Investment alternatives are different from alternative investments.
Alternative investments mean investing in less known avenues like art, real estate crowdfunding or non-fungible tokens. However, most of these investments
- require considerable research and understanding
- yield good returns only in the long term, and
- may not be safe for all.
What we are talking about here is alternative use of funds in investments or otherwise, for the short-term, till interest rates stabilize.
Some of you may have received arrears after post-Covid restoration of salaries. Most of the companies pay increments, incentives, bonus and ex-gratia amounts by this time of the year. Some of you may receive the amount shortly.
1. Prepayment of home loan
Rising home loan interest rates will take away a large chunk in the next 2-3 years. Of course, the exact amount depends on the remaining period of your home loan.
If you have spare funds to invest, consider prepayment of your home loan to reduce the total interest outgo in future.
Is the interest on your home loan likely to exceed Rs.2,00,000/- after the rate hike? You will lose income tax benefits on part of interest paid. Check if partial prepayment can bring the annual interest amount down to Rs. 2 lakhs.
2. Voluntary Provident Fund
Have you learnt to live with less during the era of salary cuts, and salaries have been restored now? Have you received a hefty increment? Maybe you still have a surplus left after paying the increased EMI. Or better still, you do not have loans to repay.
Start investing in voluntary provident fund. As of now, it will fetch you returns of 8.1% p.a.
You can opt to build a retirement fund, or withdraw partial amount in case of need.
The scheme is open only to employees in the organized sector. One can enrol at any time of the year, but some companies encourage enrolment at the beginning of the financial year. However, one cannot discontinue before the end of the financial year. The employer deducts the amount from your salary and makes monthly contributions to VPF.
You will pay income tax on returns, if the total contribution of employee provident fund and voluntary provident fund exceeds Rs.2.5 lakhs in a year. Roughly, it means the monthly contribution should not exceed Rs.21000/- if you want tax-free returns. The difference between Rs.21000/- and the EPF already being deducted, is the scope for you to invest in VPF.
The scheme allows a maximum monthly investment of total basic salary + dearness allowance.
Refer Voluntary Provident Fund on ClearTax for details.
3. Company fixed deposits
Company fixed deposits offer high interest rates. At the same time, be aware that DICGC does not cover the risk of failure in repayment.
Default may occur. Hence, one should invest only a small percentage of annual savings in fixed deposits with high rating. Preferably, do not invest for more than a year on the current year.
You can bring your money back to the safety of banks after that.
Investment advisers are not allowed to charge a commission on this by SEBI rules. Investors can visit the company’s website and follow instructions.