Where to invest

Where can savings be invested? Four common choices (Fig. 5.5):

a) Fixed deposits (FDs). You put a lump sum in a bank or post office for a fixed time (say one, three or five years) at a fixed interest rate that does not change. FDs are among the safest options and suit people who want safety more than high returns. The government also backs safe long-term savings such as the Public Provident Fund (PPF), which any citizen can open, and small savings schemes like the National Savings Certificate (NSC) and Sukanya Samriddhi Yojana.

b) Bonds. A bond is a loan you give to the government or a company for a fixed time; they pay you interest. Buy a Rs 10,000 bond at 5% a year: you get Rs 500 interest, and if it matures after a year, Rs 10,500 in all. A bond may last just a day or as long as 30 years or more, and you may be able to sell one before it matures. Government bonds are usually safer than corporate (company) bonds.

Think of two companies. One borrows from you and promises to repay with interest: that is a bond. The other sells you a slice of itself: that is a share.

c) Shares (stocks, equity). A share makes you a part-owner of a company. You may earn dividends and gain if the share price rises. But prices go up and down with market conditions, company results and the economy, so shares carry higher risk, though they can give higher returns over the long term. The BSE SENSEX tracks 30 large companies on the Bombay Stock Exchange; it swings in the short run but has risen a lot over the long run (Fig. 5.6).

d) Mutual funds. Many investors pool their money, and professional fund managers spread it over many shares, bonds and other assets. Spreading money across many assets is diversification: do not depend on one source. Funds suit people without the time or knowledge to invest on their own, but they can still lose money, which is why adverts say they are 'subject to market risks'.

Before investing, check four things (Fig. 5.8): risk (chance of losing money), return (the profit), time horizon (how long the money can stay invested) and liquidity (how easily it turns into cash).

The trade-off (Fig. 5.9): lower risk usually means lower return; higher risk can mean higher return. FDs: low risk, steady but lower returns. Mutual funds: possibly higher. Shares: the highest potential over the long term, and the highest risk. So choose by your goal, how much risk you can bear, and when you will need the money.