A risk-free asset is one with a guaranteed future return and almost little chance of loss. Bonds, notes, and particularly treasury bills issued by the central government are regarded as risk-free investments because they are backed by the creditworthiness of the central government. The return on risk-free asset is typically quite low.
However, technically there is no such thing as a risk-free asset, nothing in the world of investment can be 100% guaranteed. Technically, the risk that financial investment will lose value or become completely worthless exists for all types of assets. However, the risk is so negligible that it is reasonable to regard treasury bill or any government debt issued by a government as risk-free for the average investor.
Return Expected From Risk Free Asset
Depending on how long an asset is held, a return rate can be predicted at the time of investment being made by an investor. The possibility that the actual return and the projected return could be considerably different highlights the risk. The unknowable component of the potential return is regarded as the risk because market changes can be challenging to foresee. A higher risk level, in general, suggests a greater likelihood of huge swings, which, depending on the final result, can result in significant gains or losses.
Investments with little risk are thought to have a reasonable chance of making the anticipated return. The rate of return is frequently significantly lower to reflect the decreased level of risk because this benefit is virtually known. The difference between the predicted and actual returns is probably small.
Although a risk-free asset return is predictable, this does not ensure a gain in terms of purchasing power, let us explain why. Even if the value of your risk-free investment has increased as anticipated, inflation may result in the asset losing value in comparison to the decreased value of the currency due to inflation.
Assets Without Risk
Theoretically speaking, an investment that offers a guaranteed return with no risk is said to have a risk-free return. The interest on an investor’s money that would be anticipated from a risk-free asset when invested over a certain amount of time is represented by the risk-free rate. The risk premium on the security is the difference between the return earned and the return at risk. To quantify the entire expected return on an investment, the return on a risk-free asset is combined with a risk premium.
Here is the list of 8 Risk-Free Asset to Invest :
- Treasury Bills
Treasury bills, also known as T-bills, are short-term debt instruments issued by the Government of India and are now available in three tenors: 91 days, 182 days, and 364 days. T-bills are money market vehicles. Treasury bills are interest-free securities with zero coupon payments. They are instead issued at a discount and redeemed at face value when they reach maturity. For instance, a 91-day Treasury note with a face value of INR 100 may be issued at 98.20, or a discount of, say, 1.80, and redeemed for that amount. The difference between the issue price and the maturity value, which is 1.80, is the return to investors
- Government-Sec
A tradeable instrument known as a Government Security (G-Sec) is one that the Central Government or State Government have issued. It is an instrument representing the government’s debt responsibility. These securities come in two varieties: short-term (sometimes referred to as “treasury bills,” with initial maturities of less than a year) and long-term (usually called Government bonds or dated securities with an original maturity of one year or more). In India, the State Governments exclusively issue bonds or dated securities, known as State Development Loans, while the Central Government issues both Treasury Bills and Bonds or Dated Securities (SDLs). G-Secs are referred to as risk-free gilt-edged products since they have almost no default risk.
- Sovereign Gold Bonds
Sovereign Gold Bonds (SGBs): SGBs are special securities whose prices are based on the price of a commodity, specifically gold. SGBs are budgeted as an alternative to market borrowing. The calendar of issuance, which includes the tranche description, subscription date, and issue date, is made public. The bonds have a face value of one gramme of gold and are issued in multiples of 1 g of gold. The minimum investment in the bonds is one gramme, and the maximum subscription limit per fiscal year is four kilogrammes (kg) for individuals, four kilogrammes (kg) for Hindu Undivided Families (HUF), and twenty kilogrammes (kg) for trusts and other similar entities, as may be from time to time notified by the Government, provided that (a) in the case of joint holding, the above limits shall apply to only the first applicant; and (b) the annual ceiling shall include bonds subscribed When eight years have passed since the Bonds’ issuance date, they must be repaid.
How to Redeem Gold Bond?
Bonds may be redeemed early after the fifth year from the date of issue, and such repayments must be made on the next interest payment date. A resident of India who is an individual may hold bonds under the SGB Scheme in his or her individual capacity, on behalf of a minor child, or jointly with any other individual. A Trust, HUF, Charitable Institution, or University may also hold the bonds. The nominal value of the bonds is determined in Indian Rupees using the simple average of the closing price of 999-purity gold for the final three business days of the week prior to the subscription period as published by the India Bullion and Jewelers Association Limited. For investors applying online and paying against the application using digital means, the issue price of the Gold Bonds is INR 50 per gramme less than the nominal value. The Bonds earn interest on their nominal value at a rate of 2.50 percent (fixed rate) per year. Half-yearly interest payments are required, and the final interest payment is due along with the principle at maturity. The redemption price will be determined in Indian Rupees and will be based on the simple average of the closing price of 999-purity gold over the previous three business days as reported by the India Bullion and Jewelers Association Limited. SGBs purchased by banks only through the use of a lien, hypothecation, or pledge will be included in the calculation of the statutory liquidity ratio. The aforementioned subscription caps, interest rate discounts, etc., are in accordance with the existing scheme and subject to change in the future.
