With falling deposit rates on Fixed Deposits and Recurring Deposits, the investors are looking for newer products to invest their funds as well get safety. Each product is meant for a different type of investor with varying degrees of risk and different scope for returns. The gains from each product is taxed differently too.
Learning the correct way for investments into direct equity is an art that every investor must develop over his/her lifetime. Although, the equity market is risky when compared to other investment products, it has the potential to generate the best returns in the long term.
To demonstrate what we have stated above, take a look at these examples from the stock markets (given below). These are just a handful out of numerous companies that have given such returns. The last column of the table below depicts the result of a hypothetical INR 100,000 invested in any of these companies over the stated time period.
|Name of Company||Start Date||Start Share Price||End Date||End Share Price||CAGR||Future Value of 1 Lac|
|Supreme Industries||1/1/2007||44||31/12/ 2016||740.75||36.85||16.8 Lacs over 9 years|
|CRISL||3/1/ 2005||54.7||1/1/2015||2095||43.99||38.3 Lacs over 10 years|
|Bosch||1/1/2004||1350.7||1/1/2015||23824||29.81||17.62 Lacs over 11 years|
|Page Ind.||1/1/2008||451.95||1/1/2015||11795||59.36||25.7 Lacs over 7 years|
Mutual Funds are growing in popularity every year. Gradually more retail investors are looking at MFs when it comes to making investments for the long term.
Mutual Funds are of two broad categories:
- Equity Mutual Funds: As the name suggests these products invest majority of the income into the equity markets. Equity Mutual funds provide the opportunity for the retail investor to gain from the markets and build wealth in the long-term. The additional benefit of this product is the taxation. All gains of capital appreciation are tax free when one chooses to invest in these products beyond one year. If the investment is redeemed before that then the gains are taxed @ 15% p.a.
- Debt-Mutual Funds: The fund manager allocates majority of the money in debt products such as Bonds (of varying maturity) and Debentures. These investments are relatively safer instruments than equity mutual funds. Taxation of these products is subject to long term capital gains tax (beyond 3 years) @ 20% after indexation. If the investment is redeemed before 3 years then the gains are taxed according to the individuals income tax slab.
This is an instrument to raise money used primarily by Governments (both central and state) and municipal bodies. Investors choose these products as the return on these is free of any risk. The government or the issuing party has a legal obligation to repay the principal at maturity as well as make regular coupon payments during the duration of the term of the investment. The coupon payments could be made annually, semi-annually or quarterly. There are tax free bonds as well taxable bonds available for the investor (LTCG @ 20% after indexation and STCG according to the individuals earning capacity).
Debentures are a way through which private limited companies raise money to carry their business expansion plans. These are loans that the company takes from institutions, HNIs and retail investors.They are regulated by SEBI. The debentures are broadly of two varieties. Convertible debentures & non convertible debentures.
Convertible debentures are those that are converted to equity. Non convertible debentures are those that cannot be converted to equity shares. Non converted debentures are further divided to secured and unsecured debentures. Secured debentures are loans taken by the issuer that are backed by assets of the company. These are generally safer instruments and fetch a lower rate of interest as compared to unsecured debentures.
National Pension System
NPS is a product that many do not know of. It gives you the option of making investments into equity, corporate deposits and government securities through its Tier-1 account. The best part about this product is the additional tax benefit of INR 50000 that a person receives as per the Income Tax Act section 80 CCD 1(b). This tax benefit is over and above the INR 1,50,000 benefit.