You would never travel to a new place without planning your trip well in advance. You will always have a map handy and might even use the services of a local guide. Similarly, as you embark on your journey of investing your hard-earned money, you will need a roadmap that can guide you through the entire process.
Each one of us has certain aspirations and goals.
Some of them could be intangible ones like running a marathon or hiking a mountain while most of the others are monetary aspirations such as having a comfortable lifestyle, being able to travel, purchase a home, provide for your family and so on.
One of the easiest ways to meet your monetary aspirations is by directing a part of your income towards different kinds of investments.
In this article, we talk about some of the best investment options available for you to invest in India.
We will cover most of them in great detail and also talk about what kind of investment options you should consider based on your current financial situation and your future financial needs and goals.
For example, you would rarely travel to a new place without planning your trip well in advance. You will be sure to have a carefully planned itinerary of where you would stay, where you would eat, how would you get around and so on. You will always have a map handy and might even use the services of a local guide.
Similarly, as you embark on your journey of investing your hard-earned money, you will need a roadmap that can guide you through the entire process.
All of your monetary aspirations require you to have the financial bandwidth to make each of them possible. In order to progress from one goal to another, you need to plan ahead and have a good investment strategy in place.
We do, however, understand that this is not an easy task. For this very reason, you may choose to put it off until it seems necessary.
Planning your investment requires you to understand what kind of investment fits your needs and your profile. We will cover some of the different investment options available in the market today and try our best to help put things in perspective.
There is an old adage in the financial world that often holds true. It roughly translates into something like this, “the best time to invest was 10 years ago and the next best time to invest is today.”
Let’s take a look at some of the benefits of investing early.
Let’s assume you start investing as soon as you get your very first job after graduation. At this stage in your life, you have very few financial commitments. Since you are yet to get married and start a family, you don’t have any additional expenses that come with such responsibilities.
You can divert a higher percentage of your salary towards the investments of your choice. This will enable you to take slightly higher risk and reap the rewards of your early investments in the form of higher returns.
If some of your investment choices don’t work in your favour, you will have plenty of time to correct your course and make the necessary changes. By starting early, you can experiment with your investments and get a better understanding of what works best for you.
When you start making money, there is always a temptation to buy the next best smartphone, a fancy gadget for your home, a brand new TV and so on. In most cases, such purchases require you to take a loan and pay EMIs.
When you start investing early, you rarely give in to such temptations. You become judicial with your spending habits and avoid any unnecessary purchases.
When you start investing early, you are naturally ahead of your peers. At least in terms of financial security. Not only will you be ahead of your peers, but you will also have a better understanding of the market and different investment options available for your financial needs. While your peers are still learning and playing catch up, you might be well on your way to buy your very first big purchase (your first home or a car, for example).
Because of your decision to start investing early, you will have an overall better quality of life.
You will not have to undertake any stress regarding your financial needs. You will have money available for planned purchases and other emergencies. This will significantly contribute to your overall well-being.
Compounding is commonly addressed as the eighth wonder of the world. And rightly so, as it has the capacity to significantly increase your returns over time. Compounding is where the return of your investment is reinvested along with the principal amount for the duration of your investment.
To learn more about how exactly compounding works, you can read this article to get a better understanding.
Before we talk about all the different investment options available in the market today, let’s take a look at some of the key principles that are necessary for investing well.
Your investment portfolio should always be a good mix of different kinds of investments in different asset classes. In order to minimise the risk and ensure a good return on your investments, diversification is extremely important.
We repeatedly talk about having a good understanding of what your short-term and long-term financial goals are. Think long and hard about what these are and make your investment decisions accordingly. For example, having sufficient amount as a retirement corpus is a long-term goal and saving up for your own wedding will be your short-term goal.
If you need help with deciding what your financial goals are, you can read this article for reference.
Once you have a good understanding of what your short-term and long-term goals are, you also need to assign a specific time frame for each of these goals. For example, your retirement might be 40 years from now whereas your wedding might be 3 years from now. This will also determine the risk factor involved in your investments and help you assess your investment options in an informed manner.
Investment options are broadly categorized into two buckets – financial assets and non-financial assets.
Financial assets include market-linked products such as stocks, mutual funds etc., along with other fixed-income products like bank deposits, public provident fund and so on. Non-financial assets, on the other hand, include investment options such as gold and real estate. For those who are early investors, there are plenty of low risk options available too.
Let’s take a look at some of the best investment options available today.
Public Provident Fund, most commonly known as PPF is one of the safest and most secure forms of long-term investment available today. A PPF account can be opened in a post office or in a bank.
The invested money is locked in for a period of 15 years. The money in your PPF account can only be partially withdrawn after a period of 6 years. Since PPF is a long-term investment option, you can also extend the tenure of your investment for an additional five years upon the completion of the 15 years.
With PPF as your investment option, you earn compound interest on your accumulated returns. Since the duration of this investment is 15 years, this compound interest significantly contributes to your overall returns.
Another important advantage of a PPF account is that it is completely tax-free. You do not pay any taxes on the interest earned or at the time of withdrawal.
Since the principal invested and the interest earned is backed by the government, PPF is regarded as one of the safest investment options in India with very little risk involved.
PPF has been generating an average return of 7%-8% historically.
