To build wealth for the long term, you may need to diversify, combining different investments into one comprehensive portfolio. By mixing asset classes such as stocks, bonds, real estate and gold, one can reduce the risk because all are unlikely to move in the same direction at the same time. Here's a menu of financial products one can use to build a retirement portfolio.

Safe options

Public Provident Fund (PPF) : PPF is a long –term small saving scheme backed by the government's guarantee, with an assured return. Today, the interest rate offered is 8 per cent. A maximum of Rs 70,000 can be invested and the same is eligible for deduction under Section 80C of the income tax act.

PPF is one of the investment options eligible for tax benefits even under the proposed Direct Tax Code expected from April 2012. On maturity after 15 years, the entire amount including the interest is tax-exempt.

Unlike other small saving schemes, interest rates for PPF are not fixed throughout its term and can be reset. However, in practise, the rates have not changed much. So, if you are a conservative investor, PPF is one of the best options for a retirement portfolio. If you are in the 30 per cent tax bracket, return on investment post tax exemption is 11.43 per cent.

Voluntary Provident Fund (VPF) : The VPF option is available only to salaried employees. Over and above the mandatory 12 per cent of the basic and DA that make up your PF contribution, you are allowed to invest an additional sum from your salary. The interest earned on this investment will be same as that from Employee Provident Fund and the interest received is non-taxable.

For those in highest tax bracket, the effective return on investment will be equal to that from a fixed deposit carrying a 12 per cent interest, making it one of the best options for retirement. VPF is far superior to traditional pension plans (without risk cover) offered by insurance companies. Investments in VPF is eligible for tax benefit under Section 80C.

Debt-oriented mutual funds : If you are an investor with a limited risk appetite, you can take equity exposure through hybrid mutual fund schemes. These schemes invest predominantly in debt products such as Certificate of Deposits, debentures, government securities and fixed deposits, with up to 20 per cent allocation to equity.

Over the past five years some of the consistent performers in this space, such as Canara Robeco Monthly Income Plan, HDFC Monthly Income LTP and Reliance Monthly Income Plan, delivered annual returns of 11 per cent. The capital gain is taxed at a flat 10 per cent or 20 per cent with indexation. The tax structure makes such schemes attractive compared to fixed deposits. However, debt market performance is not assured.

Equity : Over the long term, equities have proved to be the best asset class to beat inflation. If you had invested Rs 1 lakh ten years ago in the Nifty Index, its value would today be Rs 5.2 lakh against Rs 2.15 lakh earned in a fixed instruments, with a 8 per cent return.

Equity funds also enjoy tax exemption on their returns if held beyond 12 months. Some of the solid large-cap schemes are HDFC Top 200, HDFC Equity, and Birla Sun Life Frontline Equity. In the short term, though, equities can be volatile and investors should be prepared for capital losses during a market correction.

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