LIFE INSURANCE POLICIES
Monthly savings required: Rs 34,386
Returns: 6%
Like: Tax-free corpus on maturity and reasonably safe investment. You are eligible for tax deductions and get a life cover as well.
Dislike: Very low returns compared with other options. Returns could be higher if one opts for a longer tenure. The life cover offered by traditional plans is also relatively low.
Keep in Mind: If your policy does not give you a cover of 10 times the annual premium, you won't get any tax benefit. Term Insurance policies also not covered
PROVIDENT FUND, PPF
Monthly savings required: Rs 27,641
Returns: 8.5%
Like: Corpus is tax-free on maturity and the investment is very safe. You also get tax deduction and can withdraw money in case of emergencies.
Dislike: While the PF contribution is linked to your basic salary, there is a Rs 1 lakh limit on annual investment in the PPF.
Keep in Mind: You can increase your investment by opting for a voluntary PF contribution, but this is subject to limits.
DEBT Funds
Monthly savings required: Rs 26,427
Returns: 9%
Like: No tax is levied during the investment period and even on withdrawal the tax rate is lower. Investment is reasonably safe if you choose a good fund house.
Dislike: Returns are marketlinked. They can be very good when interest rates go down, but could turn negative or stay flat when rates are rising.
Keep in Mind: You can benefit from inflation indexation and bring down your tax rate further.
RECURRING DEPOSITS
Monthly savings required: Rs 25,836
Returns: 9.25%
Like: It allows you to lock into a high interest rate even if you don't have the money right away. Returns are assured and investment is very safe if you choose a good bank.
Dislike: The income is fully taxable, which could pare the returns in the higher tax bracket. Not possible to lock in for 15 years. Maximum tenure offered by banks is 10 years.
Keep in Mind: Tax has to be paid on the income earned every year, even though you get the sum on maturity.
FIXED DEPOSITS
Monthly savings required: Rs 25,256
Returns: 9.5%
Like: Investment is very safe if you choose a good bank. Returns are assured.
Dislike: The present high rates may go down in the future. Not possible to invest for 15 years. Maximum term offered by banks is 8-10 years. Income is fully taxable.
Keep in Mind: Have to open a new fixed deposit every month. Can't add to the existing account.
ULIPS
Monthly savings required: Rs 24,127
Returns: 10%
Like: Tax deduction on investment, tax-free growth, and maturity corpus is also not taxed. Life cover is a bonus. It's possible to tweak asset allocation.
Dislike: High charges compared to mutual funds Returns are market-linked and could be lower than estimated.
Keep in Mind: No tax benefit if your policy doesn't give you a cover of 10 times the annual premium.
BALANCED FUNDS
Monthly savings required: Rs 24,127
Returns: 10%
Like: No tax deducted during growth phase and corpus is tax-free on maturity under current tax laws. Higher debt allocation makes these funds stable.
Dislike: Returns are marketlinked and could be lower than estimated. Performance of funds could falter over the long term.
Keep in Mind: Tax laws are likely to change and corpus could be taxed on withdrawal.
EQUITY FUNDS
Monthly savings required: Rs 20,017
Returns: 12%
Like: It's the best way for small investors to put money in equity. Diversified basket reduce the risk of equity investing. Corpus will be tax-free on maturity under current tax laws.
Dislike: Returns are marketlinked and could be lower than estimated. Past performance of equity funds may not continue in the future.
Keep in Mind: It's not possible for any one fund to consistently outperform the market.
STOCKS
Monthly savings required: Rs 14,959
Returns: 15%
Like: These offer the highest return potential and the lowest cost. Dividend income is a bonus. No tax after one year under current laws.
Dislike: Direct investment in stocks is not easy for small investors. Concentrated exposure to a few stocks can be risky, even if they are blue chips.
Keep in Mind: Demat charges will balloon if you buy stocks in small quantities.
Best Regards
Prakash Nair
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