I remember when I started investing, I wanted to know all the investment options available to me but it was very difficult to find those. I could only find few options here and there. Hence, today, I’m going to list all of the popular investment options available in India and this is going to be the most knowledgeable and helpful post you’ll ever come across in the internet.
The first step to solve a problem is to recognize the problem clearly.– Mohsin Mansuri
Related: If you’d like to know the real benefits of right investing and how it can help you achieve financial freedom then click here
We all know investment option comes with different level of risk and reward. Usually, risk and reward goes hand in hand. The more risk you’re willing to take, higher the reward and vice versa. However, it’s not always the same.
If you’re willing to put some extra time and effort to do the research, you can minimize the risk. Hence it’s very important for you to know these options, find out which suits best for you as per your risk taking capacity & patience then take the decision
I have ranked the safest/least risky/least rewarding options first.
- Savings Accounts
- Gold & Gold Mutual Funds
- Liquid Funds / Insta Redemption Mutual Funds
- Fixed Deposit / Recurring Deposit
- Real Estate
- Bonds/ RBI Bonds
- Public / Employees Provident Fund. (PPF) / (EPFO)
- National Pension Scheme (NPS)
- Unit Linked Insurance Plans (ULIP)
- Index Funds
- Mutual Funds/Equity Linked Saving Scheme (ELSS)
- Small-Cap Mutual Funds
Ready? Lets get started..
1. Savings Accounts: Annualized Returns (3.25% – 7%)
Savings accounts give us an interest rate of anything between 3.25% to 7% annually (depending on the bank’s policy). The average interest rate offered by majority of the banks in India is 4%. The inflation rate in India is approx 7-8% per year. Hence this is not a good investment option at all.
You are losing the purchasing power of your money in savings account. You must only keep emergency fund (which should be 6-8 times your monthly expense) in your savings account. So you can use it whenever you have an emergency. As you get almost 100% liquidity (means you can withdraw full amount by going to the bank, or a specified amount through ATM).
- Risk: There is almost no risk in your principal amount except you lose purchasing power if you keep larger funds which is also a risk.
Remember, Inaction is the Greatest Risk of ALLJohn F. Kennedy
If in case the bank goes bankrupt or shuts down due to any reason. RBI will pay you up to Rs. 1 Lakh that was deposited in your savings account.
2. Gold & Gold Mutual Funds: Annualized Returns (5% – 8%)
Gold is treated as an investment option by many Indians. However, in reality, if we look at the historic data, the price of Gold has increased at the rate of only about 5-6% annually (CAGR) in the last 50 years.
There are times when gold has given double the return (100%) in a span of few years. However, we need to understand the fact that the price of Gold keeps on changing very frequently. Those who get good returns purchase it when the prices are low and trade it frequently.
- Risk: It is not recommend for a know-nothing investor or a middle class person to invest all their savings in Gold for long term as there is not much gains.
- In fact, even the World Gold Council website (www.gold.org) have done analysis and research over various periods and have recommended to include Gold in your portfolio to only about 3% – 9%.
Personally, I’d recommend to include Gold in your portfolio but only about max 10% of the total investments you’ve made. If you’re purchasing gold as an investment option then it’ll be best to go for Gold Mutual Funds like Quantum Gold Savings Fund – Direct Plan. You won’t have to worry about safety, purity and security of Gold and you get returns based on the price of Gold.
Read more about Gold as an investment in India by clicking here.
3. Liquid Funds/Insta Redemption Mutual Funds: Annualized Returns (7% – 9%)
You can also purchase Liquid Mutual Funds which comes with no lock in period and give stable returns like 7-9% annually and are always better then Fixed Deposit. It can be invested at the time when you feel you may need the funds in near future and don’t want to take more risk.
- Risk: There is not much risk in this type of fund and your capital is protected. However, if you think you won’t need this money anytime soon then its better to invest for long term in any of the following options I will mention below.
