Introduction to non-stock market investment options: debt, government schemes, insurance, real estate and more

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Picture a gymnasium. What do you see? Different people working out with different equipment, isn’t it? There’s that one person who’s lifting heavy weights. And then, there’s someone else who is sweating it out on a treadmill. You also notice that there are a couple of people playing badminton on one side of the gym. And oh, there’s someone who has only just enrolled and he’s trying his luck with the monkey bars. That paints quite an accurate picture, doesn’t it? 

Much like how there are different kinds of equipment to help you work out and stay fit, there are also a plethora of investment options available out there. Yes, you read that right. If you’re considering investing outside of the stock market, you have so many other choices to pick from. These non-stock market investment options have different levels of risk, returns, liquidity and volatility. 

And as we’ve seen in the previous chapters in this module, building a portfolio is not only about maximising your returns. It’s also about balancing the other factors like risk and volatility to suit your investor profile and meet your life goals. 

So, without further ado, let’s take a look at some non-stock market investment options.  

Bank fixed deposit

One of the many investment options preferred by Gen X, bank fixed deposits are stable and safe non-stock market investment options. Here, you deposit an amount with a bank for a fixed period of time. In return for parking your funds with them, the bank offers you a fixed rate of interest on the amount that you invest. 

You can either regularly withdraw the interest that you earn during the tenure of your deposit, or you can reinvest it along with the principal. 

Fast facts:

  • Risk: 

Very low. FDs are considered to be one of the safest investment options.   

  • Return: 

Low to moderate. The returns offered by fixed deposits vary from one bank to the other. They typically range from around 4.5% to around 8% per annum. 

Treasury bills (T-bills)

Also known as zero coupon bonds, T-bills are debt instruments offered by the government of India. These short-term investment options come with three different tenures: 

  • 91 days
  • 182 days
  • 364 days

Unlike other investment options, with T-bills, you don’t get paid a fixed rate of interest. So, how do you earn from investing in a T-bill? Well, T-bills are issued at a discount and then redeemed at their fair value at the end of the tenure. So, you profit from that difference between the fair value and the issue price. 

Let’s look at an example to understand how this works.

  • Say there’s a 91-day T-bill with a face value of Rs. 1,000. 
  • You purchase 10 of these bills at a discount, for Rs. 970 each. (with a discount of Rs. 30 on each bill). 
  • At the end of the 91-day period, the T-bills are redeemed (bought back from you) at Rs. 1,00o each.
  • So, you’ve essentially made a profit of Rs. 30 on each T-bill. Your total gain comes up to Rs. 300 for the 10 bills.

Fast facts:

  • Risk: 

None. Since the T-bill is backed by the government of India, there’s absolutely zero risk of default. 

  • Return: 

Low. The returns offered by such debt securities typically range between 3% and 5% per annum. 

Dated government securities

Just like T-bills, dated government securities are also debt instruments that are offered by the government of India. However, these are long-term bonds with a wide range of investment tenures, starting from around 5 years and going up to around 40 years. 

Dated government securities come with either a fixed or a floating rate of interest, which is also known as the coupon rate. The interest from these instruments is paid to you on a half-yearly basis. 

For instance, let’s look at Anil’s investment in these securities to get a better idea.

  • Anil invested Rs. 50,000 in dated government securities for a period of 10 years.
  • The securities bore a coupon rate of 8%.
  • So, each year, he earns Rs. 4,000 as interest. (Rs. 50,000 x 8%)
  • This interest is paid to Anil on a half-yearly basis, as Rs. 2,000 every six months.

Fast facts:

  • Risk: 

None. Same as with T-bills, the dated government securities also carry zero risk of default.

  • Return: 

Low to moderate. The returns offered by dated government securities range from around 6% to around 8% per annum. 

National Pension Scheme (NPS) 

Also backed by the government of India, the National Pension Scheme is a long-term investment option. It is essentially a voluntary savings scheme that aims to provide retirement benefits to its investors. In addition to this, the investments that you make under the NPS are also tax-deductible up to Rs. 1,50,000 under Section 80C of the Income Tax Act.   

Fast facts:

  • Risk: 

Very low. Since it is a government scheme, the NPS enjoys little to no risk at all. 

  • Return: 

Moderate to high. The returns generated by NPS is typically around 8% to 12% per annum. 

Public Provident Fund (PPF)

The Public Provident Fund (PPF) is another government-sponsored scheme. Investing in PPF is extremely easy. You simply need to open a PPF account with either a bank or a post office and deposit your funds. Similar to the NPS, investments under PPF are also eligible for tax deductions up to Rs. 1,50,000. Additionally, there’s a mandatory lock-in period of 15 years, making the PPF an attractive long-term investment option. 

Fast facts:

  • Risk: 

Very low. Investments in PPF are guaranteed by the government of India. 

