INVESTMENT OPTIONS IN INDIA: RISKY ASSETS

Every human being falls several times before he/she learns how to walk. Similarly the investment and its cold, chaotic and confusing world cannot be understood until you get into it with some real hard cash in your pocket.

India, one of the fastest growing economies in the world is attracting a lot of foreign investors today. Today, Indian economy is growing with a good pace and with it is linked the Investment opportunities growth. Most of the investors have an eye on the markets that have a higher growth rate than the developed economies. India today is one of the top choices for investment for various investors. But the question is where to invest in India?

INVESTMENT AVENUES

Investment in India can be classified into 2 classes:

1. Risky assets class

Risky assets refer to assets that have a significant degree of price volatility. This class contains investment options that offer unguaranteed return. Risky Assets carry a varying level of risks with them. Some of the risky assets are commodities, equities, high-yield bonds, real estate and currencies. In the banking context, risk assets generally referred as an asset owned by a bank or financial institute whose value may fluctuate due to changes in interest rates, credit quality and repayment risk and so on. The term may also refer to equity capital in a financially stretched or near-bankrupt company, as its shareholders’ claims would rank below those of the firm’s bondholders’ and other lenders.

2. Risk free assets class

Risky assets class contains assets that have certain future return for sure. Different people say it differently, some says that there’s no asset that can be called as risk free because all financial assets carry along with them some sort of risk. It’s a different point of view if the risk associated with an asset was very small and can be neglected by the owner, but it still exists. Government bonds are generally not considered risky assets. Let’s start off with the Risky assets in this article with the Risk free assets covered in the next article.

RISKY ASSETS

1. MUTUAL FUNDS:

Mutual fund, an option to get your money managed professionally. The investment avenues offers

• Cost efficiency
• Professional management
• Risk – diversion
• Good regularity body

It allows investors to start with a minimum of just Rs. 500. NRI can easily invest into mutual funds. What it requires is just a bank account in India & KYC (Know Your Client) to invest in Indian mutual funds.

2. DIRECT EQUITIES

A type of security which offers the investors the ownership of a company. Equities are bought & sold in the Stock Exchanges. It is one of the good investment options for a long term horizons. It beats all the asset class in terms of returns over a longer time frame. With good return comes in greater risk and hence can be considered as one of the riskiest asset class as well. Equities are highly risky. The risk of loss of capital is very high. NRI can also explore this avenue for Investment by opening up a bank account and trading account in India. They can choose the option of repatriation of non- repatriation at the time of opening an account.

3. COMMODITIES

Having emerged as one of risky assets class in recent time commodity trading is still in its nascent stage in India. The Government has allowed investment into listed commodities. Currently, commodity trading is available in bullions, base metals and Agri-commodities. Investor needs to open an account with the broker to trade in a commodity market. Commodity market is very risky. Only investors with sound knowledge are suggested to invest in commodities. As of now, NRIs are not allowed to trade in commodity market in India.

4. LIFE INSURANCE

Life Insurance is a legal contract between a buyer and the insurance company. Insurance company is liable to pay a predominant amount to the nominee in case of death of a buyer. The primary focus of life insurance is to protect the family (financially) in case of an event of death of the earning member of the family. Until the introduction of Unit Linked Insurance Plan (ULIP), Life insurance was a traditional product and it was giving fix returns of 6%- 7%. ULIP gives the benefit of risk cover as well as the returns of equity market as it invest the premium into equity linked instruments. Now, Insurance is also open for NRI investment. To buy insurance in India, NRI has to go through few formalities. NRI needs to submit Proposal from (available in prescribed format), Medical Report, and Proof of age and Income etc.

5. REAL ESTATE

The most profitable and an evergreen investment option toady in India is Real Estate. Whether a residential or commercial property most of the investor today prefers investment into real-estate. Look at the property available at 15-20 Km away from the city with the time frame of 5- 7 Yrs if you want to invest in Real Estate and that’s the Guru Mantra today. Real estate investment offers very low level of liquidity and generate higher rate of returns. NRI’s are fee to invest into Indian real estate. They can buy and own property in India, however, few Real estate Investment Trust are not open for NRI investment.

Read More

INVESTMENT OPTIONS IN INDIA: RISK FREE ASSETS

Having already discussed about the risky assets investment options in India we will be moving towards the risk free investment options in this article. We all know various investment options available that gives good return. But believe me there are “n” no. of things that a good investor will look upon before putting his hard earned cash.

