Capital Preservation

Safety of capital is very important yet safe instruments like FDs are not tax-efficient. Investors can instead put their money in a mix of tax-free bonds and arbitrage funds issued by government-backed companies that guarantee safety of capital.

The interest rate of 7.3-7.6 percent is completely tax-free, making them more tax-efficient than FDs. While these come with the tenure of 10-20 years, investors can sell them on exchanges before maturity.

Tax-free bonds issued in 2013-14 have yielded returns of around 20 percent, apart from a near double-digit rate of interest for the investor.

Wealth Accumulation

To build a corpus for long-term goals like buying a house, building a retirement kitty or funding a child's education, investors must choose products that provide enhanced earning power. This can come in the form of diversified equity funds. Investors can invest in a balanced fund or dynamic asset allocation fund to ride out the volatility inherent in equity markets. These will automatically shift the investor's money between equity and debt instruments depending on market conditions and introduce stability to the portfolio.

An Rs 10,000 monthly SIP in a multi-cap diversified equity fund starting January 2006 would have generated a corpus of Rs 23.5 lakh today.

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