First things first. I am not a financial advisor or hold any professional certificates in finance. Most young Indians now earn very well but do not know to save for the future or to invest in the right way. Somehow financial education at a young age is amiss. And for women, it is almost non existent.
This article is to provide a very high level idea on the most common investment options that are easy to follow based on my personal experiences. And it is only to provide a quick peek into the various options to invest your hard earned money. We will discuss about the investment, the investment vehicle(banks/financial institutions), the taxation involved, the risks and returns.
A few things to keep in mind before we dig in -
> A good way to start is to diversify your investments in multiple financial instruments. Remember - do not put all your eggs in one basket.
> Any investment directly or indirectly into the market comes with a risk. Make a well informed decision when choosing your funds and stocks.
> Almost all the returns on investments are taxable. There are very few investment options that are EEE(completely tax exempted) like ULIPS, ELSS and PPF. More about these later.
>It is considered better to have a pure term life insurance at a young age without any market linked plans if you have dependents. It is advisable not to mix life insurance with market linked investment.
>Do have a medical insurance to be prepared for medical emergencies.
>Always keep an emergency fund that consists of 6 months to 1 year of your daily expenses.
- Fixed Deposits(FD)
They are the most stable and traditional savings mechanism. Once you take an FD for an amount “X”, you will get the entire amount “X” plus the FD interest compounded annually after the fixed tenure of the FD. It is very easy to break(cancel) an FD and get the money instantly and hence it is one of the favourite ways to save as an emergency fund investment. There are also 5 year FDs which are locked and can be used for 80C tax exemption.
Risk : Low risk
Term : Varying from 7 days to 10 years
Minimum amount : Rs 1000
Interest rates : 2.5% to 8.25% based on the bank, amount and tenure. Senior citizens get a slightly higher interest rate.
Benefits : Easy to book an FD online, easy to cancel and can instantly get the amount(a penalty on the interest os charged if the FD is cancelled before the due date though), safe option as the government of India guarantees on FDs of less than 5L.
Points to keep in mind : Tax is applicable on the interest earned on FDs. - Recurring Deposits (RD)
This is best for those who would like to save every month. RD is continuous investment every month for a fixed duration.
Risk : Low risk
Term : Varying from 6 months to 10 years
Minimum amount : Rs 100 per month in most of the banks
Interest rates : 2.75% to 8.5% based on the bank, amount and tenure. Senior citizens get a slightly higher rate of interest.
Benefits : No need of one time investment. RD helps save every month and inculcates the habit of savings.
Points to keep in mind : Tax is applicable on the interest earned on RDs. Foreclosure is a bit complicated. Most banks do not allow a cancellation and even if they do, they will not pay the interest but only return the principal amount paid. So invest in RDs with caution knowing that you cannot get these funds till the RD tenure is completed. - Public Provident Fund(PPF)
PPF is the investment option that maximizes the power of compounding. PPF is a government backed scheme that can be opened similar to a bank account through the Post Office or through banks.
Risk : Low risk
Term : Fixed lock-in term of 15 years. The tenure can be extended after this period every 5 years till a total of 30 years.
Minimum amount : Rs 500 per annum
Interest rates : 7.1% per annum(compounded annually)
Benefits : This is an amazing way to plan for your long term financial needs and the returns are high due to the compound interest in this. Which means in the first year if you contribute Rs. 1000 towards PPF, the interest earned in the first year would be Rs. 71. The second year if you add another Rs. 1000, your principal amount now becomes Rs 2071 and interest will be given on the entire principal and the interest earned on the first year. You can also avail a loan against your PPF account and also withdraw partially for medical emergencies after 5 years of starting a PPF account. And the nest benefit, it is tax free and you can declare the amount under your 80C section when submitting your ITR!
Points to keep in mind : The amount you contribute towards PPF is locked for 15 years and the maximum contribution you can make per year is Rs. 1.5 lakhs only. - National Pension Scheme(NPS)
NPS is a retirement fund. By investing in NPS, you will get the returns on this only upon retirement. NPS is taxable at maturity. The contributions though can be included in section 80C to avail tax exemption upto Rs. 1,50,000. This is a good way to plan for retirement. It was initially started for government employees and later extended to all Indian citizens. The amount contributed towards NPS will be invested in equities. Though this is risky, the returns are generally higher than traditional schemes.
