Investments are a function of once’s risk taking abilities, their goals and aspirations and their responsibilities. Hence, it is important that before starting off one takes note of their income and expenditures, short term goals like taxation and regular spending as well as their long term goals like Marriage, Education and Retirement.
The difference between the income and expenditure and the time-frame would then be basic factors that would decide the risk taking ability and hence the proportion of assets to invest in.
I’ll start with the different kind of assets.Assets can be broadly classified into Fixed income, Equities and Commodities.
FIXED INCOME
A Fixed Income instrument is an instrument in which the time period and returns are known in advance. Some of the Fixed Income instruments popular in India are:-
Public Provident Fund (PPF): The PPF is a long-term, government backed small savings scheme of the Central Government with a time frame of 15 years.One has to deposit certain amount each year in this period either in cash or by cheque. The minimum deposit that you can make into a PPF account in one whole financial year is Rs. 500. The maximum is Rs. 70, 000. The interest is compounded annually and is credited at the end of the financial year. The current interest rate stands at 8%.The amount you invest is eligible for deduction under the Rs. 1, 00,000 limit of Section 80C. On maturity, the entire amount including the interest is non-taxable.
National Saving Certificate (NSC): National Savings Certificates (NSC) are certificates issued by Department of post, Government of India and are available at all post office counters in the country. They have a time-period of 6 years and require a minimum investment of Rs 500 but have no maximum limit. The interest is compounded semi-annually but is deemed to be reinvested and qualifies for tax rebate for first 5 years under section 80 C of Income Tax Act. The interest is taxable is there is no TDS.The amount invested however cannot be encashed till the maturity period is over.
Post Office Monthly Income Scheme: It also comes with a maturity period of 6 years. The minimum amount that can be invested is Rs 1500 and a maximum of Rs 450000 for an individual and Rs 900000 for a joint account. The interest is earned monthly and provides a auto credit facility of interest to your SB Account.
Public Sector Undertaking Bonds (PSU Bonds): These are Medium or Long Term debt instruments issued by Public Sector Undertakings (PSUs). They have varying Interest rates based on the time horizon.
Corporate Bond: These are instruments issued by corporate with wide range of tenors.Compared to government bonds, corporate bonds generally have a higher risk of default. This risk depends, of course, upon the particular corporation issuing the bond, its rating, the current market conditions and the sector in which the Company is operating. To compensate for this risk, they offer higher yields than Government bonds.
Fixed Maturity Plans: These are issues and managed by mutual funds and similar to Fixed deposits, have a definite end date that could range from a month to a few years.They typically invest in typically Govt backed securities and corporate fixed deposits. Unlike a bank fixed deposit, the rate of return promised by a mutual fund for a FMP is not guaranteed, but is typically close to the targeted return since the investments are in Fixed income securities. The minimum amount required for investment is generally Rs 5000. The dividends received in the hands of the investor is tax-free. If one invests in a growth option, he can then avail benefits of indexation i.e. the taxable gains are reduced by the inflationary changes. Taxable Gains = Amount Returned – (Amount Invested x Inflation Index for Redemption Year/ Inflation Index for Investment Year)
With thanks! Valuable information!