The best investment option for any individual will primarily depend on four factors — his risk appetite, time horizon, liquidity and tax slab. An investor can also opt for multiple investment options aimed at different financial goals having different time horizons.
For example, an investor with high risk can opt for high risk high return investment options for his long term financial goals while sticking to low risk fixed income investments at the same time for ensuring capital protection and income certainty for his short term financial goals.
Here, I will list 8 investment options along with their sub-categories that salaried individuals can consider.
1. Equity Mutual Fund
Equity mutual funds have to invest a minimum of 65% of their corpus in equities. These funds allow the investors lacking required expertise or time to invest in stocks to benefit from the high growth potential of equities. Moreover, as equities beat fixed income instruments and inflation over the long term by a wide margin, they are best suited for creating corpuses for achieving the long term financial goals.
Listed below are equity schemes where you can consider investing:
- Multicap fund: Multi cap are those funds that invest across all market capitalizations, segments and themes without any SEBI imposed caps. Fund managers of this fund can freely change their exposure to various market capitalisations and segments as per the changing market conditions. These funds have to invest at least 65% of the total assets in equity and equity linked instruments.
- Large cap fund: Large cap funds primarily invest in large cap companies. As per SEBI guidelines, top 100 companies in terms of market capitalization are classified as large cap companies. SEBI guidelines have mandated large cap funds to invest at least 80% of the total assets in the equity and equity linked instruments of large cap companies.
- Equity Linked Savings Scheme (ELSS): ELSS popularly known as tax savings mutual funds, are equity oriented schemes qualifying for tax deduction of up to Rs 1.5 lakh per financial year under Section 80C. These schemes have a lock in period of just 3 years, the shortest lock among all investment options available under the Section 80C. Being invested in equities, these funds have the greatest long term wealth creation potential among all tax saving investment options available under Section 80C.
- Midcap fund: Midcap funds invest primarily in the equity and equity related instruments of midcap companies. As per SEBI guidelines, mid cap funds have to invest a minimum of 65% of the total assets in the midcap companies. Midcap companies are those ranked from 101st to 250th in terms of full market capitalization.
- Large and midcap funds: ‘Large & midcap funds’ invest primarily in a mix of large and midcap companies. As per SEBI guidelines, ‘Large & Midcap Funds’ have to invest a minimum of 35% of their total assets in both mid and large cap companies.
- Small cap fund: Small cap funds primarily invest in equity and equity linked instruments of small cap companies. As per SEBI guidelines, small cap funds have to invest at least 65% of their total investments in small cap funds. Small cap companies are those ranked beyond top 250th companies in terms of market capitalization.
- Value fund: Value funds are those funds that follow value investment approach during stock selection. This approach involves recognising stock pricing anomalies created by temporary setbacks to the fundamentally strong companies. As per SEBI guidelines, value funds have to invest a minimum of 65% of their total assets in equity and equity related instruments.
- Contra fund: Contra funds are those that follow a contrarian investment strategy approach. This investment approach involves fund managers to bet against the prevailing market sentiments and trends. As per SEBI guidelines, contra funds have to invest a minimum of 65% of the total assets in equity and equity related instruments.
- Focused fund: According to SEBI guidelines, focused funds are those that can invest in a maximum of thirty stocks. These funds have to invest at least 65% of their total assets in equity and equity related instruments.
- Sectoral/thematic fund: Sectoral and thematic fund are those that invest predominantly in stocks related to a pre-determined theme or sectors like pharma, banking, technology, energy, real estate etc. Examples of investment themes can be commodity, defence, rural consumption, urban consumption, etc. As per SEBI guidelines, sectoral or thematic funds have to invest at least 80% of the total assets in equity and equity linked instrument selected sector or theme respectively.
- Dividend Yield fund: Dividend yield funds are those that invest predominantly in dividend yielding stocks. As per SEBI guidelines, dividend yield funds have to invest at least 65% of their total assets in dividend yielding stocks.
2. International fund
International funds are those that mostly invest in equity and equity linked instruments as well as debt securities of the entities/companies listed outside India. Most of the international funds are fund of fund schemes investing in foreign funds investing in overseas markets.
