The 4 Investment Routes To Your Financial Goal

Best investment choices for any individual, including the salaried, depend on four major factors – liquidity, risk appetite, tax slab and the investment horizon. Investors can choose multiple products aimed at various financial goals with different investment horizons. For instance, investors with higher risk appetite can choose high-risk products for their long-term financial goals, while still investing in low-risk fixed-income instruments for ensuring income certainty and capital protection for their short-term financial goals.

Let’s go through four top investment options that salaried individuals can opt for:

Bank Fixed Deposit 

Fixed deposits assure principal repayment and interest return at the booked rates regardless of any changes in the card rate during the fixed deposit tenure. Fixed deposits opened with the scheduled banks also get covered under deposit insurance programme from DICGC (RBI’s subsidiary). The insurance cover is available on cumulative bank deposits that include RDs, FDs, savings and current accounts of up to Rs 5 lakh per bank per depositor in occasion of bank failure. Thus, fixed deposits opened with scheduled banks are an ideal investment product for the ones looking to invest for short to medium term financial goals as they offer income certainty and maximum level of capital protection.

Depositors looking to save tax under Section 80C can choose to invest in 5-year tax-saving FDs. However, note that income earned from the tax saving fixed deposits is taxable according to the income slab of the depositor.

Bank Name

Interest Rates

Highest slab (%)

1-year tenure (%)

3-year tenure (%)

5-year tenure (%)

SMALL FINANCE BANKS

Suryoday Small Finance Bank

7.50

6.75

7.15

7.50

Jana Small Finance Bank

7.25

6.75

7.00

7.00

Equitas Small Finance Bank

7.00

6.60

7.00

6.75

Utkarsh Small Finance Bank

7.00

6.75

6.75

6.75

PRIVATE SECTOR BANKS

State Bank of Mauritius

7.50

6.50

7.50

6.50

RBL Bank

6.75

6.50

6.75

6.40

DCB Bank

6.75

6.25

6.75

6.75

IndusInd Bank

6.50

6.50

6.50

6.50

PUBLIC SECTOR BANKS

Union Bank of India

5.60

5.25

5.50

5.55

State Bank of India

5.40

5.00

5.30

5.40

Canara Bank

5.50

5.25

5.50

5.50

Punjab & Sind Bank

5.25

5.25

5.25

5.25

(Data as on 12th January 2021, Source: Paisabazaar)

Debt Mutual Fund

Debt mutual funds usually invest in market-linked fixed income instruments like money market instruments, government securities and corporate bonds. As they are exposed to fixed-income instruments, it makes debt mutual funds less volatile in comparison to equity mutual funds. Moreover, the tradable nature of those fixed-income instruments makes debt fund categories to book higher returns as against fixed deposits and savings bank accounts. Thus, debt mutual funds are prudent choices for the ones with short-term financial goals wanting higher returns than FDs.

Investors looking for a higher degree of capital protection for their debt mutual fund investments should opt for short-term debt funds like overnight, liquid, low duration, short duration and ultra-short term duration based on their investment horizon. Lower maturity profiles of such debt funds make them less prone to interest rate risk as compared to other debt fund categories. Investors with higher risk appetite and longer investment horizon can opt for debt funds having longer duration profiles.

Debt Funds Category

Fund Category Average Returns (%)

1 Year

3 Year

5 Year

7 Year

Debt: Corporate Bond

9.69

7.96

7.83

8.53

Debt: Money Market

5.42

6.81

6.99

7.47

Debt: Short Duration

8.73

6.61

6.98

7.62

Debt: Ultra Short Duration

5.00

5.85

6.39

7.08

Debt: Liquid

3.88

5.76

6.26

6.92

Debt: Low Duration

6.26

5.07

6.01

6.59

(Data as on 11th January 2021, Source: Paisabazaar)

Equity Mutual Fund

Equity funds invest a minimum of 65% of their corpus in equities. As equities outperform inflation and fixed income investments by a wide margin over the long run, equity funds are well suited for investors wanting long-term creation of wealth via equities but lack the expertise or time to directly invest in stocks. Investors  may also opt for investing through ELSS (Equity Linked Savings Schemes) which falls under Section 80C of the Income Tax Act. Among all investment products under the Section 80C deduction, ELSS has the benefit of having the shortest lock-in period. 

Investors can start investing in equity mutual funds with fresh lump sum investments of Rs 5,000, for additional/subsequent investments in the same mutual fund, the minimum amount is generally Rs 1,000. For those looking to invest in ELSS, both the lump sum and additional investment amount is Rs 500.

Equity Funds Category

Fund Category Average Returns (%)

1 Year

3 Year

5 Year

7 Year

Equity: Large Cap

19.39

10.09

14.05

14.02

Equity: Multi Cap

19.24

7.30

12.92

15.64

Equity: ELSS

20.06

6.52

12.89

15.69

Equity: Large & Mid Cap

20.59

6.00

13.09

16.42

Equity: Mid Cap

28.94

4.86

12.52

18.91

Equity: Small Cap

31.93

0.73

11.59

19.78

(Data as on 11th January 2021, Source: Paisabazaar)

Public Provident Fund (PPF) 

Public Provident Fund comes with a sovereign guarantee from the government, making it one of the safest among other investment options. As PPF falls under Section 80C, it enjoys EEE tax status and offers tax exemptions on their investment amount, interest component and also maturity amount. PPF’s tax-free status along with accompanying sovereign guarantee endow them an edge over five-year tax-saving fixed deposits. 

However, biggest drawback of PPF is lack of liquidity. As they come with a lock-in period of 15 years, partial withdrawals, premature closures and loan against PPF are possible just in case of pre laid conditions. PPF’s interest rate is reviewed by the finance ministry each quarter and interest earned on them is compounded annually. Presently, PPF is offering 7.1% annual returns. 

Only the low-risk investors looking for capital protection for their long-term financial goals should choose PPF. Those investors with moderate to high risk appetite wanting to create bigger corpus for their long-term financial goals should opt for equity funds. 

The author is Director, Paisabazaar.com

The views expressed are the author’s own. Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.