Are You A Risk Averse Investor? Here Are 5 Investment Options For You

Risk-averse investors are more likely to choose stable returns over volatility. For them capital preservation is the prime objective, which leaves risk prone investments out of the picture. Here is a look into the top 5 investment options for risk-averse investors.

Short Term Debt Funds

Short term debt funds include liquid, ultra-short duration, short duration and low duration funds. Their shorter maturity makes them less susceptible to interest rate risk --- shorter the maturity, lower the interest rate risk. Liquid funds invest in debt instruments with maturity of up to 91 days, ultra-short duration funds for 3-6 months, low duration funds for 6-12 months and short duration funds for 1-3 years. Compared to fixed deposits, short term debt funds offer higher liquidity and higher returns. Liquid funds, ultra-short duration funds and most of the low and short duration funds do not charge exit loads. These features make these funds highly appropriate for parking emergency fund or meeting short-term goals. Invest in liquid funds for financial goals maturing within 3 months, ultra-short-term funds, ultra-short and low duration funds for those maturing within 1 year and short duration fund for those within 1 to 3 years.

Fixed Deposit

Bank and Post-office FDs guarantee principal repayments and interest returns at booked rates irrespective of any changes in card rate during the tenure. Investors can also liquidate their FDs but after paying a prepayment penalty of 1%. This is deducted from the effective interest rate, which is either the contracted rate or the original card rate of the period for which the FD has been in force, whichever is lower. Thus, factor in the investment horizon of your financial goals and your liquidity requirements while selecting your FD tenure. This will help you avoid unnecessary premature withdrawals and loss of interest income.

Currently, small finance banks offer FD interest rates of up to 9% p.a. whereas those offered by private sector banks offer card rate up to 8.25% p.a. The highest rates offered by public sector banks go up to 7.30 % p.a. Senior citizens get up to 0.75% concessional rates above these rates depending on the banks. You can also claim tax deduction under Section 80C by investing in the tax-saving bank FDs, which come with a lock-in period of 5 years. Remember that the only principal component qualifies for tax deduction, the interest component is taxed according to your tax slab.

Public Provident Fund (PPF)

Sovereign guarantee from the government makes PPF one of the safest among all investment options. While the investment amount qualifies for tax deduction under Section 80C, interest earned and maturity proceeds are tax exempt. This gives PPF an edge over most fixed-income tax saving products. While PPF comes with a lock-in period of 15 years, one can avail loans against PPF balance, make partial withdrawals or opt for pre-mature closure subject to satisfying pre-laid conditions. PPF currently is offering 8% p.a. compounded interest. However, the interest rate is reviewed by the Ministry of Finance every financial quarter on the basis of government bond yields.

National Savings Certificate (NSC)

NSC comes with a lock in period of 5 years offering an interest rate of 8% compounded annually. Liquidity in NSC is available in the form of loans as you can borrow against your NSC deposits. Just like all small savings schemes, NSC enjoys sovereign guarantee and its interest rate is subject to review on quarterly basis. With a minimum deposit amount of Rs 100 and no maximum deposit limit, you can claim tax deduction of up to Rs 1.5 lakh on your NSC investment under Section 80C.

Voluntary Provident Fund (VPF)

VPF is another small savings scheme, which allows an EPF subscriber to invest over and above his mandatory EPF contribution. An EPF subscriber can contribute up to 100% of his Basic and Dearness Allowance (DA) component towards VPF. The contribution qualifies for tax deduction under Section 80C. VPF earns the same interest rate as EPF (the interest rate declared for FY 2018-19 is 8.65%) and is tax-exempt just like EPF.  

Bottom Line

Sovereign guarantee for VPF, PPF and NSC makes them the safest investment option for risk-averse investors because of their accompanying sovereign guarantee. Bank fixed deposits follow them because of the deposit insurance cover of up to Rs 1 lakh. While liquid and other short-term debt funds do not offer capital protection and income certainty, they outscore others in terms of liquidity and returns. Their shorter maturity profile also reduces their interest rate risk. 

However, investors with moderate to high risk appetite should prefer equities and equity mutual funds for their long term goals as equity as an asset class outperforms fixed income instruments and inflation by a wide margin over the long term. Those looking to save tax under Section 80C can consider investing in ELSS, a tax-saving equity mutual fund category with lock-in period of 3 years.

Naveen Kukreja

Guest Author Naveen Kukreja is CEO and co-founder of Paisabazaar.com. He studied engineering at Delhi College of Engineering and holds a postgraduate diploma from IIM Calcutta