Investing avenues for risk-averse small investors

The interest rates on small savings schemes are no more attractive due to record low-interest rates. Consider this: Public Provident Fund (PPF), which is one of the favourite investment avenues for conservative investors, has been offering 7.1% currently. Similarly, senior citizen saving schemes are giving interest of just 7.4%. Previously, the interest rate on small saving schemes was linked to government bond yields. However, since April 2016 the rates are market-linked, which are reviewed quarterly based on the average yield on the government bonds of similar maturity in the previous quarter plus a mark-up on this. The mark-up on the public provident fund is 25 basis points. A hundred basis point is equal to 1%.

Shift towards equities

Riding on the stock market wave, the monthly SIP book has already crossed Rs 10,000 crore mark. Falling interest rates along with the good returns from equity markets have made equity investments lucrative. While investing in the equity market, it is advisable for the first-time investors to invest in large-cap funds, preferably through SIP so that their risks are spread out. Most importantly, invest in equities only after assessing your risk profile,
time horizon and liquidity requirements.

However, fixed-income investors looking for other avenues can consider these options.

Voluntary provident fund

Salaried people contribute 12% of the salary towards the Employees Provident Fund (EPF) and a matching contribution is made by the employer. Currently, EPF offers an interest rate of 8.5%. But those who want to make higher contributions can invest through a voluntary provident fund (VPF). The good part is that the interest earned as well as the accumulation will be tax-free on withdrawal.

While increasing VPF keep in mind the new rules introduced in the budget which says that if the annual PF contribution exceeds Rs 2.5 lakh then the interest earned will be subject to tax on the exceeding amount. The limit increases to Rs 5 lakh if there is no employer contribution.

Floating Rate Savings Bonds

Unlike regular bonds that pay a fixed interest rate, Floating Rate Savings Bonds has a variable rate of interest. These bonds are issued by the government of India and come with a lock-in period of seven years with the interest rate fixed at 7.15%, which is payable at half-yearly intervals on January 1 and July 1 every year. As per the taxability, the return from your investments is added to your income and taxed as per your tax slab.

Bank or company deposits

Bank FD gives an annual return of 5-6%. On the other hand, corporate deposits give a higher return than bank deposits of 6-8%. The investor should understand that they give higher returns only because they are risky. Do not look for lower-rated FDs to get higher returns. In addition, interest earned from deposits is taxable as ‘Income from Other Sources’ and are taxed according to your slab rate.

Debt mutual funds

Small savings investors can also consider investing in debt mutual funds for better inflation-adjusted returns. Debt funds especially liquid and ultra-short duration funds are suitable to those seeking liquidity for emergency situations. Over the last year, they have given an average return of 4-6 percent. They are also very tax-efficient especially when you avail Systematic Withdrawal Plan or SWP as you pay tax only on gain and not on the whole amount withdrawn.