BOMBAY, 17 February 2003 — This week, we take a look at some of the investment tools which would prove to be prudent in the long run. There is no hard and fast rule saying that one fund is good for one person, so it will be good for you too. Each person has to examine his or her needs and decide what is suited best. There is no such thing as the best investment vehicle. Your choice should be based on your financial objectives and risk tolerance levels. However, at the same time, it is imperative at least to know one’s needs and that is what we are going to help you with.
If you are looking for long term capital appreciation, you should be investing in equities directly or settle for an equity mutual fund. Higher return will always be clubbed with higher risks, so if you go for equity, be assured that your capital will go through a lot of volatility. If you decide to invest in equity linked mutual funds, remember to park the maximum money in plain equity mutual based and only a smaller portion in sectoral funds.
On the other hand, if you are satisfied with low returns as long as your capital remains intact, then the Public Provident Fund (PPF) is an ideal option. This product offers the best post-tax returns in the country. Not only do you get a nine percent tax-free interest on your investments, you also get tax rebates which enhance your overall returns. Interest rate offered by PPF is even higher compared to the eight percent for RBI Relief Bonds.
For investors looking for a regular income, the best option is RBI Relief Bonds. These bonds come with an eight percent tax-free interest. This works out to 11.42 percent returns pre-tax if you are in the highest tax bracket. The investments are capped at Rs.200,000 per annum.
Post Office Monthly Income Schemes also offer a steady source of income but come with a lock-in period of six years. You can also invest in infrastructure bonds issued by financial institutions like ICICI and IDBI.
These are the three categories in which you have to put yourself into before deciding the best investment tool. But irrespective of the option that you go for, there are two plans for which you have to necessarily make a provision. One is for your old age and the other for your children’s future.
Retirement benefit plans
If you invest your money prudently now, old age could actually be fun. Analysts say that best mutual fund to choose for retirement is unit-linked insurance or pension plans as these, along with the retirement benefits, also offer tax rebates under Section 88. Under section 88, you can claim a 20 percent rebate on tax if your annual income is less than Rs.1.5 lakh. And you can claim a 15 percent rebate if your annual income falls between Rs.1.5 lakh and Rs.5 lakh for investments up to Rs.70,000.
In a unit-linked insurance plan, the premium you pay is converted into units. It also allows investors the flexibility of increasing their contribution during the cover term and also provides the facility to withdraw money after a minimum lock-in period. But the risk associated with this unit linked plan is that if market conditions turn unfavorable, there could be an erosion in unit value at the time of surrendering the policy. Unit Trust of India (UTI) is the only fund to offer this product.
On the other hand, pension plans, are much more stable. There are only two funds that offer dedicated pension funds. One is the Unit Trust of India’s Retirement Benefit Plan (RBP) and the other is Templeton India’s Pension Plan. Apart from these, most insurance companies offer pension plans as a part of their retirement solutions. On the performance front, UTI Retirement Benefit Plan, as on Jan. 31, 2003, generated 9.58 percent returns. Templeton India Pension Plan’s performance was much better as the fund generated 11.41 percent return during the same period.
Children’s benefit funds
Costs begin at birth with medicines and diapers and continues till the child is educated. Most of the time in India, parents also bear the cost of their child’s marriage. And to keep the joy of rearing a child intact without having to worry about the costs, mutual funds have now stepped in. And they are offering an investment avenue to help parents accumulate over a period of time money for their children’s financial needs — with tax benefits thrown in as an added attraction. There are currently eight such funds to choose from.
The longer the period of investment, the stronger is the tilt of the portfolio toward equities. Shorter investment outlooks invest a higher proportion of their portfolios in debt instruments with an intent to protect capital. And the tax benefits? Upon redemption, the income received is not attached to the parent’s income and this allows for better tax benefits. Most mutual funds also offer an insurance cover to both the parent and the child for death and permanent disability caused by an accident. There is Prudential ICICI Child Care Plan, HDFC Children’s Gift Fund, Tata Young Citizens, Templeton India Child Asset Plan, IDBI Principal’s Child Benefit Plan mainly from the private sector to choose from.