4. Fixed Deposit/Recurring Deposit: Annualized Returns (7% – 9%)
Fixed Deposit is considered as an investment option by many Indians however the maximum interest rate we get is about 9% by small finance banks and established banks gives us about 7.5% to 8% max.
- Risk: The major risk here is that it comes with a lock in period so you cannot withdraw funds when you need before maturity period.
This can be a good option for seniors though. I personally don’t prefer Fixed Deposit as a good investment option for youngsters. Simply because you can invest in an ELSS Mutual Funds which comes with 3 year lock in period and gives much higher return which is completely tax free. Even though ELSS funds are risky, 3 year is a good time frame and markets can recover easily in that period.
Read more about Fixed deposit vs Mutual Funds and why most Indians prefer Fixed deposit by clicking here.
5. Real Estate: Annualized Returns (5% – 10%)
Real Estate has no fixed rate of return as the price is different for each location. However, as per the RBI House Price Index, the annual price increase in properties in India has been around 9.3% in the last 5 years. This is much lower than the average return of any Mutual Fund which is around 12-15% annually.
The only reason why we feel property gives more profit is because when we buy a property, we tend to buy it for a long term basis for example 5,10,20 years or so. If we buy the property at Rs.50 Lakh and it becomes Rs.1 Crore in 10 years then we think it was a profitable deal. However, in real terms, we only got a return of 7.18% annually in that case. (You can calculate this in any lump sum calculator).
On the other side, when we invest in a mutual fund then we tend to check the profit and gains on the App or web site almost every day after investing. Usually, an average mutual fund will double your principal in 4-5 years.
- Risk of liquidity. If you want money urgently then you can’t sell a part of your house immediately.
- 2. Lot of Legal Requirement and additional costs such as stamp duty, registration, brokerage fees, repair, renovation, etc.
6. Bonds/ RBI Bonds: Annualized Returns (7% – 10%)
Bonds are debt instruments hence you get a fixed rate of return with it. It simply means a common man is giving a loan to a company or government. They always come with a lock in period and return is usually stable or predefined while purchasing the bonds.
If you’d like to invest in Bonds then the easiest way would be to purchase a Bond mutual fund through any mutual fund company.
- Risk: I would only recommended a senior citizen or a person who is close to reaching their goal to park their fund in bonds. Simply because if the market crashes just few months before they plan to withdraw the money then you lose a lot of value at the wrong time.
Thing of it this way, when you’re climbing a high mountain and you’re close to reaching the summit, you become more careful, right? Simply because you don’t want to lose all your progress.
7. Public / Employees Provident Fund. (PPF) / (EPFO): Annualized Returns (8.65% currently)
This is one of the most popular long term saving and investment option, mainly due to its combination of safety, returns and tax savings.
People use PF as a tool to build a corpus for their retirement by putting aside sums of money regularly, over long periods of time. PPF has a 15-year maturity, and the facility to extend the tenure.
The rate of return for PF is currently 8.25% which is proposed to increased to 8.65% and this interest rate keeps on changing as per government policy.
Risk: There are two risk involved in PF.
Firstly, the interest rate keeps on fluctuating and you literally have no control over it. The interest rate in 1998 was more than 12% and now its less than 9%.
Secondly, there are limitations on withdrawal and you have to provide strong reasons to withdraw money before retirement.
8. National Pension Scheme (NPS): Annualized Returns (9% – 14%)
NPS is market linked like the Mutual Funds. Hence there is no fixed interest rate promised. It is also a new concept hence its less famous but its gaining popularity at its own pace because of its benefits.
It offers tax benefit while investing and also while withdrawal at retirement. Once you sign up for a NPS scheme, you have to select one Fund manager out of 8 available options then select the scheme out of 4 options based on your risk/reward requirements.
- Risk: It doesn’t come with any risk as investors invest that money which they want to contribute in their pension fund and is similar to the 401(k) account (USA) which is widely appraised and recommended by all the finance experts.