The National Pension System, also known as NPS is a retirement-focused, long-term investment product. It is managed by the Pension Fund Regulatory and Development Authority (PFRDA)
The fund invests in equity, bonds, fixed deposits, liquid funds, government bonds and so on as per the investor preference. Based on your risk appetite, you can decide how much of your money can be invested in equities through this scheme.
As per the recent changes, the minimum annual contribution for an NPS Tier-1 account to remain active has been reduced to Rs. 1000. In this scheme the accumulated interest is tax-free.
The lock-in period depends on the current age of the investor as this scheme matures only when the investor turns 60 years. After 60 years, you can withdraw only 60% of the money that is tax-free. The remaining 40% of the corpus is maintained to receive a regular pension.
The average return for NPS for 3 years, as of August 2019, has been around 8.5% and for 5 years it has been around 11%.
As the name suggests, the Senior Citizens’ Saving Scheme is reserved only for senior citizens and early retirees. SCSS can be obtained at any bank or post office by anyone over 60 years. SCSS is available across India.
SCSS is a must-have in the investment portfolio of senior citizens as it is a risk-free, tax saving investment option. The maximum investment limit for SCSS is Rs. 15 lakhs and the tenure of the scheme is 5 years. Once the 5 years is completed, it can be extended for 3 more years.
SCSS offers a healthy interest rate of around 8.3% per annum that is payable quarterly.
As individuals who would have accumulated a fair share of income over the years, bank fixed deposits (FDs) are yet another safe and risk-free investment option for senior citizens in India.
As the name suggests, FD offers fixed income, in the form of interest payments, for the duration of the investment. The interest is payable either monthly, quarterly or annually. The interest rate thus earned is added to one’s income and is taxed according to one’s income slab. Depending on the bank, the FD interest rates currently range from 6% to 7.5%.
As a salaried individual, in addition to all the options discussed above, y
ou can also invest in a few other investment options like investing in mutual funds, that can be optimized for tax-saving purposes. Let’s explore some of them in this section.
ELSS gives a slightly higher return as compared to PPF and other investment options. It is a tax saving mutual fund that helps you save taxes as per section 80C.
It has a lower lock-in period of 3 years and any earnings over Rs. 1 Lakh is treated as LTCG (Long-term capital gain) and taxed at 10%. ELSS is expected to give the same returns as equity which is expected to be 12% going forward.
If you are looking for a relatively low risk, safe investment option a tax saving fixed deposit is something you can consider investing in.
As per section 80C of the Indian Income Tax Act of 1961, you can avail a maximum tax deduction of Rs. 1.5 lakhs in any given financial year. The lock-in period for such tax-saving FD is 5 years and the interest rate depends on the bank and ranges from 5.5% to 7%.
As a salaried individual with regular income coming in, one of the best options for investment for you is SIP (Systematic Investment Plan) in mutual funds.
Investing in mutual funds is easy and it is something you can do right away.
As we have previously discussed, mutual funds are broadly divided into two categories.
As the name suggests, equity mutual funds primarily invest in equity shares traded in the stock market. As per SEBI regulations, an equity mutual fund must invest a minimum of 65% of its assets in equities and other market instruments.
An equity fund is actively managed by a fund manager who decides to make investments based on multiple factors such as market-capitalization and different sectors of business, among others.
Since the assets are predominantly traded in equity markets, they are subject to higher risk but also provide higher returns.
Depending on the mutual funds you choose to invest in, the average rate of return is expected to be 12%.
Debt mutual funds are a slightly safer option than equity mutual funds because they primarily invest in debt securities that offer a fixed return. They include corporate bonds, government securities, certificates of deposit and so on.
As they are not subject to the volatility of the stock market, they are considered relatively risk-free when compared to equity funds. The average rate of return for a debt fund is around is expected to be between 6%-8%.
If you want to learn more about the scientific process Scripbox uses, in order to recommend some of the best performing growth mutual funds for you to invest in, you can find the details here. The information about each fund has been included in great detail.
If you are looking for something that provides short-term liquidity along with low risk and a reasonable return then ultra-short duration debt funds are a great option.
Kotak Savings Growth Fund and Tata Liquid Growth Fund are examples of liquid funds that are recommended by Scripbox in this category.
If you are looking for long term investments, an honourable mention would have to be real estate and gold. In addition to other long-term wealth-generating mutual funds, of course.
Most people are under the impression that real estate by default becomes an investment on its own. This is a very common misconception. The house that you purchase, for you to live in is for self-consumption. It should not be considered as an investment as it is not generating any income.
If you choose to buy a second property and decided to rent it out, then you can consider that as an investment. Commercial real estate is one of the best categories for long-term real estate investments. Long-term capital appreciation and rental potential with such properties can go a long way. However, the entry costs can be quite high and taking on debt for such investments might not be smart.
Gold is yet another popular category for long-term investment in India. Although most people prefer to purchase gold in the form of jewellery they are not aware of other forms in which gold can be purchased. An alternative way to invest in gold is through gold ETFs and sovereign gold bonds. However, investing is not entirely risk-free as the gold price can fluctuate rather frequently.
That was a lot of information but I hope it helped you understand what kind of investment options are available for different investment needs and different categories.
You can use this article as a handy guide to do more research and understand what options work best for you. If mutual funds are one of the options you are considering, you can set up an account with Scripbox and get started at the earliest.
Taxation on mutual funds is a complex topic. Taxes paid on your mutual fund investments vastly depend on factors such as what kind of funds you have invested in, the duration of your investment, which income tax slab you belong to and so on.