Investment Types: From Bank Deposits to Mutual Funds

Posted on Jan 7, 2025 in Economy

Types of Investments

a) Bank Deposits

It is the simplest investment avenue open for investors. He has to open an account and deposit the money. Traditionally, banks offered current accounts, savings accounts, and fixed deposit accounts. Current accounts do not offer any interest rate. The drawback of having a large amount in a savings account is that the return is just 4 percent.

b) Post Office Deposits

The Post Office also offers a fixed deposit facility and a monthly income scheme. The monthly income scheme is a popular scheme for retirees. An interest rate of 9 percent is paid monthly. The term of the scheme is 6 years, at the end of which a bonus of 10 percent is paid.

NBFC Deposits

In recent years, there has been a significant increase in the importance of non-banking financial companies in the process of financial intermediation. The NBFCs come under the purview of the RBI. The Act in January 1997 made registration compulsory for NBFCs.

  1. Period: The period ranges from a few months to five years.
  2. Maximum Limit: The limit for acceptance of deposits has been based on the credit rating of the company.
  3. Interest: NBFCs have been debarred from offering an interest rate exceeding 16% per annum and a brokerage fee over 2% on public deposits. The interest rate differs according to the maturity period.

Tax-Sheltered Saving Scheme

a) Public Provident Fund Scheme (PPF)

PPF earns an interest rate of 8.5% per annum compounded annually, which is exempted from income tax under section 80C. Individuals and Hindu undivided families can participate in this scheme. There is a lock-in period of 15 years. PPF is not intended for those who are seeking liquidity and short-term returns.

Life Insurance

Life insurance is a contract for the payment of a sum of money to the person assured on the happening of the event insured against. Usually, the contract provides for the payment of an amount on the date of maturity, on specified dates, or in case of unfortunate death.

Advantages:

  1. Protection: Saving through life insurance guarantees full protection against the risk of death of the saver. The full assured sum is paid, whereas in other schemes, only the amount saved is paid.
  2. Easy Payments: For salaried people, salary savings schemes are introduced. Further, there is an installment facility method of payment through monthly, quarterly, half-yearly, or yearly modes.
  3. Liquidity: Loans can be raised on the security of the policy.
  4. Tax Relief: Tax relief in income tax and wealth tax is available for amounts paid by way of premium for life insurance, subject to the tax rates in force.

Types of Life Insurance Policies

a) Endowment Policy

The objective of this policy is to provide an assured sum, both in the event of the policyholder’s death or at the expiry of the policy.

b) Term Policy

In a term policy, the investor pays a small premium to insure his life for a comparatively higher value. The objective behind the scheme is not to get any amount on the expiry of the policy but simply to ensure the financial future of the investor’s dependents.

c) Whole Life Policy

It is a low-cost insurance plan where the sum assured is payable on the death of the life insured, and premiums are payable throughout life.

d) Money-Back Policy

The insurance company pays the sum assured at periodical intervals to the policyholder, plus the entire sum assured to the beneficiaries in case of the policyholder’s demise before maturity.

e) ULIPs

Unit Linked Insurance Policies are a combination of mutual funds and life insurance. Investments in ULIPs have two components: one part is used as a premium for life insurance, while the other part acts as the investment fund.

Mutual Funds

Investing directly in equity shares and debt instruments may be a difficult task for a large number of customers because they want to know more about the company, promoters, prospects, competition for the product, etc. In such a case, investors can go for investing in financial assets indirectly through mutual funds. A mutual fund is a trust that pools the savings of a number of investors who share a common financial goal. Each scheme of a mutual fund can have different characteristics and objectives.

Types of Return

  • Capital Appreciation: An increase in the value of the units of the fund is known as capital appreciation.
  • Dividend Distribution: The profit earned by the fund is distributed among unit holders in the form of dividends.