Risk : Moderate risk
Term : Upto retirement
Minimum amount : Rs 6000 in a financial year
Interest rates : Varies based on the equity performance. As of Feb 2020, 9% to 12% based on the scheme.
Benefits : Higher rate of return
Points to keep in mind : On maturity it is taxable unlike PPF and EPF. Also this amount will be available only upon retirement and hence is a long term investment and some people may feel their funds are blocked. - Sukanya Samridhi Scheme(SSS)
This is a long term saving scheme which can be taken on their daughter’s name by those parents who have a girl child. This scheme can be started when the baby is born till she reaches 21 years of age or till she gets married after 18 years. It is fully tax exempt scheme with interest compounded annually. It is best and a must for parents with a girl child and would help secure funds for their daughter’s education and future. This scheme can also be started if the girl child is below 10 years of age.
Risk : Low risk
Term : 21 years
Minimum amount : Rs 250 with a maximum of Rs 1,50,000 per year
Interest rates : 7.6% compounded annually
Benefits : Compound interest, so better gains. Also fully tax exempt.
Points to keep in mind : The girl must operate the account once she reaches 18 years of age at least once. This scheme can be availed in most banks directly or in post offices. - Mutual Funds(MFs) — Liquid funds, equity, debt, dividend payout, growth/dividend
There are many types of mutual funds. But at a very high level, a mutual fund is where public money is invested in a pool of different stocks or bonds. Where the money for a mutual fund is decided by the owning mutual fund house which are generally financial institutions. As an example, a mutual fund could be defined as an equity fund if 60% of the amount goes to equities(i.e. stocks) and the remaining 40% is invested in government bonds. So if you invest Rs 500 in such a mutual fund, 60% of this amount will be used to buy stocks while 40% of this amount will be used to buy bonds. The mutual fund houses charge some transaction charges for these and sometimes also keep a small percentage of dividends too. Some popular mutual funds are Axis Mutual Fund, Mirae Asset Mutual Fund, Tata Mutual Fund, Invesco Mutual Fund, SBI Bluechip Mutual Fund etc.
Risk : Low to high based on the mutual fund
Term : Can vary from a few days to years based on the mutual fund policy
Minimum amount : Generally Rs. 500 or Rs. 1000 based on the fund
Interest rates : Varies based on funds. If the fund does not do well, you might be losing money too!
Benefits : High returns if you choose the right fund.
Points to keep in mind : Mutual funds are market linked and hence exercise caution. It is a high risk investment but sometimes the returns are also high while sometimes you might be at loss. Good websites to know more about mutual funds and their performance https://www.valueresearchonline.com/ and https://www.crisil.com - Equity Linked Saving Schemes(ELSS)
ELSS are tax saving mutual funds that invest your funds in equity and equity-oriented securities while a part of it is also invested in debt instruments.
ELSS is covered under the Section 80C provisions and therefore are considered tax saving. These funds come with a mandatory lock-in period of three years, which is the shortest among all 80C options.
Risk : Moderate as they are linked to market performance
Term : Fixed — 3 years lock in.
Minimum amount : Generally Rs. 500 or Rs. 1000 based on the fund
Interest rates : Varies based on the ELSS fund’s performance.
Benefits : Save tax while investing in the market and high returns if you choose the right fund while the market performs well.
Points to keep in mind : There is a lock-in period of 3 years and you cannot get your money till the end of the tenure. Also it is tax saving only via section 80C and if your 1.5L limit of 80C is already consumed with other investments, then you will not be saving much tax by investing in ELSS funds. Most importantly it is market linked, so you might be at loss after 3 years if the market does not perform well. - Stocks/Share Market
The most exciting investment option is to invest in the share market. But what exactly is the share market?
In simple terms, if there is a publicly listed company, like say Reliance Industries(RIL) and you buy 5 shares of RIL with say Rs, 20000 as an example(means each share costs Rs.4000), then your money is being given to the company which will be used for the company’s running, expansion and other goals. When RIL performs well, the share price increases to say Rs.4500 per share, and hence the value of your Rs. 20000 is now Rs. 22500. On the other hand, if for whatever reason RIL does not do well, the share price drops and so does the value of your investment come down.
