Taking comfort in Investing : More often than not, the biggest mistake investors make while investing is that they tend to ignore their risk-taking ability. As a result, they end up investing in an avenue whose risk profile is not suitable for them. While some investors are ignorant about the risks associated with a particular investment avenue, there are others, who despite knowing that the avenue is not right for them, try to be adventures by investing in them. Discomfort in Investing makes loss of conviction and confidence in the Instrument of the investing. Hence, the possibility of such an investment leading to a financial disaster is quite high, more so in unfavourable market conditions.
The investors should consider
A) His/her age.
B) Ration of amount of investment over the annual current and likely Income/Salary.
C) Time/ Duration of Investment
D) Purpose of Investment, be clearly defined, before considering investment decision.
Investors' Risks.
Whenever, an investment Decision is taken, each one should have this defined goals. And, no decision be taken in spur of moment and/or just because ever one around us taking the same investment decision ( fad investing ). While evaluating the investment some of the broader risks that are considered are..
1) Capital Risk 2) Liquidity Risk 3) Profit Risk 4) Trailing Risk 5) Historical Risk 6) Tax
I know, some of my friends would like a better explanation, here.
Still, In India, we still have some investment till now beat the above risks and give better returns. The risk averse Investors should try them, along with Equity Investments through Bonds, Equities via mutual fund or otherwise.
1. Public Provident Fund (PPF)
Scheme Feature – Let’s start with one of the most popular avenues in this space – the PPF. An offering from the small savings segment, PPF continues to be one of the most favoured investment avenues. One of the major attractions about the scheme is the tax-benefit it offers, apart from assured returns. However, the safety that this avenue offers is its main forte. It makes a good investment option not only for risk-averse investors, but also for others.
PPF runs over a 15-year period and gives an assured return of 8% per annum compounded annually. Having said this, it should be noted that though the scheme offers assured returns the rate of return are subject to revision. Given, the investments in PPF are recurring in nature; an investor has to make annual contributions to keep their account active. While the minimum contribution to the scheme is Rs 500, the maximum is Rs 70,000 in a financial year. The investors on their discretion can invest more monies, but they will not earn interest on the amount in excess of Rs 70,000. The deposits can be made in lumpsum or in 12 installments.
Tax implications – Contributions in PPF upto Rs 70,000 in a financial year qualify for deduction from income under Section 80C of the Income Tax Act. Furthermore, even the interest income earned on investments in PPF is exempt from tax.
Liquidity/redemption facility – Investors can withdraw their investments every year only from seventh financial year (computed from the year, when the first investment is made). This makes PPF a bit unattractive from liquidity point of view. However, loan facility is available from third financial year.
Scheme Feature – Another popular small saving scheme is NSC. Its popularity could be attributed to the lower investment horizon, along with assured returns and tax benefits. The scheme provides investors an opportunity to make a lumpsum investment for a period of six-years. They earn a taxable return of 8.0% per annum compounded on a half-yearly basis. Hence an amount of Rs 100 invested in NSC will grow to Rs 160.1 at maturity after six years.
It should also be noted that, though the interest is compounded on a half-yearly basis, it is payable only at maturity. An investor can start investing with a minimum investment of Rs 100 with no upper limit. Another benefit of investing in NSC is that, since the rate of return is locked at the time of investment, it remains insulated from any later change in rates.
Tax implications – Investments in NSC are exempted from tax under Section 80C of the Income Tax Act, upto the maximum limit of Rs 100,000. Moreover, the interest accruing annually is deemed to be reinvested, hence it also qualifies for deduction under Section 80C.
Liquidity/redemption facility – From the liquidity point of view, NSC is not very promising. The interest income is received only on maturity. Also no premature investment is allowed. However, premature redemptions are permitted only under special circumstances i.e. on death of the holder, on forfeiture by a pledgee & when ordered by Court of Law.
Scheme feature – KVP is another traditional investment avenue from the stable of small savings schemes. KVP doubles the money invested in eight years and seven months. There is no limit for investments. The investments can be made in the denomination of Rs 100, Rs 500, Rs 1000, Rs 5000 and Rs 10000 in all the post offices and Rs 50,000 in all the head post offices.
Tax implications – Unlike NSC and PPF, investments in KVP are not eligible for any tax benefit.
Liquidity/redemption facility – Compared to NSC and PPF, KVP fares better in terms of liquidity. Investors can make premature encashment after two years and six months from the date of investment.
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