12 Ways for a Risk-Averse Investor to Buy a Savings Plan or Scheme

Written by : Knowledge Centre Team

2020-12-08

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Every individual has different financial goals and needs. Finding the right savings plan is crucial for achieving your financial goals. It is essential to understand that some amount of risk follows all kinds of investments. With so many options floating around, one must find the most suitable option to get guaranteed returns at maturity.

Not all individuals readily accept the risks that follow with a particular investment hence becoming risk-averse with their investment needs. For example, an investor with low or fixed income having higher financial responsibility tends to be more risk-averse than an investor having high income and low financial responsibilities.

A risk-averse person ideally focuses on avoiding loss and gaining profits on their investments. The investor prefers sure-shot returns by investing in low-risk schemes and products instead of avoiding high volatility in unknown markets and schemes.

Risk-averse investments have specific stability to them and are often tax-deductible under 80C with tax-free maturity. By becoming a risk-averse investor, you choose to keep your capital safe than aiming for a higher return over it.

What Savings Plan or Scheme you can Buy?

Plenty of options are available to risk-averse investors to invest their capital. Risk-averse investors should try and stay away from investments involving high price volatilities. One can calculate the amount of risk involved by the fluctuation/volatility of the price in the market. There are several risk-averse investment strategies:

1. Savings Account

The high yield savings account provides a safe long-term return with practically no investment risk to the particular amount invested. The high term yield differs with the type of savings account. However, the rate of return should exceed the prevailing rates of inflation. This strategy has the least amount of risk involved and mostly yields the lowest returns. E.g., The Jan Dhan Yojana initiated under the government helped the farmers and the poor people earn 4% of interest on their hard-earned money which they earlier used to keep in cash.

2. Fixed Deposits

Fixed deposit is amongst the safest options available in the market at the moment for investment. The reason for the same is because they are not market-driven. Fixed deposits carry your invested amount for a predetermined time on which primary interests can be earned, which depends on the bank and the number of years. Still liquidity and return are relatively lower.

Another benefit of investing in fixed deposits is that it is tax-exempt up to 1 and a half years under the Income Tax act and also comes along with a lock-up to 5 years. Financial banks offer a 9% interest per annum, while private banks offer up to 8.25% p/a. For a public bank, the highest interest rate given is around 7.30 % per annum. The investors should note that only the principal component can be qualified under tax deduction, and the interest is taxed as per the individual’s tax slab.

Risk-averse investors who are not in immediate need of money can choose to invest their capital in Fixed Deposits. The FDs have the edge over the savings account. It pays slightly more than the regular savings account if the investor is willing to deposit money for a more extended period. There is a small risk of rising interest rates while the money is deposited and further losing a higher return rate.

3. Recurring Deposits

Investors do not have a particular lump sum to invest in Fixed deposits, like a common man earning a regular salary, saving a small amount to invest an amount every month in Recurring deposits thus earning a fixed deposit rate interest. These investments come with predefined duration and give assured returns at fixed interest rates.

Most banks usually provide the same interest rate on RDs and FDs. By opting for Recurring deposits, you get the choice to manage and arrange your investments and the interest rate on them is revised and updated depending upon the monetary policies. Also, there are individual recurring deposits that people invest in for future demand and future needs, such as buying a car or going on a tour.

4. Provident Funds

Provident Funds is the most suitable option when thinking about the future and retirement as it promises extreme safety and regular returns.

a) Public Provident Fund (PPF)

It is again one of the safer investment options as it is sovereign by the government. PPF comes with a lock-in period of 15 years, and the invested capital qualifies for a tax deduction, whereas maturity and interest earned are tax-exempt under section 80C. Currently, PPF offers 8% compound interest per annum, but it might be subjected to change if the interest rate is reviewed every quarter by the Ministry of Finance based on yields of the government bonds.

b) Voluntary Provident Fund (VPF)

Voluntary Provident Fund is a small scheme that offers guaranteed returns as it is directly deducted from your salary. It allows the employee provident fund practitioner to invest over his/her mandatory EPF contribution. It earns the same interest as EPF and is also tax-exempt.

