 7.0% per annum payable on maturity.
Sukanya Samriddhi Yojana (SSY)
This scheme has been launched by the government of India to provide benefits to the girl child. The SSY account can be opened only in the name of a girl child (age below 10 years). The account can be opened by the parent of the child or by the legal guardian. Only Indian Post Offices and a few banks in India have been allowed to offer SSY accounts to the Indian public. These banks are SBI, Canara Bank, Axis Bank, and ICICI Bank. The minimum amount to open an SSY account is Rs.1,000 and the maximum amount is Rs.1,50,000 in one financial year. The interest under the SSY scheme is compounded annually.
The SSY account matures after the lapse of 21 years from the date of the opening of the account. But if the girl gets married before the lapse of 21 years, the account gets closed. Withdrawal from an SSY account is possible only after the girl attains 18 years of age. SSY also saves income tax under section 80C. At present (Dec’22), the interest rate prevailing on Sukanya Samruddhi A/c is 7.6% per annum payable on maturity.
Sovereign Gold Bond Scheme (SGB)
The sovereign gold bond scheme is an alternative way to invest in gold. SGB is a bond issued by the government of India for a tenure of 8 years. These Bonds have a denomination of 1 gram of gold. One can buy SGB in multiples of 1 gram. The minimum investment is 2 grams and the maximum investment allowed is 500 grams in one financial year.
Upon redemption of the SG bond, the person will receive the equivalent amount only in INR. In order to buy SGB one can apply online for the same from any commercial bank’s website. It is also possible to buy SGB physically from a bank or from the Indian Post Office. If one wants to redeem the SGB early, it can be done only after the lapse of 5 years. In addition to the capital gain, one will also earn 2.5% interest on the deposit. Capital gain tax is applicable on SGB.
Gold Monetisation Scheme (GMS)
Under the gold monetization scheme, an individual can earn interest on the physical gold that they have in the locker of their homes. The gold can be in the form of jewelry, coins, or bars. The deposited gold will be tested for purity. Once the purity of the gold is confirmed it will be converted into gold bars (after necessary refining). The minimum amount of gold that can be deposited under GMS is 30 gm. There is no maximum limit.
Here, the deposited gold is actually converted as a bank deposit in the bank. This bank deposit in turn earns interest for the depositor. The gold can be held as a deposit in banks for a tenure of 5 to 7 years (medium term), and 12 to 15 years (long term). At the time of maturity of the deposit, the value of gold, at the prevailing gold rate, plus the interest will be paid back to the depositor. At present (Oct’17), the interest rate prevailing on GMS deposits is 2.25% per annum for the medium term and 2.5% per annum for the long term. Premature withdrawal is also possible, but with a penalty.
#2. Debt-Linked Investment Options
- Government Securities (G-SEC)
- Inflation Indexed Bonds
- Fixed Deposits
- Corporate Deposits
- Fixed Maturity Plans (FMPs) of Mutual Funds
- Infrastructure Bonds
Government Securities (G-Secs)
Government securities (G-secs) are investment options issued directly by the reserve bank of India (RBI). It is an investment option using which, the government of India (GOI) borrows money from investors (like Banks, etc). When there is a deficit between expense and income, the government issues G-sec.
Out of all G-secs issued by the RBI, 5% is allocated to retail investors. This is done to encourage the participation of retail investors in the debt market. But how common man can buy G-secs? It can be done through a mobile app.
The minimum amount that can be invested in G-secs through an account is Rs.10,000. Interest earned by the investor in G-secs is credited on the specified date in the account of the investor. The interest earned in G-secs is fully taxable. No TDS is deducted. If people want to redeem their G-secs holding, they can do it easily. The redeemed amount gets credited into one’s bank account automatically.
Generally, the debt market where G-secs are traded is not so liquid. It means, if one buys the G-sec, he/she may have to hold this security till maturity. The liberty to redeem it mid-way is not available.
One of the main advantages of investing in G-secs is that they can be used as collateral to obtain loans from banks. In the present financial market, G-secs are probably the safest investment option available. At present (dec’22), the yield of a 10-Year G-secs is 7.3% per annum.
Inflation Indexed Bonds
This is perhaps one of the best investment options that can be used for investing in debt-linked plans. Inflation-indexed bonds (IIBs) are issued by the Reserve Bank of India (RBI).
How do the inflation-indexed bonds work? To understand its working, let’s do it using a return calculation of an example 2-year bond.
|SL||Description||Year 1||Year 2|
|2||Offered ROI (%)||2%||2%|
|3||Principal (post inflation)||1,04,000||1,10,240|
Deposits in banks are very easy to execute. These days all savings accounts are linked with fixed deposit accounts. From the comfort of our homes, we can click-start a fixed deposit. Online fixed deposits can start from the denomination of Rs 5,000 and above.
The tenure of the deposit can be from a few days to several years. The interest you earn will depend on the principal value of the investment and the tenure of the deposit. One can be 99.9% sure that the returns promised by banks will be offered by end of the holding period. Suggested Reading: what happens if a bank goes broke?
These fixed deposits in banks also offer the facility of monthly income withdrawal of interest. This works as a great income generator for many, especially senior citizens. The interest generated from the fixed deposit is taxable.
These are Deposits with companies not with banks. These fixed deposits are the same as bank FDs but the only difference is, instead of banks we lend our money here to companies. Banks are more closely regulated and hence investments in banks are a lot safer. In comparison, fixed deposits in companies are slightly riskier.
In case the company goes under liquidation then the invested money is at risk. But this generally does not happen and fixed deposits have worked fantastically for risk-averse investors. The interest generated (above Rs 5000/year) from the deposits are taxable.
