Financial Investment Options Summarised below are the short-term and long-term financial investment options available for

Indian investors. Click on the instrument names to see a short explanation. Short-term investing Savings bank account Use only for short-term (less than 30 days) surpluses Money market funds Offer better returns than savings account without compromising liquidity Bank fixed deposits For investors with low risk appetite, best for 6-12 months investment period Long-term investing Post Office savings Low risk and no TDS Public Provident Fund Best fixed-income investment for high tax payers Company fixed deposits Option to maximise returns within a fixed-income portfolio Bonds and debentures Option for large investments or to avail of some capital gains tax rebates Mutual Funds Unless you rate high on our Investment IQ Test, use mutual funds as a vehicle to invest Life Insurance Policies Don't buy life insurance solely as an investment Equity shares Maximum returns over the long-term, invest funds you do not need for at least five years 1. Savings Bank Account Use only for short-term (less than 30 days) surpluses Often the first banking product people use, savings accounts offer low interest (4%-5% p.a.), making them only marginally better than safe deposit lockers. Back

2. Money Market Funds (also known as liquid funds) Offer better returns than savings account without compromising liquidity Money market funds are a specialized form of mutual funds that invest in extremely short-term fixed income instruments. Unlike most mutual funds, money market funds are primarily oriented towards protecting your capital and then, aim to maximise returns. Money market funds usually yield better returns than savings accounts, but lower than bank fixed deposits. With the flexibility to issue cheques from a money market fund account now available, explore this option before putting your money in a savings account. Back 3. Bank Fixed Deposit (Bank FDs) For investors with low risk appetite, best for 6-12 months investment period Also referred to as term deposits, this product would be offered by all banks. Minimum investment period for bank FDs is 30 days. The ideal investment time for bank FDs is 6 to 12 months as normally interest on bank less than 6 months bank FDs is likely to be lower than money market fund returns. It is important to plan your investment time frame while investing in this instrument because early withdrawals typically carry a penalty. Back 1. Post Office Savings Schemes (POSS) Low risk and no TDS POSS are popular because they typically yield a higher return than bank FDs. The monthly income plan could suit you if you are a retired individual or have regular income needs. Besides the low (Government) risk, the fact that there is no tax deducted at source (TDS) in a POSS is amongst the key attractive features. The Post Office offers various schemes that include National Savings Certificates (NSC), National Savings Scheme(NSS), Kisan Vikas Patra, Monthly Income Scheme and Recurring Deposit Scheme. Back 2. Public Provident Fund (PPF)

Best fixed-income investment for high tax payers PPF is a very attractive fixed income investment option for small investors primarily because of 1. An 11% post-tax return - effective pre-tax rate of 15.7% assuming a 30% tax rate 2. A tax-rebate - deduction of 20% of the amount invested from your tax liability for the year, subject to a maximum Rs60,000 for a tax rebate 3. Low risk - risk attached is Government risk So, what's the catch? Lack of liquidity is a big negative. You can withdraw your investment made in Year 1 only in Year 7 (although there are some loan options that begin earlier). If you are willing to live with poor liquidity, you should invest as much as you can in this scheme before looking for other fixed income investment options. Back 3. Company Fixed Deposits (FDs) Option to maximise returns within a fixed-income portfolio FDs are instruments used by companies to borrow from small investors. Typically FDs are open throughout the year. Invest in FDs only if you have surplus funds for more than 12 months. Select your investment period carefully as most FDs are not encashable prior to their maturity. Just as in any other instrument, risk is an embedded feature of FDs, more so because it is not mandatory for non-finance companies to get a credit rating for this instrument. Investors should consciously (either though a credit rating or through an expert) select the companies they invest in. Quite a few small investors have lost their life's savings by investing in FDs issued by companies that have run into financial problems. Back 4. Bonds and Debentures Option for large investments or to avail of some capital gains tax rebates Besides company FDs, bonds and debentures are the other fixed-income instruments issued by companies. As a result of an illiquid secondary market and a lack-lustre primary market, investment in these instruments is largely skewed towards issues from financial institutions.

While you might find some high-yielding options in the secondary market, if you do not want the problems associated with bad deliveries and the transfer process or you want to invest a large sum of money, the primary market is the better option. Back 5. Mutual Funds Unless you rate high on our Investment IQ Test, use mutual funds as a vehicle to invest Have you ever made an investment in partnership with someone else? Well, mutual funds work on more or less the same principles. Investors pool together their money to buy stocks, bonds, or any other investments. Investing through mutual funds allows an investor to 1. Avail the services of a professional money manager (who manages the mutual fund) 2. Access a diversified portfolio despite making a limited investment Our primer Investing in Mutual Funds should educate you a lot more on the benefits of investing in mutual funds and strategies you could employ. Back 6. Life Insurance Policies Don't buy life insurance solely as an investment Life insurance premiums, depending upon the policy selected, include the costs of 1) death-benefit coverage 2) built-in investment returns (average 8.0% to 9.5% post-tax) 3) significant overheads, including commissions. This implies that if you buy insurance solely as an investment, you are incurring costs that you would not incur in alternate investment options. It is, however, important to insure your life if your financial needs and profile so require. Use our Are You Adequately Insured planning tool to find out if you need life insurance, and if yes, how much. Back 7. Equity Shares

Maximum returns over the long-term, invest funds you do not need for at least five years There are two ways in which you can invest in equities1. through the secondary market (by buying shares that are listed on the stock exchanges) 2. through the primary market (by applying for shares that are offered to the public) Over the long term, equity shares have offered the maximum return to investors. As an investment option, investing in equity shares is also perceived to carry a high level of risk.
Benefits of Investing Early

