Investors: Be slow but steady
As far as investing goes, there’s no alternative to a well-hedged portfolio. It should contain, in the mix appropriate to the investor, all the instruments he needs to thrive in any economic weather. These instruments typically include deposits, gold, real estate, mutual funds, equity, and bonds.
In the periods of uncertainty and volatility, diversification ensures that parts of the portfolio keep performing even if other parts don’t. For example, the stock markets are volatile, but gold has risen nearly 60 per cent since last year. That said, any portfolio consists of stable instruments that can provide assured returns. These help not just investors with well-hedged portfolios, but also those averse to the idea of market-linked volatility and risks such as senior citizens. Let’s look at some of these options, how they work, and some lesser known risks inherent to low-risk investments.
The Employees’ Provident Fund is one of the best investment schemes you can double-down on. The scheme, available to salaried employees, allows both the employee and the employer to contribute to a retirement fund. While the employer’s contribution is capped at 12 per cent, voluntary contributions can be maximised from the mandatory limit of 12 per cent of the basic and dearness pay to 100 per cent.
Since this is a government-backed savings scheme, there is capital safety and returns are tax-free. At present, the scheme offers 8.50 per cent returns per annum, which is much higher in comparison to almost all other debt-based long-term investment schemes offering assured returns. VPF contributions will also provide you tax deductions under Section 80C. However, this being a long-term scheme, be aware of withdrawal restrictions.
Public Provident Fund (PPF) for the general public, Sukanya Samriddhi Yojana (SSY) for families with daughters under the age of 10 and senior citizen savings scheme (SCSS) for those above 60 — each of these schemes are best-in-class for eligible investors.
These are also government-backed small savings schemes providing above-average returns, the highest degree of capital safety, and very high tax-efficiency.
Returns from PPF and SSY are fully tax-free while interest income from SCSS can be exempt up to Rs 50,000 per year for senior citizens under the provisions of Section 80TTB. These investments can be availed through authorised banks and post offices.
However, be aware of the lock-ins: PPF has a maturity period of 15 years while SSY matures in 21 years. SCSS matures relatively quicker at five years. If you’re looking for a shorter investment, the five-year National Savings Certificate is an alternative. However, it’s not as tax-efficient as the options mentioned above.
Through your local post office, you can book fixed deposits of tenures ranging from one to five years. The interest rates vary from 5.5 per cent to 6.7 per cent compounding quarterly. These returns are marginally better than what government banks and large private banks are providing on deposits of similar tenures.
Not just that, post office savings accounts still offer 4 per cent returns while bank savings returns in most instances have gone below that mark. Therefore, the humble post office may be a good option for risk-averse depositors. Be aware of local Covid-19-related restrictions while stepping into a post office.
These are also known as company deposits. You can make them with private or government-owned companies of various kinds. During a period marked by bankruptcies and defaults, a company deposit isn’t a risk-free option. Therefore, as a risk-averse investor, you must consider low-risk company deposits. These deposits have credit ratings denoted by letters such as AAA, AA, A, B, C, D etc.
AAA-rated deposits are your best option now because they signify the highest degree of capital safety and the highest likelihood of paying back your capital with interest according to the agreed timeline. Before you make a deposit, do the due diligence on the company’s affairs and avoid ones posing a high risk, even if the interest rate offered is higher. Benchmarked against government bank FDs, company deposits could get you 2-3 per cent higher returns in some cases. But don’t go all in. Take a measured exposure to this option, diversify, and get the best of all worlds.
Smaller banks are hungrier for deposits. To attract new depositors, they promise a rate of interest higher than more prominent or larger banks — sometimes 2-3 per cent higher.
However, be aware of risks associated with any bank deposit. For example, if you picked a bank with major NPA-related problems, you may have difficulties if the bank underwent a moratorium in the manner some banks recently did. Just as with company deposits, diversify your deposits across multiple banks, and have exposure to smaller banks proportionate to your risk appetite. Through diversification, you’ll get higher interest along with greater capital safety.
These are just some avenues for assured returns at a time of great volatility and receding interest rates.
However, do note that sometimes avoiding risk is also a risk — the risk of earning low returns and not being able to achieve your life goals.Young investors especially would do well to create a portfolio that allows them to use options such as equity mutual funds to create wealth at a faster pace.
The writer is CEO of BankBazaar.com