In India, individuals enjoy a plethora of options, both in the private and public sector, while choosing an investment instrument. Not only banks and other financial institutions, but the government, as well as PSUs, offer diverse investment products that enable investors to grow their savings.
As a result, selecting the right investment option can be both intimidating and perplexing for individuals, especially for those belonging to the middle-income group.
How to Know Which is the Best Investment Option?
To answer the question – what is a good investment? – one has to take into account a few factors.
These are as follows –
One of the primary factors that tell whether an investment is suitable for a particular investor is the risk involved in it. Usually, investment options bearing high risk offer higher returns to investors and vice versa. That is why it is pertinent for one to gauge his/her risk appetite before zeroing in on a particular investment option.
Market-linked products carry a certain degree of risk as their returns depend on microeconomic factors, as well as macroeconomic ones to some extent.
Few of such products include –
|Stocks||Stocks are offered by companies that seek to raise capital from the public. The price of each stock depends on how that company is performing and generating revenue. Individuals purchasing these stocks can become a shareholder of that company.
When the price of a stock appreciates, the holder can sell it can earn capital gains.
|Bonds||Bonds are offered by the government, private companies, RBI, banks and financial institutions, etc. to raise capital. Investors earn profit from bonds through interest payouts.|
|Mutual funds||A mutual fund is a pool of money collected from several investors and invested in a mixed-bag of bonds, stocks, and other securities of different companies. Individuals who do not have the expertise or patience to browse through different stocks and pick the right one can opt for mutual fund investments.
Mutual fund investments are of two types –
Unit linked insurance plans (ULIPs), and National Pension Scheme (NPS) are two other examples of market-linked investment options.
Fixed-income products, unlike market-linked ones, generate stable returns irrespective of the market conditions.
Some of these include –
|Fixed deposits||FD or fixed deposit plan is considered one of the best investment options in terms of safety and security. These are offered by banks as well as other financial institutions and PSUs (corporate FDs).|
|Public Provident Fund||Public Provident Fund or PPF is a long-term investment scheme offered by the government via commercial banks.|
|Senior Citizens Saving Scheme||Senior Citizens Saving Scheme or SCSS is offered by post offices to those aged 60 years or above (55 years in some cases).|
Post Office Monthly Income Scheme (POMIS), National Savings Certificate (NSC) and recurring deposits (RDs) are other examples of fixed-income investment products.
Time in case of investments denotes the tenure associated with them. It means the minimum or maximum time the investment has to be locked in before it can be withdrawn.
However, different investment options treat tenure differently. There are products which can be prematurely withdrawn partially or in full –
- Any time before the tenure ends (For example, FDs).
- After a certain period has passed (For example, PPF).
- After maturity, i.e. completion of the lock-in period (For example, NSC).
Individuals usually choose a mix of short-term (less than 1 year), medium-term (1 year to less than 5 years), and long-term (above 5 years) investment options to maximise their savings as well as have liquid cash in case of emergencies.
Generally, when looking for long-term schemes, investing in fixed-income options like PPF is the ideal way to go forward. For medium-term, mutual funds can be a good option, and for short-term, fixed deposits since these offer higher returns than a savings account.
Researching to seek good investment companies in India will help individuals diversify their savings portfolio optimally.
3. Income tax benefits
Since returns on any investment scheme are classified as income, these are taxable. However, there are options that enable investors to claim income tax benefits under different sections of the Income Tax Act, 1961.
Some of these sections include –
|80C||Offers a cumulative tax deduction of up to Rs.1.5 lakh.
Meaning, if an individual invests Rs.1.5 lakh in any of the schemes that offer tax exemptions under this section, then he/she will be able to deduct this amount from his/her taxable income.
It should be noted here that the returns or interest generated by such schemes may be taxable.
Examples – 5-year tax-saver FD, PPF, SCSS, Equity Linked Savings Schemes (ELSS), etc.
|80CCD (1b)||Offers an additional deduction of up to Rs.50,000 over and above Section 80C.
Examples – NPS.
|10(10D)||Offers income tax exemption on the entire amount received from a life insurance policy.|
By considering these factors, individuals will be easily able to answer the question of what is a good investment? – and decide accordingly.
The market offers diverse options for all types of investors, which makes growing savings easier and lucrative.
Those who wish to opt for a quick and easy investment option can opt for fixed deposits or recurring despots. Those holding a savings account can start a fixed deposit plan or RD from their bank’s official app or net banking website. Individuals willing to take risks can, in turn, invest in stocks and mutual funds.
Nonetheless, knowing how to make good investments will help them diversify their portfolio and maximise their returns efficiently.