In the Power of Compounding we discuss the importance of time in compounding. In this article we discuss how, because of the power of compounding specially over a long period of time, the difference between starting to invest early versus starting late can have a significant impact on your wealth. Well elaborate this with the help of an example. Let's compare two friends Sonia and Peter. Sonia starts saving Rs750 per year from the time she is 15. After 15 years, she stops investing money to her nest egg. On the other hand, Peter starts investing Rs5,000 per year when he is 30 and continues investing this amount every year till he is 60. If both earn 15% post-tax return per annum on their investments, who will have more wealth when they retire at age 60? Sonia. Her Rs750 annual savings between age 15 and 30 will aggregate to Rs27.7 lakhs by age 60, whereas, Peters Rs5,000 annual savings between age 30 and 60 will aggregate Rs25 lakhs. Both will have built up meaningful wealth (compared to their investments). BUT for Sonia to build her wealth, the difference in the annual investment amount and the fewer number of years required for making investments, highlight the importance of starting to invest early. To summarise, the power of compounding is the single most important reason for you to start investing right now. Remember, every day that your money is invested, is a day that your money is working for you. Risk vs Returns

Every investment has an attached risk 'Just buy this blue-chip stock, theres no risk at all. For most people who invest in shares there is a good

chance that youve heard someone say this before. For most people who just put their money away in bonds or deposits, one of your main reasons for this probably is -I dont want to take any risk at all, I just want my money safe. Are these statements true? Is investing in bonds or deposits completely risk-free? Or investing in blue-chip stocks necessarily very low risk? NO. Whenever more than one outcome is possible from an investment, there is always some amount of risk. Only the level of risk is different.

Use risk to analyse expected returns While investing, risk is measured to evaluate the kind of returns you should expect from the investment. Or your return expectations should be based on the level of risk you can bear. In principle, the higher the risk, the higher the returns that should be required. Empirically returns across various asset classes show that investment in equity shares give the highest level of returns in the long-term, followed by corporate bonds and deposits and lastly bank deposits and government debt. Not surprisingly, the level of risk is also in the same order. You might be saying - how can debt be risky? It is. Companies that run into financial trouble could delay your interest payments or even default on paying back your money. Even government debt has some amount of risk. How? Simply put, governments like companies also face the risk of financial problems. However, lack of funds for a company could result in the company defaulting on a loan repayment. But a government can always print more currency and repay its borrowings. So you will get your money back. BUT, there is a hidden cost (risk). Printing more currency is likely to lead to higher inflation and hence lower real returns on your investment (see our article Running to Stand Still to understand about real returns). Agreed that the chances of governments or well-managed companies getting into serious financial troubles are low. But that is only difference in the level of risk. There is a risk attached, and that cannot be questioned.

Understanding risk vs return essential for good financial planning You might ask - why is it so important to understand the risk versus return relationship? Because if you dont, it is quite likely that your investment returns will not match your risk profile and consequently you are not managing your hard-earned money well. A wasted opportunity, as even a small difference in your investment returns (at the same level of risk) can make a BIG difference to your financial wealth (due to the astounding Power of Compounding). To understand the importance of managing your money well read Guide To Financial Planning. This article highlights why financial planning is not as difficult as it sounds and how you can easily make your hard-earned money work for you. Also you can use our Risk Analyser to understand your risk profile (both your risk-taking capacity and your risk tolerance level) and read The Need To Diversify to understand how you can increase your expected returns while not increasing your level of risk. The Need to Diversify

Reduce risk without compromising returns. In our article Risk versus Return we highlight how every investment has a risk attached. And how the higher the risk, the higher should be the expected return from any investment. This probably then imply that if you want to reduce the risk in your portfolio, the only choice for you is to move your investments into low yielding investments. Right? Wrong. Diversification across investments is another way to reduce the risk of your portfolio. To understand how, look at this simple example (it involves some basic statistical concepts but dont get turned off, its simple to understand and you can get into the calculations only if you want) Say, there are two assets A and B. Both assets have a potential return of 10% and a standard deviation (a statistical measure which measures the variability (i.e. risk) of the potential returns) of 20%. Also, the returns of both these assets are uncorrelated i.e. the performance of Asset A is not dependent at all on the performance of Asset B. Now assume you invest equally in both these assets. Your weighted potential return (0.5 * 10% + 0.5 * 10%) will equal 10% - this is the same return as that for the individual assets. However, due to the fact that you have now spread your risk over two uncorrelated assets, the standard deviation (i.e. risk) of your portfolio will be 14.1% (lower than the 20% for each individual asset). Refer to the supporting Statistical Analysis if you want to understand how. It is important to understand what this means. You would have been able to reduce the risk profile of youre the returns on your portfolio to 14.1% (from 20% for an individual asset) without having to compromise on your returns, merely by diversifying. So, by choosing two assets whose returns are not correlated (this is important) like say Stock A which is a pharmaceutical company and Stock B which is a software company, you can reduce your risk while not necessarily having to reduce your returns. In summary, there are two things that are important to keep in mind while planning your investments 1. Every asset has a risk attached to it. And, the higher the risk, the higher should be its expected returns. 2. Dont put all your eggs in one basket. By diversifying across assets, you can reduce your risk without necessarily having to reduce your returns. You dont have to get into calculating standard deviation of the return of your assets, you need to just be aware that if you diversify your portfolio, your overall portfolio risk will be lower. To get the maximum benefit of reducing your risk through diversification spread your portfolio across different assets whose returns are not 100% correlated. Different assets should ideally span across different asset classes such as fixed income, equity, real estate, gold as well as different investment options within these asset classes e.g within equity shares, your exposure should be to companies in different sectors; or within fixed income investments, partly government risk and partly corporate risk.

As a thumb rule, diversify your investments across 15-20 different individual assets.