Sensex, Nifty rout: From FDs to InvITs, here're low-risk investment options

On Tuesday, investors saw a dramatic drop in their wealth, with stocks nosediving by Rs 39 trillion amid Lok Sabha election results 2024 concerns. The Sensex plummeted nearly 6,100 points to settle at 70,234 points, while the Nifty50 fell below the 21,300 mark during intra-day trading.

The broader markets didn't fare any better. The BSE Midcap crashed by 11.8 per cent, and the SmallCap plunged by 10.3 per cent.

What should investors do?

Amar Ranu, Head of Investment Products & Insights at Anand Rathi Shares and Stock Brokers, advises, "Building a portfolio that includes some less-risky assets can help you ride out market volatility."

While this strategy may lower your risk exposure, it often results in lower returns over the long run. Here are some low-risk investment options to consider for safeguarding your finances:

Savings accounts

Adhil Shetty, CEO of Bankbazaar.com, recommends savings accounts as a fundamental banking product available at all banks. "Savings accounts are highly liquid, allowing you to deposit and withdraw money at any time without any risk of capital loss," he explains. While the interest rates are relatively low, typically ranging from 2.5% to 4% per annum, they offer safety and quick access to funds, making them ideal for short-term savings.

Post Office Savings Schemes

These schemes offer reliable returns of 7-8% with minimal investments, starting as low as Rs 100 per month. They cater to both minors and adults. Amar Ranu points out, "Savings accounts provide stability, with interest rates ranging from 7-7.5%, insured by DICGC up to Rs 5 lakhs per depositor per bank, although they're primarily for transactions rather than investments."

Savings Schemes Under Post Office Investments

Post Office Savings Account

Minimum deposit: Rs 500

Ownership: Single or joint

Interest rate: 4% p.a.

Services: Cheque book, ATM card, e-banking, mobile banking

Interest credited annually

Tax deduction: Up to Rs 10,000 under Section 80TTA, Rs 50,000 for senior citizens under Section 80TTB

Dormant if inactive for 3 years; revival requires KYC and passbook submission

5-Year Post Office Recurring Deposit Account (RD)

Tenure: 5 years

Monthly deposit: Minimum Rs 100

Interest rate: 6.7% p.a., compounded quarterly

Loan: Up to 50% after 12 instalments

Extension: Further 5 years at original interest rate

Premature closure: After 3 years, savings account interest rate applicable if closed before maturity

Post Office Time Deposit Account (TD)

Tenures: 1, 2, 3, 5 years

Minimum deposit: Rs 1,000

Interest rates (Q1 FY 2024-25): 1 year 6.9%, 2 years 7%, 3 years 7.1%, 5 years 7.5%

Tax deduction: 5-year TD under Section 80C

Pledge as security: Allowed

Premature closure: After 6 months, savings account interest rate if closed before 1 year

Post Office Monthly Income Scheme Account (MIS)

Deposit: Rs 1,000 to Rs 9 lakh (single), Rs 15 lakh (joint)

Interest rate: 7.4% p.a., paid monthly

Tenure: 5 years

Premature closure: Allowed after 1 year with penalty (2% if before 3 years, 1% if after)

Senior Citizen Savings Scheme (SCSS)

Deposit: Rs 1,000 to Rs 30 lakh

Interest rate: 8.2% p.a., paid quarterly

Eligibility: Individuals above 60 years, retired employees (conditions apply)

Tax deduction: Under Section 80C

15-Year Public Provident Fund Account (PPF)

Deposit: Rs 500 to Rs 1.5 lakh per year

Tenure: 15 years, extendable by 5 years

Interest rate: 7.1% p.a., compounded annually, tax-free

Tax deduction: Under Section 80C

National Savings Certificates (NSC)

Tenure: 5 years

Minimum deposit: Rs 1,000

Interest rate: 7.7% p.a., compounded annually

Tax deduction: Under Section 80C

Pledge as security: Allowed

Kisan Vikas Patra (KVP)

Deposit: Minimum Rs 1,000

Interest rate: 7.5% p.a.

Tenure: 115 months (9 years 7 months)

Pledge as security: Allowed

Sukanya Samriddhi Accounts (SSA)

For girl children below 10 years

Deposit: Rs 250 to Rs 1.5 lakh per year

Interest rate: 8.2% p.a., compounded annually, tax-free

Tax deduction: Under Section 80C

Tenure: Until girl turns 18, deposits for 15 years, maturity at 21 years or marriage after 18 years

Fixed Deposits (FDs)

FDs offer both flexibility and security, with returns of 7-8%.

