Self-employed individuals and professionals may lack uniform cash flows, unlike their salaried counterparts. This often sees them park sizeable amount of surpluses for lean period and future business expansion investment avenues that may not yield adequate return. Moreover, being devoid of Employees Provident Fund (EPF) and other employment-related pension benefits, they are entirely on their own to secure their post-retirement future.
Those with irregular income can consider these investment options for parking their short-term surpluses and investing for their long-term goals.
Bank fixed deposits: One of the first thing that comes to mind while investing money for short term is bank fixed deposits. They guarantee interest income and principal repayment while their booked interest rates remain constant, irrespective of any changes in the card rate during the deposit tenure. Currently, Small Finance Banks are offering the highest card rates, ranging between 8-9% whereas most private sector banks are offering the highest card rates in the range of 7-8.25% p.a. The highest card rates offered by public sector banks fall short of 7% p.a. Senior citizens usually get an additional interest rate of up to 0.50% on their FDs.
The biggest disadvantage of bank fixed deposits is their premature withdrawal penalty. On premature withdrawal, banks usually deduct up to 1% from the original booked rate or from the original card rate applicable for the period for which the FD has been in force, whichever is lower. As these can substantially reduce your FD returns, opt for fixed deposits only if you are certain to continue with them till their maturity.
Debt mutual funds: These funds invest in fixed-income securities such as certificates of deposits, corporate & government bonds, commercial papers, treasury bills and/or other debt instruments. As the underlying securities of debt funds are market-linked instruments, they do not offer capital protection and guaranteed income. Yet, these funds generally generate higher returns than bank fixed deposits and savings accounts. Moreover, unlike fixed deposits, debt funds barring fixed maturity plans do not come with fixed tenure. Hence, the concept of premature withdrawal penalty does not apply to them. While some debt funds may charge the exit load of up to 1% of the amount withdrawn if they are withdrawn before a pre-stated period, those belonging to liquid and ultra-short term categories do not charge exit loads. These features make debt funds an efficient alternative to fixed deposits for short-term goals.
Opt for liquid funds if you want to park your money for up to 3 months. Invest in ultra-short duration and low duration funds for investment horizons of 3-6 months and 6-12 months respectively. For investment duration of 1-3 years, opt for short duration funds.
Equity mutual funds: These mutual funds invest at least 65% of their corpus in equity shares. Being invested in equities, these funds outperform other investment options by a wide margin over a period of 5-7 years. Being managed by qualified professionals tracking market movements and investment opportunities, they provide a much less risky alternative to investors who wish to invest in stocks but do not have the required time or expertise to do so.
Based on the investment style or mandates, equity funds are classified into 10 categories --- multi-cap, mid-cap, large-cap, large & midcap, small-cap, dividend yield, value/contra, focused, sectoral thematic and equity-linked savings schemes (ELSS) funds. Investors should choose from them based on their own risk-appetite and the suitability of the funds’ investment objective with their own financial goals. For example, those with high-risk appetite can opt for midcap or sectoral funds while those looking for stability with long-term growth can invest in large-cap fund or a multi-cap fund. Ideally, multi-cap and large-cap funds should form the core of your equity fund portfolio while the mid-cap, small-cap and other funds can form the satellites of your core portfolio.
ELSS: Investments in these funds of up to Rs 1.5 lakh per financial year qualify for tax deductions under Section 80C. Their lock-in period of 3 years is the lowest among all investment options qualifying for Section 80C. These funds have consistently beaten most tax-saving alternatives for the period of 5 years and above. For example, ELSS funds have generated an annualised return of around 16%, 14% and 16% over the period of last 5-, 7- and 10-years respectively.
Public Provident Fund (PPF): This is one of the most popular options for long-term investing in India. Being managed by the Government of India, the investment amount and the returns generated are backed by sovereign guarantee. Ministry of Finance reviews its interest rate every financial quarter based on the government bond yields. Currently, PPF is paying 8% p.a. compounded annually on its investments. The investment amount qualifies for tax deduction under Section 80C while the maturity proceeds and interest income from are tax-free. Thus, PPF generates one of the highest post-tax returns among all available small savings schemes.
PPF’s biggest disadvantage is its lack of liquidity. Partial withdrawals are allowed only from the seventh year of subscription once in a year while premature withdrawals are allowed after 5 years for pursuing higher education or treating life-threatening diseases. While loan against PPF deposits is available from the third year to fifth year, there is an upper cap of 25% of the balance available at 2 years before making the loan application.
National Pension Scheme: NPS is market-linked solution aimed at retirement planning. Self-employed subscribers can join the NPS structure under it ‘All Citizens of India’ model and make contributions at any point of time in a financial year. The contributions qualify for tax deduction for up to 20% of the gross income under Section 80CCD(1) subject to a ceiling of Rs 1.5 lakh p.a. under Section 80C. An additional deduction of Rs 50,000 can be claimed under Section 80CCD(1B) over and above the deduction claimed under Section 80C. Subscribers can withdraw up to 60% of their corpus on maturity while the rest has to be compulsorily used for purchasing the post-retirement annuity.
The writer is CEO and co-founder, Paisabazaar.com. Views expressed are his own