Long term investment options require a careful examination of investment instruments, more than short term investment options. Since the tenure is very long, one has to ensure that the instruments are less risky and also tax efficient.
Public Provident Fund
Public Provident Fund is the best instrument for a number of reasons. One is that you get tax savings under Sec 80C of the Income Tax Act. So, you can save tax up to an amount of Rs 1.5 lakhs per annum. Second, is that the interest earned is tax free.
There are very few instruments in India which offer you both the benefits. ULIPs are one instrument that offer you these benefits.
The interest on PPF is also much better than bank deposits. The fourth reason is the safety, which is unparalleled as the PPF is backed by the Government. All these make the Public Provident Fund the best long term investment in India.
PPF can be maintained for a period of up to 15 years. A lock-in period of 7 years is the only feature that is a disadvantage as far as the PPF is concerned.
Unit Linked insurance Plans (ULIPS) offer you one feature that PPF does not. That is they come with an insurance component up to 10 times the premium paid each year. If you pay a premium of Rs 1 lakh in a ULIP, you get insurance cover of Rs 10 lakh.
The one benefit that ULIPs offer apart from insurance is that you can invest in funds that have heavy allocation to equities. So, you can earn higher and even can loser higher amounts. In case you want to play it safe then you can invest in ULIPS which place money in money market instruments.
The disadvantage of an ULIP is that there are several charges that are applicable and the insurance premium is deducted from the amount paid and you then get returns. This makes the returns low, unless you place money in funds that have allocation to equities.
However, investors can get insurance, which is why it has got an added advantage.
Tax Free Bonds
Tax Free Bonds offer you an annual interest rate every year and come with tenures of 10, 15 and 20 years. The interest earned on these instruments is tax free. Now unlike PPF, where you can invest only up to Rs 1.5 lakh per annum, there is no limit on investing in tax free bonds.
Let's say that you have Rs 25 lakhs which you wish to invest. You know if you place them in a bank deposit, the entire interest will be subject to tax. If you place them in tax free bonds, there will no interest on the tax, no matter how much the interest earned is. Those in the highest tax bracket can get post tax yields in excess of 9 per cent.
Most of the companies that come out with tax free bonds are government owned companies, making these bonds very safe for investment. That is why these tax free bonds are good long term investment opportunities in India.
Apart from these there are many other instruments like equities and real estate that can be good bets. However, the returns is uncertain, which makes long term investors a little skeptical on these instruments.