Through a Fixed Deposit (FD), you invest a sum of money for a fixed period at a predetermined interest rate. Interest rates vary between financial institutions but are generally higher than those for savings accounts.

Key points:

Tenures: From short-term (7-14 days) to long-term (up to 10 years).

Interest rates: Depend on the tenure. Shorter tenures have lower rates compared to longer ones.

Reinvestment: You can choose to reinvest the interest or receive periodic interest payments.

Types of FDs
 

1. Cumulative FDs:
— Interest is reinvested annually.

— Receive a lump sum at maturity (principal + interest).
— Suitable if you don’t need regular income.

— Benefits from compounding.

2. Non-Cumulative FDs:
—  Interest paid at regular intervals (monthly, quarterly, half-yearly, or annually).
—  Provides a regular income stream.

— No compounding benefits (interest on interest).

Interest calculation formula

Interest on FD = Amount Invested x Interest Rate x (Duration/ 12 months)

Example:

Amount invested: Rs 25,000

Interest rate: 7.1% p.a.

Duration: 3 years

Calculation:

In a cumulative FD, interest is compounded annually.

Year 1:

Interest: Rs 25,000 × 7.1% = Rs 1,775

New principal: Rs 25,000 + Rs 1,775 = Rs 26,775

Year 2:

Interest: Rs 26,775 × 7.1% = Rs 1,900.03

New principal: Rs 26,775 + Rs 1,900.03 = Rs 28,675.03

Year 3:

Interest: Rs 28,675.03 × 7.1% = Rs 2,035.73

New principal: Rs 28,675.03 + Rs 2,035.73 = Rs 30,710.76

After 3 years, an investment of Rs 25,000 at 7.1% p.a., compounded annually, grows to approximately Rs 30,712.

Non-Equity Mutual Funds

For those interested in mutual funds, Non-Equity Mutual Funds are a viable choice. These funds invest in debt instruments, offering lower risk and moderate returns. Ranu suggests, "These funds cater to conservative investors, with tax implications varying based on the holding period." Balanced Advantage Funds and Equity Savings Funds, with lower equity allocation, are good alternatives.

Types of Non-Equity Mutual Funds

Debt Funds

Invest in: Government bonds, debt securities, treasury bills, etc.

Purpose: Generate steady returns with fixed interest rates and pre-determined maturity dates.

Ideal for: Low-risk investors.

Money Market Funds

Invest in: Short-term debt instruments, cash, treasury bills, commercial papers, certificates of deposit.

Purpose: Earn regular interest and maintain stable market value.

Ideal for: Investors seeking stability and regular interest.

Liquid Mutual Funds

Invest in: Debt instruments with a tenure of 91 days.

Maximum investment: Rs 10 lakh.

Purpose: Provide high liquidity, allowing for quick withdrawals.

Ideal for: Short-term investors needing quick access to funds.

Fixed Maturity Funds

Maturity Periods: Range from one month to 5 years.

Invest in: Debt, bonds, and money market instruments.

Purpose: Earn interest with lower risk compared to equity mutual funds.

Ideal for: Investors seeking predictable returns over a fixed period.

Pension Funds

Purpose: Long-term investment for retirement savings.

Invest in: Typically a mix of equities and lower-risk debt instruments.

Ideal for: Long-term investors looking for low-risk options to grow their retirement savings.

InvITs (Infrastructure Investment Trusts)

InvITs provide an opportunity to invest in infrastructure projects, offering stable returns but with some exposure to market risks. They involve dividend distribution tax (DDT) and capital gains tax, appealing to both retail and institutional investors. The expected return from InvITs is around 9-10%.

Types of Infrastructure Investment Trusts (InvITs)

1. Investment in revenue-generating finished projects: These involve investments made through projects already generating revenue and are typically offered to the public.

2. Investments in projects under construction: Investors can also put their money into projects still under construction, which are usually offered more privately.

"By diversifying their portfolio to include these low-risk options, investors can better withstand market fluctuations and secure their financial future," Amar Ranu says.

Liquid funds

Liquid funds are a type of Debt Mutual Fund that primarily invests in short-term debt securities, offering fixed returns. Examples include the Aditya Birla Sun Life Liquid Fund and the SBI Liquid Fund.

"These funds are considered low-risk and offer better returns than savings accounts, although they are not entirely risk-free like bank deposits," says Shetty.