- PSU Bonds
Bonds known as “Public Sector Undertaking Bonds” (PSU Bonds) are issued by companies in the public sector which often have a government ownership stake of more than 51%. It’s a medium- and long-term debt product that the public sector units issue. One example of PSU is Indian Oil Corporation Limited. PSU banks, power companies, railroads, and other organisations issue PSU bonds due to their ownership of 51% of the government. These organisations could be owned by the federal or state governments. PSU Bonds, in contrast to other bond categories, are a reliable source of investment for investors. It has a distinct significance. Investing in PSU bonds has various benefits. PSU bonds are among the safest investment options because they are issued by government organisations. For many investors, the return on investment is another draw. At an interest rate of 8% to 9%, you might anticipate annual returns. In comparison to many other debt securities available on the Indian market, PSU BondsIndia’s yield is greater.
- National Pension Scheme – NPS
National Pension System (NPS) is a voluntary, defined contribution retirement savings scheme designed to enable subscribers to make optimum decisions regarding their future through systematic savings during their working life. NPS seeks to inculcate the habit of saving for retirement amongst the citizens. It is an attempt towards finding a sustainable solution to the problem of providing adequate retirement income to every citizen of India. Under NPS, individual savings are pooled into a pension fund which is regulated by PFRDA and is managed by professional fund managers as per the approved investment guidelines and invests into diversified portfolios comprising government bonds, bills, corporate debentures and shares. These contributions would grow and accumulate over the years, depending on the returns earned on the investment made. At the time of normal exit from NPS, the subscribers may use the accumulated pension wealth under the scheme to purchase a life annuity from a PFRDA empanelled Life Insurance Company apart from withdrawing a part of the accumulated pension wealth as lump-sum, if they choose so.
- PPF – Public Provident Fund
National Savings Institute of the Ministry of Finance introduced the Public Provident Fund (PPF) as a savings-cumulative-tax-saving vehicle in India in 1968. The scheme’s primary goal is to mobilise small savings by providing an investment with respectable returns along with income tax advantages. The Central Government completely guarantees the programme. A PPF account’s maturity balance is completely exempt from income tax. A PPF account requires a minimum deposit of INR 500 each year. Acccount holder may deposit a maximum of 1.5 lacs in any PPF account during a given financial year, including those for which he serves as guardian. PPF accounts opened in the names of minor children, a guardian is required. When it comes to such PPF accounts for minors, parents can serve as guardians. Any deposit made in excess of Rs. 1.5 lacs during a fiscal year will not be eligible for interest. The price may be paid in full or in yearly instalments. This does not, however, imply a single deposit made once every month. Every three months, the Indian government’s ministry of finance releases the rate of interest for PPF accounts. Every year in March, the interest is paid and compounded annually. The lowest balance at the end of the fifth day of each month is used to compute interest.
- NSC – National Savings Certificate
The National Savings Certificate (NSC) is a tax-saving investment designed to support modest or medium-sized savings. All Post Offices offer the NSC programme, which is pushed by the Indian government. The risk is regarded as being extremely minimal because the initiative is backed by the Indian Government. The scheme is not open to Non-Resident Indians (NRIs) or HUFs and is exclusively available to Indian citizens. The national pension system is extremely popular because of the income tax advantages, low minimum investment requirements, and minimal risk. Every three months, the Ministry of Finance releases the NSC interest rates. The NSC scheme’s current interest rate is 6.80%. (Oct-Dec 2022).
Section 80C of the Income Tax Act permits a deduction for the primary investment amount. According to the Income Tax Act of 1961, the deduction is only allowed up to Rs. 15 lakh. Interest earned on NSC is considered a reinvestment in NSC when interest is earned on the principal sum. According to the Income Tax Act of 1961, it is therefore permitted as a deduction under section 80C up to Rs 1.5 lakh. The interest received is first added to the investor’s gross income before being deducted. Consequently, tax is subtracted from interest income as well.
- Kisan Vikas Patra – KVP
A flexible investment product backed by the government is Kisan Vikas Patra (KVP), and it is available in form of certificates. It is a small savings plan with a fixed rate that will double your investment after a set amount of time (123 months in the currently available issue). KVP certificates are currently available for purchase through a few public sector banks as well as India Post Offices. The minimal initial deposit required to start a Kisan Vikas Patra account is Rs. 1000. There is no upper limit on KVP investments; you may invest in multiples of Rs. 100. However, Kisan Vikas Patra certificates are now offered in the following denominations: 1,000, 5,000, 10,000, and 50,000 rupees. Furthermore, Kisan Vikas Patra doubles your investment and permits you to hold onto it for almost ten years, resulting in the establishment of long-term wealth. When applying for a loan, Kisan Vikas Patra can be pledged or transferred as security by submitting the required application form to the relevant Post Office along with an acceptance letter from the pledgee.
The government-backed Kisan Vikas Patra provides security and guaranteed returns. The certificate acknowledges the quantum of your investment and the amount you will receive after the investment period. When applying for a loan, Kisan Vikas Patra can be pledged or transferred as security by submitting the required application form to the relevant post office along with an acceptance letter from the pledgee. Only the President of India/Governor of the State, the RBI, cooperative societies, cooperative banks, scheduled banks, corporations (public/private), local authorities, government companies, and housing finance companies, however, are eligible to receive this pledge.
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