Most individuals have short and long-term financial goals. Their risk appetite depends on factors such as the importance of the goal, size of the fund required for achieving the desired goals, their age and income among other considerations. For example, an investor nearing retirement would have a lower risk appetite than, say, a young investor who is 25-year old. Similarly, an investor with low income and bigger financial responsibilities will be more risk-averse than someone who has a large income with fewer financial obligations.
If you’re a risk-averse investor, you can consider putting your money in a number of investment instruments available in the market. However, always consider things like your returns expectations, goal tenure and liquidity requirements as you chalk out your investment strategy. We’ve discussed a few popular investment instruments to help you make informed decisions.
1. Fixed Deposits (FDs)
FDs are undoubtedly one of the most popular investment instruments for risk-averse investors. They allow benefits like high liquidity, guaranteed returns which are higher than a savings account, ease of investments, loan against deposits, etc. Also, deposits up to Rs1 lakh per bank per depositor are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of Reserve Bank of India (RBI), in case the bank fails to honour the repayment.
However, the rate of interest offered by FDs is not very attractive. Large banks are currently offering an interest rate of around 6-6.7 per cent per annum on FDs with 1-5 year tenure. A few smaller banks are offering higher rates, but these may be smaller new banks and risk-averse investors may not want to have a big exposure to banks that do not have a proven track record. Also, FD returns above Rs. 40,000 in a year attract a 10 per cent TDS, while its interest income is added to the investor’s income and taxed according to the applicable income tax slab.
That being said, to maximise investment benefits, you can use the FD laddering technique wherein you can distribute your FDs in equal amounts with regular maturity gaps instead of investing your entire fund in a single FD account. Doing so would ensure your investments get the benefit of a future rate hike while being in a better position to average out the impact of any rate fluctuations. This investment loop will also prevent you from disturbing your entire fund in the face of a financial emergency if your requirement can be met by liquidating just one FD.
2. Public Provident Fund (PPF)
PPF is one of the safest investment options available in the market. It comes with a long lock-in period of 15 years and its interest gets compounded annually. However, apart from offering guaranteed returns, PPF also provides ‘EEE’ tax benefit to its investors, i.e. investments, interest income and maturity fund are all tax-exempt. PPF investments allow tax deduction benefit under Section 80C of the I-T Act of up to Rs. 1.5 lakh in a financial year.
PPF is an attractive investment option for young risk-averse investors. Those who are close to their retirement can also invest in it, provided they don’t have an immediate requirement for such funds. PPF is currently offering an interest rate of 7.9 per cent per annum.
3. National Savings Certificate (NSC)
National Savings Certificates come with a maturity period of five years. It is currently offering an interest rate of 7.9 per cent per annum, which gets compounded annually. It also allows tax deduction benefit under Section 80C of up to Rs. 1.5 lakh in a financial year. As the interest accrued on NSC investments is deemed to be reinvested every year, and therefore considered for 80C benefit; however, the interest earned on the fifth year is not reinvested, so it is not eligible for the tax deduction benefit. You can also take a loan against your NSC investments. All these factors make NSC an attractive investment product for senior citizens as well as young risk-averse investors.
4. Senior Citizen Savings Scheme (SCSS)
Senior citizens or retirees have limited sources of income and their age does not allow them to take a lot of risk on their money. So, the government offers them with SCSS products wherein they can invest their money to earn a safe return. SCSS investments offered a return of 8.6 per cent p.a. in the quarter ending December 31, 2019. Investors can invest a minimum of Rs 1,000 or in its multiples under the SCSS, while the investment threshold is Rs15 lakh. SCSS also allow tax benefit under Section 80C. Do note that only investors above 60 years can invest in this product. SCSS also allows investors to close their investments early subject to payment of applicable penalty charges. These factors make SCSS an excellent investment opportunity for senior citizen investors. However, many investors find the upper investment limit of Rs. 15 lakh slightly disappointing.
5. Bharat Bond ETF
The newly-launched Bharat Bond Exchange-Traded Fund is a good option for investors who are looking for a safe investment instrument with high liquidity that offers attractive returns.
Bharat Bond comes with two maturities, i.e. 3 years currently offering interest yield of around 6.7 per cent and 10 years providing an interest yield of around 7.6 per cent. Bond ETFs, like equity ETFs and stocks, are listed on stock exchanges, allowing investors to buy and sell them whenever needed. Do note that long-term capital gains on Bharat bond ETF are taxed at a 20 per cent rate with indexation benefit. Hence, this highly safe and tax-efficient investment instrument can be a good option for investors across age groups.
While a risk-averse investment approach when implemented efficiently might secure fixed returns, these might not be enough to meet your financial goals in time. As such, to beat inflation in the long term and for adequate wealth creation, investors would be well-advised not to eliminate investment risk altogether. As they say, always factor in the risk of not taking any risk at all. Risk-averse investors should, thus, consider having some exposure to equity-oriented investment instruments to garner good returns. Consider taking the Systematic Investment Plan (SIP) route to reduce investment risk when investing in equity products.
Also, try to diversify your investments across different asset classes to further minimise overall risk. Consult your financial advisor if you require help to build a diversified and pragmatic investment plan.
The author is CEO, BankBazaar.com