Click here to know more about international funds
3. Debt Mutual Funds
Debt funds basically invest in fixed income instruments such as money market instruments, corporate bonds, government securities, etc. As market-linked fixed income instruments are less volatile than equities, debt mutual funds too are relatively less volatile than most equity and hybrid fund categories. Being invested in market-linked fixed income instruments, debt funds usually generate higher returns than savings and fixed deposits.
Listed below are debt funds where you can consider investing:
- Overnight fund: Overnight funds are those debt funds that invest in overnight securities or assets having a residual maturity of 1 day.
- Liquid fund: Liquid funds are those that are allowed to invest only in debt and money market securities having maturity of up to 91 days.
- Ultra short duration fund: Ultra short duration funds are those that primarily invest in debt and money market instruments to build portfolios with Macaulay duration of 3 to 6 months.
- Corporate bond fund: Corporate bond funds are those debt funds that invest in highly rated corporate bonds. According to SEBI, corporate bond funds have to invest a minimum of 80% of their total assets in AA+ and above rated corporate bonds.
- Low duration fund: Low duration funds are debt funds, which invest in debt and money market instruments in a manner that the Macaulay duration of portfolio is between 6 and 12 months.
- Money market fund: Money market funds are those debt funds that invest in money market instruments with maturity of up to 1 year.
- Short duration fund: Short duration funds are those debt funds, which invest in money and debt market instruments in such a way that the Macaulay duration of their portfolios are from 1 to 3 years.
- Medium duration fund: Medium duration funds are those debt funds that invest in money and debt market instruments in such a way that the Macaulay duration of portfolio is from 3 to 4 years. These funds have been given the flexibility to maintain a Macaulay duration of 1 to 4 years in case of anticipated adverse situations.
- Medium to long duration fund: ‘Medium to long duration’ funds are those that invest in money and debt market instruments in such a manner that the Macaulay duration of the portfolio ranges from 4 to 7 years. These funds have been given the flexibility to maintain a Macaulay duration of 1 to 7 years in case of anticipated adverse situations.
- Long duration fund: Long duration funds are those debt funds that invest in money and debt market instruments in such a manner that the Macaulay duration of portfolio is more than 7 years.
- Dynamic bond fund: Dynamic bond funds are open-ended dynamic debt schemes that are free to invest in money market and debt instruments across duration depending on the interest rate scenario, credit quality and other market factors.
- Credit risk fund: Credit risk funds are those that invest at least 65% of their total assets in AA rated papers (except AA+) and below rated corporate bonds.
- Banking and PSU fund: Banking and PSU funds are those that invest a minimum of 80% of their total assets in debt instruments of banks, public financial institutions and public sector undertakings.
- Gilt fund: Gilt funds are those that invest in fixed income securities issued by Central and State governments. As per SEBI guidelines, Gilt funds have to invest a minimum 80% of total assets in government securities across maturities.
- Floater fund: Floater funds are those that primarily invest in debt instruments having floating interest rates. As per SEBI guidelines, floater funds have to invest at least 65% of their total assets in floating rate instruments.
4. Hybrid Mutual Funds
Hybrid mutual funds are those funds that invest in equity, debt and other asset classes to generate better risk-adjusted returns. These funds are ideal for those who want their mutual fund managers to implement their asset allocation strategy as well.
Here a list of hybrid mutual funds where you can consider investing in:
- Conservative hybrid fund: Conservative hybrid funds primarily invest debt instruments with some exposure to equities. As per SEBI guidelines, conservative hybrid funds have to invest between 10% and 25% of their total assets in equity and equity linked instruments and between 75% and 90% of the total assets in debt instruments.
- Balanced hybrid fund: As per SEBI guidelines, balanced funds are those that have to invest between 40% and 60% of the total assets in equity and equity linked instruments and between 40% and 60% of the total assets in debt instruments. These schemes are not allowed to exploit arbitrage opportunities.
- Aggressive hybrid fund: Aggressive hybrid funds predominantly invest in equity and equity related instruments. As per SEBI guidelines, these funds have to invest between 65% and 80% of their total assets in equity and equity linked instruments and between 20% and 35% of the total assets in debt instruments.
