Investment Advice for Indian Defence Personnel

Summarised below are the short-term and long-term financial investment options available for Indian investors.

Short-term Investing

• Savings Bank Account. Often the first banking product people use, savings accounts offer low interest (generally 4% p.a. in India presently), making them only marginally better than safe deposit lockers. In case a large amount keeps lying in the account, apart from losing the opportunity cost of investment in better products, the interest is also taxable as per the Income Tax laws.

Use only for short-term (less than 30 days) surpluses

• Money Market Funds (also known as liquid funds). Money market funds are a specialised 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 or use ATM cards from a money market fund account now available, explore this option before keeping a large sum of your money in a savings account.

Offer better returns than savings account without compromising liquidity

• Bank Fixed Deposit (Bank FDs). Also referred to as term deposits, this product is offered by all banks. Minimum investment period for bank FDs is usually 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. Another important aspect is to remember the tax aspects which can cut down a substantial part of your interest earnings.

For investors with low risk appetite, best for 6-12 months investment period provided it is tax-efficient for you

Long-term Investing

• Post Office Savings Schemes (POSS). POSS are popular because they generally 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), Monthly Income Scheme and Recurring Deposit Scheme. However, tax on the interest earned should also be considered while investing in POSS.

Low risk and no TDS but keep in mind the tax-angle

Public Provident Fund (PPF). PPF is a very attractive fixed income investment option for small investors primarily because of:-

• Low risk – risk attached is Government risk.
• Tax-rebate – Under Income Tax section 80C to the full extent of Rs 1.5 lakh.
• Fairly good returns – Linked to Government 10-year securities, rate fixed in April every financial year.

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. However, first look at your organisation’s Provident Fund scheme (like EPF, DSOPF etc) which might offer better features and/or returns.

Best fixed-income investment for high tax payers

• Company Fixed Deposits (FDs). 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.

Option to maximise returns within a fixed-income portfolio

• Bonds and Debentures. 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.

Option for large investments or to avail of some capital gains tax rebates

Mutual Funds. Have you ever made an investment in partnership with someone else? Well, mutual funds work more or less on the same principle. Investors pool together their money to buy stocks, bonds, or any other investments. Investing through mutual funds allows an investor to:-

• Avail the services of a professional money manager (who manages the mutual fund) at a very low cost.
• Access a diversified portfolio despite making a limited investment.
• Have the flexibility of quantum, timing, flexibility and variety of investments as also withdrawals.

Unless you know stock markets well, use mutual funds as a vehicle to invest

Life Insurance Policies. Life insurance premiums, depending upon the policy selected, include the costs of :-

• death-benefit coverage.
• built-in investment returns.
• 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.

Don’t buy life insurance as an investment. Preferably buy a Term Plan for insuranceand Mutual Funds and other instruments for investment

Equity Shares. There are two ways in which you can invest in equities:-

• through the secondary market (by buying shares that are listed on the stock exchanges).
• 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.

Maximum returns over the long-term, invest funds you do not need for at least three years

IN A NUTSHELL

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 are very confident of your stock market investment skills, use mutual funds as a vehicle to ride

• 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 three years.

GIVING (Charity)

What is the appropriate behaviour when we are accosted by hungry eyes and outstretched grubby palms at traffic signals everyday? Should we toss some coins and quell the guilt, shoo them away and turn up the music or ignore them and wait for the light to change because we can’t be responsible for every poor in the country? The answer, we know, is none of the above. As we roll up the window and wave the odour away, it is perhaps time to look at how we can help.

With the haves getting richer and have-nots getting poorer, charity has never been so necessary or so convenient. Writing a cheque to your favourite cause is one way to give, but certainly not the only way. Also, giving does not always have to be about money-you could contribute your time, your professional abilities, or your areas of special interest. In fact, even a good workout (charity marathons!) could end up helping a cause.

Volunteering

If writing a cheque is not your definition of giving, then committing two hours a week might just be the ideal way to contribute to a cause. Volunteering can include any kind of activity – teaching children, using your skills with a needy NGO, participating or helping to organise a mela or an awareness programme, or helping out at a picnic for underprivileged children. All these are the fun options to giving. If you have only weekends to spare, you can participate in some short-term activity like volunteering for a Thalassemia awareness programme or helping organise a sports meet for underprivileged children. All you have to do to start volunteering is email an organisation that will assess your areas of interest after meeting you. It will then assign you to an organisation and a task after a short sensitisation training session.

Online Giving

Social fulfilment at the click of a button can’t get easier than this. There are several social organisations founded by non-resident Indians that work in areas such as education, healthcare and providing basic amenities in India. Most of these allow you to donate online. A simple Google search will throw up plenty of options to choose from. ‘GiveIndia’, for example, has its own online donation section at its website www.giveindia.org. You can access the site, go through the names of NGOs listed, and donate money online to any of these. Another site, www.rediff.com, also has an online donation section called click2donate. Donations to, say World Vision, through your credit card on a monthly basis, after giving the instructions once to your credit card company, is another easy way to earn your plus points with the God. You can make various other kinds of donations, as well. For example, at www.ashanet.org, you can donate shares, or even a computer. Donations can be made once, monthly or yearly, through the Internet, by post or by money transfer. Most online donations are also eligible for tax exemptions under Section 80G. Don’t forget to check the website and the NGO benefiting from your donation for authenticity before making the payment. And then, just click!