People invest their hard-earned money into investment plans in an attempt to take care of future contingencies, plan life events, and to deal with financial and health emergencies. We must note that prudent investors should never invest in speculative activities because these are likely to destroy financial prospects over the long term.
That said, we note that the various financial instruments available in the market can help individuals and families to invest their finances and gain healthy returns. Citizens can invest in these plans with a view to preserving their capital, build a corpus of funds over time, develop assets, and liquidate their investments under certain circumstances.
We intend to examine some of the available fixed income instruments that can help citizens to gain a sense of financial security and to lead productive lives.
Rates of return on various government-backed investment instruments
The Government of India Savings bond program (2003) is a fixed income instrument that offers an 8% return per annum. Investors must face a mandatory lock-in period of six years from the date of commencement. This bond is issued by the Reserve Bank of India and is backed by a sovereign guarantee.
Investors must note that there is no investment ceiling on this instrument and the interest accumulates in six-month intervals and is payable after the maturity period along with the principal amount invested in this plan. However, the total amount of money due to investors is taxable at the time of withdrawal.
The 5-year National Savings Certificate is a popular small savings instrument that offers an 8% rate of interest per annum. Investors that opt for this instrument can avail tax deduction on their deposits and a guaranteed return on their investment.
This instrument is fixed in terms of a cumulative payout of interest at the end of the investment horizon. This instrument is deemed a liquid investment on which loans can be availed. Investors must note that this investment qualifies for tax rebate under Section 80C.
In addition, the interest, which, accrues annually is deemed to be reinvested and qualifies under Section 80C. These certificates can be bought at general post offices across India.
The Public Provident Fund is a long-term investment vehicle that offers investors guaranteed returns on investment and a tax-free withdrawal on maturity. Resident Indians can deposit a minimum of INR 500 per year and a maximum of INR 1, 50, 000 per annum.
This vehicle affords 8.10% compounded interest on a per annum basis and bears a mandatory tenure of 15 years. Investors that are interested in risk-free returns can choose this investment vehicle because the returns are guaranteed by the Government of India.
We must note that this investment is considered liquid because loans can be availed based on investments made in the Public Provident Fund. Investors can open an account under this scheme at any head post office or branches of certain nationalized banks.
The Senior Citizens Savings Scheme was launched in 2004 and ensures a regular income stream for senior citizens and. Retired Indian citizens can open and operate this account at the age of 60 years with a minimum investment of INR 1,000.
The scheme generates an annual return of 8.4% per annum compounded annually. Investors must note that the capital invested in this scheme is not inflation-proof but is guaranteed by the Government of India. The payout of interest is on a quarterly basis and the scheme is subject to a lock-in period of five years.
Thereafter, it can be extended by another three years. The interest earned on the deposit is taxable and is deducted at the source. Certain branches of many nationalized banks enable interested citizens to open an account under this scheme.
Company deposits can be opened by resident Indians that are 18 years and older with a minimum investment of INR 1,000 per annum. This instrument offers a prescribed rate of return over a fixed tenure. Company deposits are governed by Section 58A of the Companies Act, 2013.
These deposits must have a credit rating from an Indian credit rating agency and premature encashment of the deposit is allowed. Investors must bear in mind that the capital invested in this instrument is not inflation-proof and neither is it secure and therefore, a risky investment option.
The rate of interest varies and depends on the tenure of the maturity period. Some company deposits are configured to offer 12.5% annual return and tenures can range from six months to ten years. Investors that are interested in a regular income can invest in company deposits and are paid on a monthly, quarterly, half-yearly, or annual basis.
The Post Office Term Deposit enables investors to earn guaranteed returns over the tenure of the investment. Resident Indian citizens can invest in this instrument in multiples of INR 200. The interest rate on the deposit may vary from 7.10% to 7.90% but this depends on the tenure of said investment.
Investors can opt to stay invested in this instrument for a maximum of five years in order to avail income tax deductions on the amount invested. The minimum tenure for this instrument is fixed at one calendar year, but investors can open any number of deposit accounts.
An investor that opts for a two-year tenure, receives an interest rate of 7.20% while investors that choose a three-year horizon are eligible for 7.40% interest.
The New Pension System is a recent offering from the Government of India that offers pension benefits to Indian citizens. This defined contribution plan is a market-linked product that is liquid and allows investors to withdraw early. This instrument affords certain tax deductions to investors who must invest a minimum of INR 1,000 when opening an account.
The Sukanya Samriddhi Yojana is a tax-free small savings scheme that can be opened in the name of a girl child with a minimum investment of INR 1,000. Resident Indians can open an account at any post office or commercial bank and can withdraw up to 50% of the corpus once the girl child attains 18 years of age.
An interest rate of 8.6% is applicable to all deposits made under this scheme. However, the Government of India reviews and resets the interest rate every quarter of the calendar year. Funds invested under this scheme are exempt from all forms of taxation and represents an attractive debt investment.
Infrastructure bonds are financial instruments that attract a minimum investment of INR 5,000, offer an interest rate of 7.25% to 8% per annum, and have a tenure of 10 years. These tax-savings instruments offer investors certain tax exemptions and remain illiquid during the first five years of tenure. The interest in this instrument is paid annually or cumulatively. We note that these bonds are listed on bourses and can be traded after a lock-in of five years.
Bank recurring deposits are offered currently, for a maximum tenure of ten years, and provide interest rates between 6.75% and 9% per annum. Investments made in such deposits earn a higher rate of return than savings accounts in banks. The interest rate on these deposits is assured for the term of the investment tenure.
These deposits are liquid investments and certain loans can be availed by pledging these deposits with the banks. However, this instrument offers no tax advantages and does not qualify for a credit rating.
In the preceding paragraphs, we have surveyed the rates of returns on certain fixed-income investments. Investors and citizens would be well advised to make sure that they understand the terms and conditions of each scheme before they proceed to make an investment.
Investors that can stay invested for the entire tenure of an instrument tend to get higher returns on their investments, and this should be the ideal for all investors to follow.