To invest in the share market, one would need a demat account and most demat accounts charge a fee per annum along with transaction charges for every transaction. These days there are many more online financial portals like Zerodha, 5Paisa, Upstox etc that charge differently. There are 2 types of taxes associated with shares — long term capital gains(taxed at 20% of your profits) and short term capital gains(the share needs to be held for at least 2+ years to be considered long term, taxed as per your income tax slab).This means of the above Rs. 20000 invested, if you sold the 5 shares you own at Rs. 22500 after 2 years of buying the stock, then a tax of 20% on your profit, i.e. 20% of Rs. 2500 has to be paid as tax. Shares also provide a dividend, i.e. the company shares its profits with the investors but this is usually very small.
Risk : High as the amount would reflect the performance of the company you invested in.
Term : Through intraday trading you can buy and sell in the same day within a few minutes or hold the stock for as long as you want for years together.
Minimum amount : Depends on the stock one wants to buy. There are also penny stocks that cost less than Rs. 10 per share as .
Interest rates : Not applicable.
Benefits : Highest returns if the right fund is chosen.
Points to keep in mind : Risk : Moderate as they are linked to market performance
Term : Fixed — 3 years lock in.
Minimum amount : Generally Rs. 500 or Rs. 1000 based on the fund
Interest rates : Varies based on the ELSS fund’s performance.
Benefits : Save tax while investing in the market and high returns if you choose the right fund while the market performs well.
Points to keep in mind : A share’s share price is not the true reflection of the actual value of the share. This means an investment of Rs. 10(called the face value) as an example could be the value of 1 share but to buy 1 share the share price could be as high as a few thousands. When a dividend is paid out, it is based on the actual face value and is hence generally low. Many have made millions and lost their entire life savings, so proceed with caution and never put emergency or medical funds into such a risky investment. - Gold
Investing in physical gold in the form of jewellery or gold coins/biscuits has been an ancient Indian tradition. Fortunately this has yielded great benefits to our ancestors as the price of the yellow metal grew in a balanced style over time. But now, we have other forms of investing in gold — digital gold and gold sovereign bonds. Also there are certain stocks and mutual funds that directly invest in gold and provide us a safe way to earn money on the rising gold prices.
Physical gold : While it is good to have physical gold in a tangible form with us, most of the times especially for jewellery, we pay an additional amount in the form of wastage and making charges. Traditionally, this jewellery is wealth we pass on to our younger generations and jewellery can be worn, because of the additional charges, physical gold is not best investment option. Still some amount of physical gold is always good to have as this can be used as collateral for loans as well. Another major drawback of physical gold is safety and fear of theft.
Digital gold :
Minimum amount : Rs 100 per month in most of the banks
Interest rates : 2.75% to 8.5% based on the bank, amount and tenure. Senior citizens get a slightly higher rate of interest.
Benefits : No need of one time investment. RD helps save every month and inculcates the habit of savings.
Points to keep in mind : Tax is applicable on the interest earned on RDs. Foreclosure is a bit complicated. Most banks do not allow a cancellation and even if they do, they will not pay the interest but only return the principal amount paid. So invest in RDs with caution knowing that you cannot get these funds till the RD tenure is completed. - Real Estate
Investing in real estate is a costly affair. Real estate here could be land, apartments, commercial spaces etc.The investment amount is generally very high and hence this must be proceeded with caution. Also property loans are available from all banks and financial firms.
Minimum amount : Could be in thousands, lakhs or crores based on the type and location of the property.
Interest rates : Not applicable. A rent might be possible though.
Benefits : Fixed asset and regular rental income is a good source of alternative income.
Points to keep in mind : Properties might appreciate or depreciate in value over time. The registration, sale and purchase process is not very simple and sometimes properties might be in litigation and property cases run in court for years. - Cryptocurrency/Bitcoin
I strongly do not believe in cryptocurrency as being from the software field I know it is just a hyped piece of code with no real world significance. Hence I never ventured into it and will probably not enter into this in the future as well. So I am leaving this section for the reader’s own analysis and caution.