- Dynamic asset allocation/Balanced advantage fund: Dynamic asset allocation funds, popularly known as balanced advantage funds, have the freedom to dynamically manage their exposure to equity and debt instruments as per the market conditions and without any minimum or maximum exposure limits.
- Multi asset allocation fund: Multi asset allocation funds are those that invest in at least 3 asset classes. As per SEBI guidelines, multi asset allocation funds have to maintain at least 10% of their total assets in each of the 3 asset classes pre-determined by the respective fund houses.
- Arbitrage fund: Arbitrage funds are those that seek to benefit from arbitrage opportunities. As per SEBI guidelines, arbitrage funds have to invest a minimum 65% of their total assets in equity and equity linked instruments while following their arbitrage strategies.
- Equity savings fund: Equity savings funds aim to provide capital appreciation and income distribution by investing in equity, debt and arbitrage opportunities. As per SEBI guidelines, equity savings funds have to invest at least 65% of the total assets in equity and equity linked instruments and minimum of 10% of the total assets in debt funds. These funds have to also disclose their minimum hedged and unhedged exposure in their Scheme Information Document (SID).
5. Bank Fixed Deposits
Bank FD guarantees principal repayments and interest returns at booked rates irrespective of any card rate changes in course of the tenure. Deposits made with Scheduled Banks are also covered under the deposit insurance program from the DICGC, an RBI subsidiary. The depositor insurance program covers your bank FDs, RDs and current and savings account deposits of up to Rs 5 lakh per depositor per bank in situations of bank failure. Thus, salaried individuals wishing to earn higher interest rates from their FDs can distribute their FDs across numerous banks offering higher rates of interest in such a manner that their cumulative deposits involving recurring, savings, current and fixed accounts do not surpass the Rs 5 lakh cap in each of those banks.
Those wanting to save tax as per Section 80C can open a tax saving FDs, which come with lock-in period of five years. However, note only the principal amount qualifies for the tax deduction, the interest earned is included to your income which is taxable according to your tax slab.
6. Public Provident Fund (PPF)
PPF is one of the safest avenues among all investment choices owing to the sovereign guarantee that comes along with it. PPF investments also qualify for tax deduction under Section 80C with its maturity and interest components also being tax free. The status of being tax free interest and maturity component gives PPF a benefit over the five-year tax saving bank FDs and some other small savings instruments, whose interest components are taxable as per the depositor’s tax slab. The interest of PPF is reviewed by the Finance Ministry every quarter.
Lack of liquidity and long lock-in period of 15 years are the biggest drawbacks of PPF. Partial withdrawals, loan against PPF and premature closures of PPF are only allowed in case of some pre-laid conditions.
Those wishing to save tax under Section 80C with investment horizons of 15 years should instead invest in ELSS for greater wealth creation. While equity as an asset class can be extremely volatile in the short run, they tend to outperform fixed income instruments like PPF, bank FD, etc as well as inflation by a wide margin over the long term.
7. National Savings Certificate (NSC)
Investments in NSC come with a lock in period of 5 years and qualify for tax deduction under Section 80C. Being managed by the Finance Ministry, investments in NSC come with sovereign guarantee. The interest rate is reviewed quarterly and the interest component accruing annually is deemed to be reinvested under Section 80C. Thus, only the interest component earned in the last financial year of investment is taxed as per the tax slab of the investor. This gives NSC an edge in terms of tax efficiency when compared to bank fixed deposits.
8. Voluntary Provident Fund
VPF is just an extension of the Employee Provident Fund (EPF) as it allows the EPF subscribers to voluntarily invest over their mandatory EPF contributions for up to 100% of their dearness allowance and basic salary. Like EPF, VPF contributions are tax exempt and qualify for the Section 80C tax deduction. Also, their interest rates are revised annually and are the same as EPF’s. Salaried investors with low risk appetite seeking sovereign guarantee along with tax efficiency can also opt for VPF investment.
2 Comments
Dear mam,
I am selvaganeshan D. I am working person. Say me best sip mutual fund in 2020.
Hello Selvaganeshan D,
You can invest in Axis long term equity Fund, Parig Parikh long term equity fund and ICICI Prudential Bluechip Fund as these funds have been giving consistent returns. Also, try diversifying your portfolio in different mutual funds to make the most of your investments.