9. Unit Linked Insurance Plans (ULIP): Annualized Returns (10% – 14%)
ULIP is a combination of Insurance + Investment. The goal is to provide wealth creation along with life cover, hence the return is slightly less than a mutual fund. Simply because the ULIP fund manager pays a premium to insurance company and invests the remaining fund in stock/bonds/debt instruments.
It always comes with a lock in period of minimum 3 years and is tax-free. One great advantage of ULIP is that the investors have the power to switch the portfolio between debt & equity based on the risk appetite as well as their knowledge of the market’s performance.
When I first wanted to invest in Mutual funds, I came across many ULIP sales advisor who tried to mis-sell me this package claiming it’s better than mutual funds. However, after doing some research, I realized it’s not worth if you already have a life cover by your employer as you only take advantage of returns from this plan which is usually less than Mutual funds.
Risk: Lock in contract and less returns as compared to Mutual Funds.
10. Index Funds: Annualized Return (10% – 15%)
Index Funds are like Mutual funds without an active fund manager. Hence the stock and companies are picked based on the Index you select and allocation/changes in portfolio is rarely done.
For example: if you invest in HDFC Index Fund Direct Sensex Plan, then you’re simply purchasing stocks of all the companies listed in Sensex. If the Sensex performs, your fund performs. If Sensex fails, you get loss. However, we all know, Sensex and market only grows in the long term.
Main advantage of Index fund is that the expense ratio is usually very less which increases the profit margin when the market condition is good.
- Risk: However, when the market is bad, Index funds often gives bad return as compared to MF as there is no fund managers intervention to reduce loss.
11. Mutual Funds/Equity Linked Saving Scheme (ELSS): Annualized Return (12% – 18%)
Mutual funds and ELSS invests in all type of companies and are managed by an active fund manager. In these categories, your money is invested in all types of companies for better diversification and profit.
The only difference between ELSS and other all Mutual Funds is that ELSS comes with a lock in period of 3 years and is tax free. Whereas, all other Mutual Funds comes with NO-contract (they may have a minor exit fees) and are taxable. (Not taxed at source, you have to file for ITR manually).
Investing in Mutual Funds is by far the best option for a middle class investor as the principal amount is doubled in 4-5 years period.
- Risk: You must only invest that money which you won’t need for long term. Its because the return is never fixed and is based on market performance. This is why they say MF investments are subjected to market risks. 🙂
- If you invest a huge amount and the market crashes then you may even lose the principal amount. However, you only lose the money when you withdraw it from the fund. If you keep it invested, it will recover, grow and multiply in long run.
Investing a small amount in Mutual Funds through SIP is by far the best investment advice for all.
12. Small-Cap Mutual Funds: Annualized Return (15% – 25%)
Small-Cap Funds are part of Mutual Funds where the Fund manager invests all the money only in Small-Cap companies. Technically speaking, these are companies whose value is less than Rs. 500 Crore. Not an established companies but because they have potential to grow, the chances of profit is super high.
- Risk: Statistically speaking, 9 out of 10 new businesses shut within first 10 years of inception. Hence they come with higher risk and when the market condition is bad, small-cap often performs worst in all sectors.
So if you’re young and aggressive investor then you can increase small-cap fund in your portfolio
13. Stock/Shares: Annualized Returns (Just Anything)
Finally, the most controversial investment class. Many people have become millionaires because of share market and many have lost lakhs if not crores as well.
It all depends on how much research you’ve done on the company that you’re buying. Share market is NEVER a gambling. It is purely owning a small portion of the company and gaining profit when the company does well.
- Risk: Stock comes with highest risk among all the investment options as you can lose all your money in a matter of few days.
- You must never invest in stocks based on someone’s recommendations or suggestion.
If you want to get your hands dirty, try with smaller amounts after doing your own research & book the profit i.e. sell the stock when the price increases, never be greedy. Or else start an SIP with a Mutual Fund for long term.
Personally, I have more funds invested in stocks, then mutual funds and other streams of income. You can read my answer to why I have more fund invested in stocks here which will give you great perspective on what I think about stock as investment.
If you learned something from this post then don’t forget to share it with your loved ones. Cya 🙂