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Government backed investment options are a good bet in times of turbulence, but going overboard may keep you away from your financial goal, says

 WITH the financial meltdown hitting Indian shores, things are only getting worse for investors here. And the road ahead seems to be filled with potholes. The benchmark stock market, for instance, has already plummeted by more than 50% since its all-time peak in January this year, while most top-rated mutual funds are giving negative returns. In such times of turbulence, government-backed investment and deposit schemes seem to be a good bet for those looking for safe and secure investment havens. After all, people at least don't run the risk of losing money by parking their funds in those instruments.
    Explains Ashish Kapur, CEO, Invest Shoppe India: "The mayhem in the Indian and global financial markets along with slowdown in industrial production is making investors nervous and they are shifting towards safer instruments such as PPF, post office schemes, FDs with PSU banks, GILT funds and LIC plans."
    The best part of such plans is that apart from being safe and risk-free, some of them (such as PPF, NSC and Senior Citizens' Savings Scheme) offer tax benefits too while interests are totally tax-free in some cases (like PPF). These instruments also offer attractive rates of return. For instance, while post office schemes offer 8 to 9% guaranteed return, the same can go up to 10-11% in the case of bank fixed deposits, which can't be considered bad in the current scenario. No need to say that some options such as PPF and Senior Citizens Bonds definitely need to be part of asset allocation for those in lower tax brackets.
    Financial experts, however, warn that while it is good to keep some risk-free instruments in your portfolio — which would prove to be a cushion in times of crisis — you should always avoid going overboard as relying solely on safe instruments may keep you away from your financial goal.
    "Risk and return always go hand in hand while investing. When you choose to save in governmentbacked savings plans, you can't expect a higher than market rate of return for the money because your primary objective is security of the funds and not returns," says Atul Surana, Certified Financial Planner and MD, Catalyst Financial Planning.
    Explaining further, Surana says that with the increased volatility in stock markets, there is a surge in demand for safer investing options. "However, being true, they are not an investing option but rather a savings option. Any plan that does not beat the inflation rate can't be called investment, but purely a savings option," he says, adding, "we are, in fact, a nation of savers — 35% of our earnings are saved into various assets. Though these investment plans are partially government supported/ backed, most of them are neither tax-efficient, nor do they beat the inflation rate."
    Agrees Lovaii Navlakhi, MD & chief financial planner, International Money Matters. "When volatility hits, people run to the safest avenue that gives assured returns. People tend to become totally risk averse without taking inflation into consideration. They, however, do not realise that one of the reasons why interest rates on bank deposits have been increased is high inflation. People need to be aware that post tax and inflation, the real returns on FDs are actually negative," he says.
    It would, thus, be wrong to assume that government-backed schemes are fully 'safe'. In fact, every investment carries a risk. There may be no credit or market risk in a government security, but there will be an interest rate risk on such instruments. "Even in a bank FD, the risk is that on renewal, the interest rate may be lower. Investors need to match their time horizon with a suitable product and thus reduce some of the risks on investment," says Navlakhi.
    Moreover, due to a lower rate of returns, poor liquidity, poor transparency and also owing to the lack of tax efficiency, these plans in isolation need huge savings commitment for achieving a particular financial goal for any individual.
    "It is very difficult to rely completely on safe plans to achieve your financial goals as nearly all of us have desires that are significantly higher than what our savings can generate from risk-free investment options. So, to accomplish our financial goals within the desired time, our investments should have some exposure to equity, real estate and other high-return instruments," says Kapur.
    Thus, the current crisis notwithstanding, it is always prudent to diversify your investments into various investment options and across companies. And depending on the time horizon for a financial goal, calculated risk can be taken with your investments.
    "With the time horizon, the risk negates for a stock-related investment, such as Systematic Investment Plan, in a diversified equity fund. Also follow a particular short-term, medium-term and long-term strategy for investing and choose the financial products that best suit your risk appetite," says Surana.
    However, shorter the term, lesser the risk you should take with your funds. This will ensure that the uncertainty of returns is lesser as you gradually approach your financial goal!