Risk Free Investment Options

By | March 19, 2012

Debentures:
Debentures are also traded in market like shares. Debentures are smallest units of borrowing. Companies generally raise funds from the market by issuing debenture certificates. An investors who holds a debenture certificate can claim the equivalent amount as the certificate’s face value from the company on maturity. In addition to the face value of the certificate the interest is also paid to the investors as a compensation for the risk. In India the debentures certificate face value is generally Rs 100. So if I want to invest Rs 10,000 in debenture of a company it means I will need to buy 100Nos of Rs 100 debenture of that company. So at the end of the maturity period I will be paid back Rs 10,000 by the company plus some interest. Unlike shareholders, debenture holders have minimum risk of loss and their return (principal + interest) is almost secured. Where shareholders are dependent on streams of dividends (which is very variable) as their risk compensation, debenture holders receive interest coupons.

Bonds:
In India there is hardly any difference between Debentures and Bonds. At time we use both the term as their synonym. The term Bonds are more used in America hence is most across the world. In India the bonds are mainly issued by government of India, or financial institutions like banks or big private corporate houses like Tata, L&T etc. Recently Government of India has popularized the purchase of long term Infrastructure bonds that pays a healthy interest of approximately 8.5% per annum and that too it offers income tax rebate upto Rs 20,000 from your taxable income. So on one side you are earning interest and also gaining some tax benefits.

Fixed Deposits Offered by Banks:
Banks fixed deposits irrespective of whether they are offered by private banks or government controlled banks the returns are very secures. As on today when we are seeing inflation rate hovering in India close to 9%, these bank deposits are offering nearly 9.5% per annum interest on deposits upto 3 years.

Term Deposits in Post Offices:
This investment option is very popular in rural areas of India where other investment options are not so popular. These term deposits are like banks fixed deposits but the services are offered by Indian Post office and controlled by the Government.

Monthly Income schemes of Post Office:
As investment in post offices are controlled by Indian Government, they are considered as very safe. For this reason monthly income schemes offered by Indian post offices are favorite investment option of retired citizens. I have seen a live example of one of my family member who retired from a very senior position in a private company after working for nearly 35 years. All of his savings he accumulated in the form of Provident Funds (which was nearly Rs 1.0 Crore) was invested in Monthly scheme of the Indian Post Office. This savings scheme offers nearly 8% interest with a minimum lock in period of 6 years. Today he generates nothing less than Rs 65,000/month just from the interest earning. I am not sure but I think the Post office also award some bonus on maturity (after 6 years) in the tune of 3-4% to the investor.

National Savings Certificate (NSC):
This is again a government backed investment plan which offers a healthy interest of 8% per annum with a lock in period of 6 years. In the first two years you can claim deductions of equivalent amount of your NSC holding. If you are holding a NSC certificate of Rs 10,000 then you can claim Rs 10,000 deduction u/s 80C. You can buy NSC from Indian Post Office. NSC is issued in denomination of Rs 100/500/1000/5000/10000.

Kisan Vikas Patra:
Kisan Vikas Patra is also very secures investment option offered by Indian Post Office. The interest rate of KVP is slightly better than NSC @ 8.5% per annum but the lock in period is 8 years and seven months.

Liquid Funds:
Mutual Fund companies offers this financial instrument as an alternative for bank’s savings account. Where a banks savings accounts can pay interest in the tune of 3.5%, liquid funds can give interest as high as 5%-6% per annum. So by keeping the same level of liquidity, an investor can earn better interest if they do not want to compromise a lot on their liquidity by investing in other risk free option or equity. Minimum investment amount is limited to Rs 5000 and above and if one needs to draw this money it can be done in 1/2 from the date of demand without compromising on the interest.

Public Provident Fund:

In India it is compulsory to open Employers Provident Fund account for each and every employee. Saving under EPF scheme is a must. In addition to EPF, government also offers Public Provident Fund (PPF) scheme where employees can directly open an PPF account and deposit a fixed monthly savings in this account and earn a healthy interest of 8% per annum. The lock-in period of PPF is minimum 15 years

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