You have a number of investment options available.
Let’s take a brief look at them:
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Fixed Deposits with banks or companies offer interest on the deposit amount made over the defined time period.
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PPF (Public Provident Fund) is backed by the central government and is offered by the post office and by nationalized banks. PPF is similar to a fixed deposit account.
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Real Estate refers to land or property that is a physical asset.
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Gold and precious metals, including jewelry, are physical assets that can be kept at home and passed on as inheritance.
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Government and Corporate Bonds are fixed term investments with contractual interest payments or a pre-fixed repayment price at the end of the tenure.
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Equities are stocks or shares of a company traded on the stock exchange. When you invest in equity of a company, you become a part owner of the company and have a share in the profits earned by the company in proportion to your stock holding. You can buy stocks of any listed company through a stock broker.
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Mutual Funds combine different instruments such as stocks or shares, bonds or both into a single product which is managed by an expert fund manager. There are many types of mutual funds suitable for different investors with differing needs and risk profiles.
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Post Office Schemes such as NSC, Post office recurring deposit, KVP, etc. These are generally secure options since they are government backed and offer a limited but fixed rate of interest.
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Commodities are materials traded globally such as oil, metals, etc.
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Collectibles can include antiques or works of art.
The table below can help you to understand the benefits and drawbacks of each investment product
| Investment Option | Benefits | Drawbacks |
| Fixed Deposit | Returns are guaranteed | Interest earned is limited |
| Readily available | Not a tax-efficient option as, interest income exceeding Rs 10,000 in a financial year is taxable | |
| Ease of buying | Lock-in period, penalty on pre-mature withdrawal | |
| Public Provident Fund | Can start with a small amount. |
Lock-in period of 15 years and cannot be partially withdrawn before the end of the 6th year. |
Returns are guaranteed. |
No tax benefit. |
|
Offers income tax benefits. |
Predefined interest since they are not market linked. |
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| Real Estate including property and land | Can provide regular rental income. |
Time, money and effort to identify the right property. |
Physical and emotional satisfaction of owning a property. |
Expensive to purchase. |
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Helps in saving tax on the loan taken for buying property. |
Needs active management in terms of upkeep of property. |
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| Can be used for leaving a legacy. | Involves a lot of legal processes in buying/selling | |
Causes emotional stress if project timelines get extended. |
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High search cost. |
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Predicting a rise in real estate prices is difficult. |
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Time consuming to find a buyer to sell it at the price you want. |
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| Gold and precious metal including jewelry | Tangibility provides reassurance. |
Very expensive to buy. |
Unaffected by volatility of stock market, can provide diversification and hedge benefits. |
Difficult to store safely |
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| Easy to find a buyer | High transaction costs. |
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If you sell it, you will lose some value. |
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Emotions attached to gold make it “a difficult to sell” investment. |
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Appreciates less as compared to other investment products |
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| Government & Corporate Bonds | Assured returns. |
Interest rate risk: Rise in interest rate can decrease the market value of a bond. Falling interest rates mean that newly-issued bonds will have lower returns |
Low volatility. |
Limited returns, hence not suitable for long term investing |
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Default risk: Risk of receiving less than expected or no payment (in case of corporate bonds). |
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| Equities (popularly known as stocks or shares) | Potential of earning high return in the long term. | Highly volatile. |
| Ease of buying / selling. | Returns are not guaranteed. |
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Requires effort, research and time. |
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Can be costly. |
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Can be unavailable to purchase |
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| Mutual Funds | Simple to invest in. |
Returns are not guaranteed. |
Offer in-built Asset Allocation and Diversification. |
Customization of portfolio not possible |
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| Can start with a small amount | Risk of over-diversification if one invests in similar schemes | |
| Ease of buying/selling | ||
| Highly liquid | ||
| Offers tax benefits | ||
| Professionally managed | ||
| Highly regulated | ||
| Commodities | In certain circumstances, negatively correlated to broader stock market hence provides diversification and hedge benefits | Difficult to buy and sell |
| Holding a commodity can provide protection against geopolitical risks (The risk of negative impact on an investment's returns due to political changes or instability in a country). | ||
| Collectibles | Can be an alternative to traditional forms of investments as it can appreciate significantly in certain circumstances. |
Difficult to buy and sell. |
Ease of buying. |
Difficult to assess value and can be expensive |
Key Takaways
- Investments can be broadly categorized into physical assets and financial assets.
- Different investment options have differing features, risk and benefits and hence suit different needs.
- Mutual Funds are a good starting point for most investors as they combine the benefits of investing in many different products such as stocks or shares, bonds or both into a single product which is managed by an expert fund manager.