Let’s look upon the risk free assets investment options and some key factors that an investor should look upon to get what his money deserves.

NSC: National Savings Certificate (NSC)

• National savings certificate offers a fixed amount of interest.
• The Department of Post, Government of India issues NSC.
• NSC can be availed at various authorized post offices.
• The maturity period of NSCs is 6 years.
• The rate of return offered NSC is 8% per annum.
• NSC gives tax benefit under section 80 C. Minimum valid investment amount in NSC is Rs. 500.

If we talk practically, then NSCs can be considered as a risk free avenue of investment because of the reason that they are backed by the Government of India. The option is not available for NRI’s Investment.

Fixed Deposit

A fixed deposit is nothing but a risk free investment into the bank /corporate for a specific period of time and earns some interest as return. The rate of returns offered in fixed deposit is higher than what is offered by banks savings account.

• An investment into 5 year fix deposit is eligible for tax benefit under section 80 C maximum of Rs. 1, 00,000.
• The benefits under this investment option are open for NRIs as well. NRI can invest in Fixed deposits offered by national as well as private banks in India.

PPF

Started with the objective of providing income security to the workers in the unorganized sector and self employed individuals in their old age, PPF is a government backed, long-term small savings scheme initiated by the Central Government.

• It offers an interest rate of 8% per annum and offers tax benefit under section 80 C of up to Rs. 70,000.
• PPF has a lock in tenure of maximum 15 Yrs. However, it provides facility to withdraw 50% of the balance at the end of the fourth year, proceeding the year in which the amount is withdrawn or the end of the preceding year whichever is lower.
• However, with no benefits for foreign investors, the option is not available for NRI’s Investment.

Post office – MIS

• MIS – monthly income Scheme made especially for the purpose of providing regular pension to the investors.
• Under Post office MIS, the investor can enjoy 8% per annum interest paid on monthly basis. Post office MIS limits an investment of maximum Rs. 4.5 lakh and a maturity period is 6 years.
• It provides the facility to prematurely enchase after 1 year but before 3 years at the discount of 2% and after 3 years at the discount of 1%.
• The Post office MIS option is not open for NRI’s Investment.

Bonds

• Bonds is a form of financial instrument used for lending money to government or company and in return, enjoy a fix amount of interest on principal paid by the government or company.
• A bond is a debt instrument which is issued for a period of more than one year.
• The return offered by the corporate bonds is much higher than those paid on government bonds, backed by the risk factor.
• The company or the government borrows money and promises to pay a stated rate of interest for a defined period and then to repay the principal at a given date of maturity to the investor.
• The important note that must be taken care of by every investor before investing into bonds is the rating and the interest rate offered by the bond. The option is open for the NRI’s who can also invest into Bonds and can enjoy a good return.
• However, it also depends from issuer to issuer and the terms and condition varies. The eligibility criteria for the investors are clearly mentioned by the bond issuer. NRI’s can always refer to the offer document and invest into bond accordingly.

POINTS TO REMEMBER BEFORE YOU TAKE AN INVESTMENT DECISION

The key points that an investor must always keep in mind before putting his money for a good return includes the following:

Liquidity

One of the most important criteria for selection of Investment Avenue is Liquidity.

An investor must look upon the liquidity option according to the need for the return. An investor needing money in a time frame of 3-4 years should not invest into PPF since it comes with a minimum lock in of 5 Years. 

Risk Profile

The investor must choose the investment option based on the risk profile.

E.g. Equities is not a good option for a low risk investor. If looking for a safe investment option the government backed options should be preferred, which may offers a low return but involves a low risk at the same time. Risky asset class may cause a loss of principal amount.

Taxation

Looking at the tax treatment of any investment avenue before investing is really important. Since taxation can kill your real return on investment, it becomes really very important to keep in mind the taxation treatment at the time of investment.

E.g. A investor invests into fix deposit at 9% and falls under 30% tax bracket. The real yield will be just 6.22% which is equivalent to current inflation rate. In actual, the investor is not earning any returns post inflation.

Time Frame

As liquidity the time horizon is another important factor to look upon before Investment in any of the asset class.

E.g. Mutual fund or Fix deposit : could be a good option for short term investment debt;

where as real estate and regular investment into equities can be a good option for long term investment.

Read More