What are the monthy investment options I have that has good return value in India?

Question

Like the title says, what are the investment options I have if I need to investment monthly from a part of my salary on regular basis. The parameters I am looking for are;

• Good percentage of interest, so that it is more beneficial than saving bank account rate.
• Able to withdraw money whenever I need it. Although this will not be frequent. There should be no or very less penalty for withdrawals.
• My investment horizon is long term, typically in the 10 years range.
• The plan / scheme should be from reputed financial institutes like Citi Bank, ICICI Bank, SBI etc. that have a proven track record on delivering to people what the promise and should have existed for atleast 10 years.

I am looking for some hard numbers and compelling reason based on hard facts. ;) If the difference is not much then I would let it be in Savings a/c.
I have a long working years yet to complete. This is to say that I am not at retiring age and I am in mid career or later stages of beginner corporate life.

Answer 1

First, your benchmark: Your SB account gives you 4%.

Now, consider a fixed deposit. Banks offer you those, at rates that depend on the term. The 1-year FD today gets you between 9 and 9.5%. While the term is locked in, you can get an early withdrawal - if you exit the 1 year FD within, say, 60 days, they'll give you the interest rate that applied for 60 days when you started the FD (with some banks reducing a further 1% from that rate as a penalty). Still, your principal is returned in full (the penalty is only on the interest).

Negatives: Taxes. The interest paid is fully taxed, and worse, taxes are deducted at source (TDS = 10% of the interest), so even if you don't use the interest it's counted as income and taxed.

Next, consider a short term debt mutual fund. These are, for terms of more than a month, just as low on risk as a bank fixed deposit. There is no equity, and these funds put money back into bank wholesale deposits which give an even better rate. You can withdraw any time you want (it takes only a day to get money back into your account). Usually early withdrawal penalties will apply for about 30 days, but if you have a longer horizon that shouldn't be a problem.

The good part: No TDS, and the interest received is not considered "income", until you withdraw. So if you get 9% and don't exit, you pay no taxes, and the compounding of the full 9% happens. It's an alternative to a Savings Bank account - just keep putting your money in, and take it out when you need it.

The bad part: There is no guarantee that you'll get 9%; with market prices being volatile, the yields could drop to 6%. So you have to track this carefully (currently, yields have been between 8 and 9% for the last year)

A more detailed piece on this at: http://capitalmind.in/2011/01/at-yahoo-reconsider-that-fixed-deposit/

Choosing such a fund: I wrote an article about it at http://capitalmind.in/2011/01/how-to-find-good-short-term-debt-funds/ - I still continue to be invested in those funds (and they're giving me about 9%)

The above are limited risk options. For a long term view I would consider equity investments (buying stocks or equity mutual funds) from reputed funds. If you're risk averse consider buying a "balanced" fund like HDFC Prudence, where they invest part in fixed income markets and part in stocks.

Lastly, don't look at the recent past only. The Sensex has returned over 18% in the last ten years, but the ten years before that were horrible. Equity markets are risky, but can give you fantastic returns as well.

Answer 2

You are asking too many things. There is no ideal option, and you may want to split your investments into multiple avennues. The options in India are;

Recurring Deposit(RD): This is available with any bank for amounts as small as Rs 500/- a month. The rate is interest is definately higher than Savings Bank. Its more close to the rate on a 3 yrs Fixed Deposit. You cannot withdraw without penatly. It varies from Bank to Bank. The term can be 1 year to 10 years. It would make sense to start a one year or two years RD and on maturity invest this else where and start a new RD.

SIP from Mutual Funds: All mutual funds give an good option for investing monthly/quarterly. The returns are market linked and in long term basis can be better than Fixed Deposit. The term can be from year to 5 years. There is typically a lock-in period of 3 years on a 5 years SIP before which you cannot withdraw.

NPS: You can open an NPS account and give a standing instruction to your bank to transfer funds. However withdrawl is not allowed.

Postal savings Schemes: You can open these at post office and give standing instructions to your Bank to transfer funds, or manually.

AutoSweep: This is a facility offered by ICICI and Citi Bank where they would automatically put excess funds into Fixed Deposits and whenever you withdraw, if there is less balance in your account, they would automatically break your FD. Most seemless and better returns than an regular savings bank.

The above schemes are automatic, ie you need to set-up the instruction once and then forget about it.

Other options will be to actively manage the funds yourself by moving into a different account and then invest from this account into whatever investment option you like.