Safe Investments with High Returns in India? How to Plan a 5-Year Investment

Introduction

Many investors look for something that is both completely safe and pays high returns. In practice the two pull in opposite directions: the investments least likely to lose money usually pay modest, predictable returns, and the ones that can grow faster can also fall in value. This article explains that trade-off and how to compare common options for a goal about five years away.

Safety and returns: the trade-off

• Safety of capital means how likely you are to get back the money you put in.
• Returns are what you earn on top. Higher potential returns come with a higher chance of losses along the way.
• Five years is long enough to ride out some ups and downs, but short enough that a large fall just before you need the money can hurt.

No investment offers high returns with no risk. Treat any offer of “assured high returns” with caution.

Lower-risk options

Bank fixed deposits

A fixed rate for a fixed period. If a bank fails, the DICGC insures deposits up to ₹5 lakh per depositor per bank, including interest. Breaking a deposit early usually means a lower rate. Interest is taxed at your income-tax slab rate.

Public Provident Fund (PPF)

A government-backed savings scheme with a 15-year term. The government sets the interest rate every quarter, and the interest is tax-free. Partial withdrawals are allowed only after five full years from the end of the year in which the account was opened, and only up to a limit, so PPF suits long-term saving more than a five-year goal.

Post office schemes

Schemes such as the Post Office Monthly Income Scheme (five years, interest paid every month) and National Savings Certificates (five years) are backed by the government, with interest rates set every quarter. The interest is taxable.

RBI Floating Rate Savings Bonds

Government bonds that mature after seven years. The rate is linked to the National Savings Certificate rate and resets every six months, and the interest is taxable. Only investors aged 60 or over can cash them in early, and only after four to six years depending on age, so they suit money you can leave untouched for the full term.

Options with more risk and more potential growth

Debt mutual funds

These invest in government and corporate bonds and money market instruments. Returns are not fixed: bond prices move with interest rates, and a borrower can default. For funds that invest more than 65% in debt and money market instruments, gains on units bought on or after 1 April 2023 are taxed at your slab rate, however long you hold them.

Hybrid mutual funds

These invest in a mix of asset classes, such as shares and bonds. The mix varies widely between types of hybrid fund, from mostly bonds to mostly shares, so how much a fund can fall in value depends on the fund. Check its asset allocation and risk level (shown on the riskometer) before you invest.

Equity mutual funds and shares

The highest growth potential, and the highest chance of losses, sometimes large ones, over shorter periods. Over five years, falls are possible.

Sovereign Gold Bonds

Government bonds linked to the price of gold. New bonds are issued only when the government announces a tranche, so check whether any issue is open. Existing bonds are listed on the stock exchanges, where their price moves with the price of gold.

Planning for five years

1. Start with the goal. If you must have a fixed amount on a fixed date, lean towards lower-risk options.
2. Match the lock-in. Check you will not need the money before a product allows you to take it out.
3. Spread the money. Combining lower-risk and growth investments limits the damage if one does badly.
4. Move towards safety as the date approaches. Shift gains from riskier investments into lower-risk ones in the last year or two.
5. Compare after tax and costs. Interest, capital gains and fees differ between products.

A SIP (systematic investment plan) is a way of investing a fixed amount in a mutual fund at regular intervals. It is not a fund in itself: the risk and potential return depend on the fund you invest in.

How EquityBox can help

EquityBox is a distributor of financial products, not a SEBI-registered investment adviser. We explain how products such as mutual funds and fixed income options work, what they cost and what their risks are, so that you can make your own decisions. Contact us to talk through your options.

Mutual fund investments are subject to market risks. Read all scheme-related documents carefully.