Anusha Shashidhar had this question on the Suggest a Topic page the other day, and I think the tax bracket does make a difference in what products you choose because some of the things I wrote in my earlier post on investments like FMPs and tax free bonds will not be so attractive to someone in the lower tax bracket because they can use other products that are easier to set up (bank FD or RD) and don’t have any uncertainty in them either.
I think the following three product categories are worth looking at for beginners who aren’t liable to pay a lot of tax.
1. ELSS Funds: You can still look at ELSS funds this year for your 80C deductions and since you are only at the beginning of your career you have a lot of time on your hands that reduce the risk of equities somewhat. That makes me think that ELSS funds should be in your list of options.
2. Public Provident Fund: Starting with Jitendra Solanki, many people recommended PPF, which is something that I thought of including earlier but the 15 year lock in made me turn away from it. But if you are okay with the 15 year lock in period, then this is a great option as well, especially considering the tax free at maturity aspect of it. Business Line has a great article on how to invest in a PPF.
3. Plain old bank Recurring Deposit or Fixed Deposit: I shared Ramesh’s comment on OneMint’s Facebook wall earlier about a recurring deposit, and I’ll paste it here as well because I think there is a lot of merit in this line of thinking.
Fixed Deposit rates are showing a tendency to decrease rates now. SBI has already reduced by .25%. the same is true for RDs
I think it is the best time to invest for long term say 5 years before rates fall. And if you donot have surplus cash, you can always reserve your berth by investing in RDs for 5 years thus insuring your higher interest rates above 10% for next 5 years even if rates fall below 8%
I think this makes sense and Hemant has shown through detailed calculation that due to the benefit of compounding a fixed deposit at SBI yields quite good for the long term.
I’d also like to say that for people who are in the 10% bracket, sometimes it may not make sense to try to reduce your tax liability to zero because every instrument that reduces tax liability locks in your money and sometimes it is just better to pay the little tax you owe and have the freedom to use your money the way you want.
Finally, my apologies to Anusha and all the others who I’ve had to disappoint when they have asked for personal recommendations, I believe I have a good reason to say no, and if you have the time here is explanation for that.