Q: In these times of turmoil, many investment avenues are fetching low returns. Fixed deposits are generating less-than-desirable returns. In such a scenario, where else could I invest my money for stable returns without taking undue risks? Samrat Banerjee.
Ans: As you’ve rightly pointed out, FD rates have seen a dip in recent months following RBI’s decision to cut the repo rate on several occasions since 2019. However, despite the lowering of rates and taxable returns, I would still suggest you continue with FDs as capital protection has become as important as capital appreciation in these challenging times. FDs are also highly liquid instruments, so that could work in your favour if you were to encounter an unanticipated event. You can also invest in FDs through the laddering technique to maximise investment benefits.
Now, it’s also advisable that you diversify your portfolio optimally to offset total investment risk. From that perspective, here are some other investment products that you can consider. However, it’s critical that all your investments are strictly in line with the demands of your financial goals, age, current income flow, risk tolerance, and liquidity requirements.
- Small savings schemes like PPF, Sukanya Smariddhi Yojana, etc.: For guaranteed returns that are usually higher than FDs. Also, small savings schemes are highly tax-efficient. But most of them carry very long investment tenures, so liquidity could be an issue.
- Voluntary Provident Fund: If you’re a salaried professional, you may want to top-up your mandatory EPF contributions through VPF. Again, VPF fetches higher returns than FDs with minimal investment risk and are also highly tax-efficient. But they are not as liquid as an FD.
- Equity Fund SIPs: If you have an investment horizon of at least 5 years and can afford to take some investment risk, investing in a highly-rated equity fund through the SIP mode could generate much higher returns than FDs in the long-term. Also, equity funds are more liquid than small savings schemes, and investing in an Equity Linked Savings Scheme (ELSS) would also provide tax deduction benefits up to Rs. 1.5 lakh under Section 80C of the Income Tax Act.
- Debt fund SIPs: If your investment horizon and risk appetite are lower, you can also choose to invest in a highly-rated debt fund in SIPs. However, you might want to stay away from credit risk funds or those debt funds that are invested in assets with long holding tenures at this point.
- Sovereign Gold Bonds: You can also look to slightly increase your gold investments to add solidity to your portfolio but ideally in a digital form because those are free of purity and storage concerns. Among dematerialised options like Gold mutual funds, Gold ETFs, and SGBs, the latter is perhaps the best one owing to its guaranteed interest income above the price of gold and no capital gains tax on redemption. But ensure your total gold investments are not more than 10% of your total portfolio’s value as the prices of the coveted yellow metal tend to flat-line over long periods.
Have a question on personal finance? Ping me on Twitter at @adhilshetty with the hashtag #AskAdhil. The writer is CEO, BankBazaar.com, an online marketplace for loans and credit cards.