  • Return: 

Moderate. The rate of return offered by this scheme ranges between 7% and around 8% per annum.  

National Savings Certificate (NSC)

The National Savings Certificate, which is a post office savings bond, is another initiative of the government of India. Similar to the PPF, the NSC is also a fixed income investment scheme. The difference is that it  has a lock-in period of only 5 years. The investments that you make under the NSC  scheme are also eligible for tax deductions up to Rs. 1,50,000.    

Fast facts:

  • Risk: 

Very low. The scheme offers complete protection to your investments.

  • Return: 

Moderate. The rate of interest ranges between 6% and 7% per annum. 

Non-convertible debentures (NCDs)

Debentures are debt instruments that companies issue to raise funds from the public. NCDs come with a fixed tenure and a rate of interest attached. The interest payouts from your NCD investments can be quarterly, half-yearly, or annual, depending on what you choose or what the NCD offers. Also, with respect to NCDs, there’s no option for premature withdrawal.

Fast facts:

  • Risk: 

Moderate to high. The risk varies depending on whether the NCD is secured or unsecured. 

  • Return: 

Moderate to high. The returns offered by NCDs are generally in the 11% to 13% range.   

Insurance

An attractive long-term investment option, insurance not only gives you an avenue to grow your wealth, but also offers the added advantage of a protective life cover. The investment period typically ranges from 10 to 30 years. Throughout this period, you’ll be required to pay premium charges to the insurer. Depending on the plan you choose, your premium payments can be made on a monthly, quarterly, half-yearly, or annual basis.

At the end of the tenure, you get maturity benefits along with bonuses and loyalty additions. In case you pass away during the term of the insurance policy, your nominees get a certain sum of money as death benefits.     

Fast facts:

  • Risk: 

Very low. Insurance is another one of the safest investment options available with little to no risk of default.  

  • Return: 

Low. The protective life cover that you get with insurance products compensates for the low returns. 

Real estate

A hugely popular investment option in India, real estate investment is another excellent choice for people considering investing outside of the stock market. Real estate may have the ability to fetch you handsome returns, depending on how the market is faring. Since the value of real estate properties appreciates over time, there’s the possibility of enjoying significantly higher returns in the medium to long-term. Real estate investments also give you an avenue to earn a steady, passive income by renting out the properties.

Fast facts:

  • Risk: 

Moderate. Although there’s no risk of default, there’s always liquidity risk with these investments.

  • Return: 

Moderate to high. You get to enjoy both passive income and income from the sale of the asset.      

Gold 

Gold is arguably the most popular investment option in India for the common man. Investments in gold are versatile, because you can either hold them for the short term or for the long term. Since the demand for the yellow metal is generally exceptionally high, buying and selling gold is almost effortless. Also, thanks to digital gold, you can now invest in the precious metal and reap all the benefits without the hassle of having to securely store it at home.

Fast facts:

  • Risk: 

Very low. There’s generally very little risk involved with gold. 

  • Return: 

Moderate to high. The returns usually vary since they are based on the current market price and the demand for the metal.  

Wrapping up

See how there are many easy ways in which investing outside of the stock market is possible? But of course, depending on your risk profile, your portfolio could also benefit from some equity investments. And speaking of equity, it can be broken down into large cap, mid cap and small cap. Wondering what these terms are?  This is what we’ll be looking at in our next chapter.

A quick recap

  • Bank fixed deposits are stable and safe non-stock market investment options that come with low risk and offer low to moderate returns.
  • T-bills are debt instruments offered by the government of India. They are available in three different tenures, namely 91 days, 182 days and 364 days. They come with no risk and offer low returns.
  • Dated government securities are debt instruments offered by the government of India. These are long-term bonds with a wide range of investment tenures, starting from around 5 years and going up to around 40 years. They come with no risk and offer low to moderate returns.
  • The National Pension Scheme is a voluntary savings scheme that aims to provide retirement benefits to its investors. NPS comes with very low risk and gives moderate to high returns.
  • The Public Provident Fund (PPF) is another government-sponsored scheme that comes with a mandatory lock-in period of 15 years. It comes with very low risk and offers moderate returns.
  • The National Savings Certificate is a fixed income investment scheme that has a lock-in period of only 5 years. It also comes with very low risk and offers moderate returns.
  • Debentures are debt instruments that companies issue to raise funds from the public. NCDs come with a fixed tenure and a rate of interest attached. The risk-return profile of NCDs is moderate to high on both counts.
  • With a  low risk-return profile, insurance not only gives you an avenue to grow your wealth, but also offers the added advantage of a protective life cover.
  • Real estate investments carry moderate risk and offer moderate to high returns.
  • Investing in gold carries very low risk, but it has the potential to offer moderate to high returns.
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