For an investment to be rewarding or lucrative for an investor it should be able to beat inflation rate consistently over a long time period. As of now inflation is trending in the range of 5-6 per cent. Here we imply that real return which is computed as:
Real return= Nominal return - Inflation; should be positive.
To understand this, say as in the current investment environment, if you are fetching a maximum of 5.5 percent return on fixed deposits and inflation is in the range of 5-6 percent, then your annual real return from the investment shall be zero.
Now this said despite the return being lowered for several investment options and the threat of interest rates being slashed for Post office small savings schemes in the upcoming quarter, even now we have instruments that can yield a higher return than inflation:
Equity based options:
1. SIP in Index fund:
If you wish to earn return from the share market without taking too much risk, Systematic Investment Plan (SIP) in Index fund can be started. Typically, index funds are suitable for investors who are on the hunt for less risky investment and have a considerably long term investment horizon. Furthermore, lesser volatile the index fund be more shall be the return for the investor.
Until April 2021, Indian stock market in the last 10, 20 and 30 years has yielded an average return of 10 percent.
2. Equity Linked Savings Scheme:
Equity linked savings scheme are equity funds that park a major chunk of its corpus into equity and related instruments. These schemes carry a mandatory lock-in of 3 years. Investment in ELSS qualifies for tax deduction up to the maximum of Rs. 1,50,000 per year under Section 80C. So, if you remain invested in the scheme for a considerable time then one can get a return as high as 15 percent.
1. VPF or Voluntary Provident Scheme:
This is another investment tied to EPF or Employee provident fund (EPF) that can fetch a higher return over and above inflation. This is because VPF carries a similar rate as EPF and is currently pegged at 8.5 percent. Employees with surplus income can consider the VPF investment option and contribute in it on a voluntary basis to earn inflation beating return. Note from this year, contribution of up to Rs. 2.5 lakh annually into the scheme shall be tax-exempted.
2. National Savings Certificate (NSC):
This is a post office savings scheme whose interest rate is decided based on the repo rate. Currently the repo rate is at a barely 4 percent (Repo rate is the rate at which RBI lends money to commercial banks). And in the near future, repo rates are likely to head northwards and so shall the interest rate on NSC which is currently offering 6.8 percent per annum.
3. Savings scheme for senior citizens:
For individuals aged over 60 years, the government has given out two options, one is the PMVVY or Pradhan Mantri Vaya Vandana Yojana that fetches 7.4 percent and the other is Senior Citizen Savings Scheme (SCSS) that also offers 7.4 percent tax-free return. While the former scheme is provided by the LIC, the SCSS is a Post office scheme.