Investors make money in trading financial instruments expecting prices to appreciate and in turn benefit from selling at higher price. This is the basic rule of trade. However, there are instruments which are not marketable. These instruments are mainly from Governments and risk free. These are called non marketable financial assets. Non marketable assets are the ones that cannot be traded freely in the market. The purpose of these assets is to provide a good savings plan to individuals for future purposes or a regular income. Most of the non-marketable financial assets are risk free. Let’s look at some examples:
Employee provident fund & public provident fund (EPF & PPF)
This is a fund where you (or you & your employer) deposit a certain amount of money every month or year as the case may be. The minimum fund to be deposited is very low and most of the people can afford to start PPF in any nationalized or private banks (some banks and branches may not have this facility so check with individual banks). There is maximum limit on PPF. The EPF has no limit as such and the amount depends on your salary.
The EPF and PPF are fully exempt from tax net and hence they are one of the most popular instruments for majority of people who want to build decent wealth over long period of time so that they can support their old age.
Post Office Plans
Indian post offices have few good plans for investment. Their products are very similar to banks. Post offices offer savings account, term deposits, and monthly income plan. The idea of post offices providing these plans is because of their wide reach across the country. Post office plans are also very popular among people as this is risk free.
National Savings Certificate (NSC)
NSC is sold in various denomination of Rs 100 to Rs 10000. The tenure is 6 years and investors get a lump sum amount at the end of maturity. This offers good interest rate and can be used for tax deduction benefit.
Kisan Vikas Patra (KVP)
This one is offered by post office. The advantage of KVP is that there is upper limit on investment. Investors can invest any amount of money in this plan. The interest rate works out to be 8% – 9%. This is risk free investment.
This is very common. Almost all of us have bank deposits in our accounts. Bank deposits are again a very safe investment. Usually banks do not default on their obligation. Banks offer variety of choices on the type of account. The accounts can be current account, savings account, fixed deposits, recurring deposits etc. The current account doesn’t pay any interest but all other types pay interest.
Important points to understand
First, these financial instruments are risk free. However, this only means that the Government will not default on its obligation. The risks in these investments come from two major macroeconomic factors; namely inflation and interest rates. A high inflation will kill the returns while a high interest rate will increase the opportunity cost thus reducing the attractiveness of the instruments. For example, if the inflation rate is 9%, a PPF providing 8% is essentially reducing your wealth over time and not increasing it.
Second, most of non-marketable financial assets have longer lock in period. This means you cannot liquidate these investments without incurring a penalty. This eats into your returns.
Finally, the good part is that they are risk free and work well in the time of volatile stock market and market crash. The market portfolio may lose major value, but these non-marketable financial instruments will hold on to their value and grow too at a reasonable rate of 8%-10%.