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At the outset, let us tell you that there is nothing like the best investment vehicle. There is a plethora of investment opportunities available in the market. Your choice should be based on your financial objectives and risk tolerance levels. However, there are quite a few compelling investment cases which no investor can afford to ignore.
If you are looking for capital appreciation
Equities are said to generate the best returns over the long-term. So, if you are looking for long-term capital appreciation and can stomach bouts of volatility, you should be investing in equities directly or settle for an equity mutual fund.
Equity funds gave returns of 6.07 per cent on an average in the last one year. While allocating your funds in equities, make sure that a large part of your portfolio is invested in plain vanilla equity diversified funds and that a small portion is committed to sectoral funds.
For instance, with disinvestment just around the corner, it may be a good idea to put some money in petroleum sector funds.
Gilt funds also give good returns, but only in a falling interest rate scenario. With interest rates stabilising, capital appreciation may be ruled out this year. Gilt funds thus are avoidable for the moment.
If you are looking for capital preservation
If you are extremely risk averse and capital protection is your top priority, the Public Provident Fund (PPF) is an ideal option. This product offers the best post-tax returns in the country. Not only do you get a nine per cent tax-free interest on your investments, you also get tax rebates which enhance your overall returns.
Investors can avail of a 20 per cent tax rebate if they are in Rs 60,000-Rs 150,000 tax bracket and a rebate of 15 per cent if they are in Rs 150,000-Rs 5,00,000 tax bracket. Therefore, PPF forms the best investment option on the tax breaks that it offers.
Interest rate offered by PPF is even higher compared to the eight per cent for RBI Relief Bonds.
Though not the most liquid investment in the market today, the PPF does offer partial liquidity. Investors can avail of loans up to 25 per cent of the balance with PPF after three years. A withdrawal can also be made after the seventh year. The amount, however, cannot exceed 50 per cent of the balance in the fourth preceding year, or last year, whichever is lower.
If you are looking for a stable source of income
For investors looking for a regular income, the best option is RBI Relief Bonds. These bonds come with an eight per cent tax-free interest. This works out to 11.42 per cent returns pre-tax if you are in the highest tax bracket. The investments are capped at Rs 2,00,000 per annum.
However, there are no caps on investments in seven per cent RBI Relief Bonds. The interests are payable half-yearly, but premature encashment is not allowed. You can, however, transfer the bonds by executing a transfer deed.
Post Office Monthly Income Schemes also offer a steady source of income , but come with a lock-in period of six years. They offer a coupon rate of nine per cent. You can claim a maximum deduction of Rs 9,000 per annum against your interest income under Section 80L. Any income above this is taxable.
You can also invest in infrastructure bonds issued by financial institutions like ICICI and IDBI. Investments in infrastructure bonds also enjoy tax rebates under Section 88 and deductions under Section 80L. However, interest income in excess of Rs 9,000 is taxable under Section 80L.
If you don't mind a bit of risk, then debt funds may be a good idea too. In the past one year, debt mutual funds gave a return of 11.62 per cent. However, with interest rates expected to stabilise, this may not be replicated.
Fund managers say that in the 'best case' scenario they may provide nine per cent pre-tax returns.
If you want a regular source of income, using a systematic withdrawal plan will be more tax efficient than opting for a dividend plan (See related story - ). But if you have a one year investment horizon, you can opt for a growth plan.
Gains arising from investments held for more than a year are eligible for indexation benefits as they qualify as capital gains. Purely based on returns, debt funds are losing their sheen. However, they offer other advantages like instant liquidity and diversification.
If you are looking for liquidity
Fixed deposits with banks and money market mutual funds are the most liquid. Money market mutual funds offer to redeem investors' capital on the same working day. However, when investors have to break a fixed deposit with a bank, they may have to forgo some interest receivable.
Therefore, money market mutual funds seem to be the best alternative for someone looking for liquidity.
Therefore, investors have to allocate their investments in the instruments wisely to minimise their taxes. If the limits under section 80L and section 88 have been exhausted, RBI Relief Bonds would be a good option.