Fixed Maturity Plans of MFs
FMPs or fixed maturity plans are offered by mutual fund companies. Their functionality is very similar to traditional fixed deposits. Here the mutual fund companies ask investors to lock their money in their fund for a certain period with a promise of certain interest.
When you will see a mutual fund brochure you will notice that at the beginning of its features a term will be mentioned like ‘Closed Ended Scheme’ or ‘Open Ended Scheme’. These closed-ended schemes are nothing but FMPs. When these FMPs are launched we can buy their units and should hold on to them till a predefined period of time.
Infrastructure bonds are offered by the government of India. These bonds offer tax-saving benefits under section 80C. In the past, the bonds have also been issued by institutions like IDBI, IIFCL, and NABARD. The infrastructure bonds offered by these government entities offer tax benefits under section 80C.
Investments in infrastructure bonds up to Rs.20,000 is available for tax benefits under section 80C. The maturity period for these infrastructure bonds is close to 10 to 15 years. At present (dec’22), the yield of infrastructure bonds is about 8% per annum.
#3. Alternative Investment Options
Alternative investment options are called such because they do not operate like traditional investment products. They are slightly more complicated for a retail investor to understand and execute. Nevertheless, they are such options that if handled well, provide excellent diversification.
Futures & Options
Theoretically, it is not so easy to understand how FUTURES work. So let’s try to understand it through a simple example. Normal procedure: Suppose you want to buy 10 nos shares of Tata Steel. The shares of Tata Steel are currently trading at Rs.670 (say). In the next 6 months, the share of Tata Steel will jump to Rs.750.
Normally, you will have to spend Rs.6,700 to buy 10 nos shares of Tata Steel. After 6 months, when the stock price becomes Rs.750, you sell your stocks to book a profit of Rs.800 per share. In this case, the return will be 11.85% (=800/6750).
Through Futures: You will have to buy a FUTURE contract of Tata Steel valid for a period of 6 months. In the Future market, you pay only 20% of Rs.6,700. (Rs.1350). After 6 months, when the stock price becomes Rs.750, you sell your futures contract. Your return will be 59.25% (=800/1350).
Let’s try to understand it too through a simple example. Example: Suppose you want to buy shares of Tata Steel. The shares of Tata Steel are currently trading at Rs.670 (say). In the next 6 months, the share of Tata Steel will jump to Rs.750.
In the options market, you will enter into a contract today, which will be over in the next 6 months. You will quote that you are willing to buy the option, 6 months from today, at a price of Rs.730 per share. As a deal with the seller, you will pay a premium to the seller. Here the premium can be as low as 1% (Rs7.3/share). This premium you will have to pay the seller upfront.
After the expiry of 6 months, when the share of Tata Steel will be trading at Rs.750 per share, you will buy Tata Steel by exercising your option. In this case, you will have Tata Steel share at Rs.737.3 (Rs.730+7.3). These share you can immediately sell these at a market price of Rs.750. Your profit will be Rs.12.5 per share. Your return is 1.69% (12.5/737.5).
The return is too low, right? But consider this, if the stock of Tata Steel after 6 months rose only to Rs.725. What you will do? In options trading, you have the right to not buy Tata Steel shares. You can just refuse to buy. Your only loss is the premium amount of 1%.
Cryptocurrency (Bitcoin, NFTs)
Bitcoin is a form of cryptocurrency that one can buy using mobile apps as an investment. As it is a relatively new investment, currently there is a lot of volatility in it. Hence, if one intends to put their money in crypto like a bitcoin, they must do it with a holding time as long as 15-20 years. Another form of Crypto investment is NFT (Non-Fungible Tokens). These are even newer than cryptocurrency. To know more about bitcoin, check this article.
Currently, equity mutual funds promise the best risk-return balance. In a good multi-cap mutual fund scheme, returns to the tune of 16% per annum are possible.
Debt-linked plans are safer. Government Securities (G-Secs) are the safest. Bonds issued by the Government are also very safe. Bank deposits are also safe. For me, if the investment time horizon is as long as 7-10 years, I’ll also consider hybrid mutual funds safe.
In the near term, governments across the world are not comfortable with a decentralized cryptocurrency like bitcoin. But as countries are issuing their own CBDCs now, the counter-attack on the bitcoin will soften. But surely, Bitcoin will not continue to grow as fast as it has done in the last decade. But I think, it will still beat equity.
In today’s times, regular investing in equity mutual funds is best for people in their 20s and 30s. They can also put their money in stocks, but only after proper analysis. The advantage of investing in the 20s and 30s is that the invested money can stay parked for the next 20 years and benefit from compounding.
Equity-linked investment plans can render fast growth. One can take the mutual fund or the stock market route to invest in equity.
Please write a similar article for the year 2022. Thanks and Great work!
The illustration of calculation of net yield for inflation adjusted bond is incorrect.
The yield in first case was calculated to be 2.225%, while is the second case it is written in the starting only that it is 2%. However, the article goes on to calculate the yield as 7.79%, which is in-fact, not inflation adjusted.
Major error, kindly fix.
Great article as always. I am a fan of yours. Thanks
Nice article sir
Would request you to give some ideas on HOW TO SAVE(MONTHLY,QUARTERLY,HALF-YEARLY,YEARLY) FOR PURCHASE OF PROPERTY(50Lakhs+) ….with the TENURE…
If objective is to generate funds for property purchase, through savings, it is a tough ask. Better alternative will be to invest. How to think investment in this case?
– (1) Finalise the time horizon (say 5 years).
– (2) Select a suitable balanced fund.
– (3) Start a SIP in this mutual fund.
– (4) Keep contributing for next 5 years without fail.
You can use access this SIP calculator to make your calculation.
Thanks for your comment.