5. National Savings Certificate

Risk-averse investors receive guaranteed returns by investing in NSC. It is a fixed investment scheme and offers a lock period of up to five years or ten years, depending upon the chosen scheme. One can invest with a small amount, and there is no maximum limit. One can also use NSC as collateral.

Benefits of Buying National Saving Certificate | Buy Best Saving Schemes Online

6. Government Bonds/ Securities

Bonds are considered to be safe spaces for investors. Bonds that are issued by or under central government or state are called government bonds. They yield low returns than other bonds, but are more stable and have assured returns as the government assurance backs them. For treasury bills, you get dividends on maturity, and for dated Government securities it is bi-annually.

7. Municipal and Corporate Bonds

Bonds are debt instruments issued by corporations in which the chance of default is scarce. Risk-averse investors generally invest in bonds of well-off corporates as the holders of these bonds are given the first preference during repayment from the process of liquidation if things go awry. Municipal bonds are tax exempted which increases the investor's total return.

8. Dividend Growth Stocks

The dividend growth stocks are dividend-yielding stocks of blue-chip companies with fewer investment risks that are generally stable even when the market fluctuates. These blue-chip companies do not show volatility in stock price with a regular increase in annual dividend returns. The advantage of having dividend growth stock is that it helps offset the losses when the market is down the drain. The investors can choose to reinvest or buy more stock shares, thus reducing the average price and gaining more capital.

Know More About - Dividend Distribution Tax (DDT)

9. Short-term Debt Funds

The short term debt funds comprise of Liquid: 91-day maturity period

a) Ultra-short duration: 3-6 months of the maturity period
b) Low duration funds: 6-12 months
c) Short-duration fund: 1-3 years

These funds tend to have a shorter maturity period making them less susceptible to market risk. These short term debt funds offer high liquidity and higher returns than fixed deposits and savings accounts. Most of these funds do not have management charges or exit load charges. These are tools available for the common man to invest their money for a short period to meet short term goals with good average returns.

10. Post Office Monthly Return Scheme (POMIS)

The POMIS is an investment scheme under the Indian Postal Service that promises an investor a guaranteed return of 8.5% per annum on their fixed monthly income. The POMIS comes with several advantages, such as the account is transferable from one post office to another without any additional costs. The scheme also does have Tax deduction at the source which keeps your investment intact. The maturity of this scheme is five years which assures fixed monthly income. The downside is the cost deduction when capital is withdrawn before the maturity period, and one cannot enjoy the benefit of 80C under this scheme.

11. Kisan Vikas Patra

Kisan Vikas Patra offers a guaranteed rate of return and ensures you get a guaranteed savings plan. It does not have a fixed maturity and one can hold the account until the invested money is doubled, that is, ten years four months. You are eligible to withdraw money without penalty after 2.5 years of investment. Any withdrawals made before this period attracts lower interest. The downside to this is that the scheme is fully taxable.

12. Senior Citizens Savings Scheme

If you are an early retiree or a senior citizen then this investment plan is a must have to ensure a good savings plan even after retirement. The scheme is specifically introduced for the senior citizens above the age of 60. The scheme can be availed under any bank or also under post office. The early retirees can invest in the scheme, given that they do it under a month of getting the retirement capital/funds. The current interest rate of SCSS is 8.7% per annum and is quarterly payable and fully taxable. The members of the scheme are allowed to open more than one account and can invest up to Rs 15 lakhs in the tenure of 5 years which can also be extended to three more years once the scheme matures.

There are several strategies to get risk free and guaranteed returns. Though risk-averse investment is a good enough way to get fixed returns, it might not be enough to meet your financial needs during a particular time even if such investments are managed efficiently. It is often suggested that risk-averse investors have some or limited amount of exposure to equity-oriented investments to get good returns over the capital invested.

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