Being self-employed has its own pros and cons. Pros are the flexibility of work and the rules around your schedule. On the other hand, being self-employed, you may not have a regular stream of income (compared to employed individuals). No employee benefits like pension fund (EPF) and company insurance. Thus, being self-employed requires you to have a solid financial and investment plan that will help you during no income days and retirement. With irregular income, you should try to achieve financial security as early on in life as possible. Here we highlight the best investment options for self-employed people in India.
5 Best Investment Options for Self Employed Individuals
Following are the best investment options for self-employed in India:
1. Mutual Fund
Mutual funds are market-linked investment options that invest across different securities and asset classes. The variety of schemes available across mutual funds makes it the most suitable and popular investment option amongst investors. Every mutual fund has an investment objective with a certain risk. Furthermore, you can invest a lump sum amount or small amounts regularly through SIP in mutual funds. Following are the reasons why mutual funds are a suitable investment option for self-employed individuals in India:
- Low Investment: You can invest in mutual funds with as little as INR 500. MFs help you save small amounts on a regular basis and help you create a substantial corpus over time.
- Rupee Cost Averaging: Investing through SIPs allows you to invest the same amount at predetermined intervals. This regular investing will help you average out the market volatility in the long term and helps you generate significant returns.
- Diversification: Investing through mutual funds gives you exposure to a basket of securities. Thus, you’ll have your investments across a well-diversified portfolio. Furthermore, you can choose to invest across different types of mutual funds for different goals.
- Tax Saving: Investing in Equity Linked Savings Scheme (ELSS) helps you save tax. In other words, investment up to INR 1,50,000 per annum in the ELSS scheme is tax exempted under Section 80C of the Income Tax Act 1961.
- Professional Fund Management: You do not have to worry about managing the securities in the fund portfolio. Professional fund managers manage the holdings for you. Therefore, you need not worry about tracking your investments daily.
Being self-employed deprives you of the benefits of being part of the corporate insurance plan and employee provident fund scheme. Thus, as a self-employed individual, you must take care of your insurance needs. Insurance for self as well as the dependants must be considered. You need to focus on getting life insurance as well as medical insurance. These are the most basic insurance policies that one must look into. Following are the reasons why insurance is suitable for self-employed individuals:
- Emergencies: Unexpected events in life can take a toll on your well-being – physical or financial. Thus, having insurance to save you from such a situation is a must.
- Security for Dependants: Insurance is a protection you can have for your dependants. In case of the untimely demise of the insurer, the insurance can provide the necessary financial assistance.
3. Unit Linked Insurance Plan (ULIP)
A unit-linked insurance plan (ULIP) combines investing with insurance protection. Policyholders make monthly or annual premium payments. The financial objective of a ULIP is to provide wealth creation and life insurance protection. It achieves this by investing a portion of the premium in an insurance plan and the remainder in a mutual fund. Equity funds, debt funds, liquid funds, and balanced funds are the four categories of ULIP plans. Following are reasons why ULIPs are suitable for self-employed individuals:
- Offers Life Cover: ULIPs combine life insurance and investments. It protects the investor and his family in the event of an emergency, such as the unexpected death of the investor.
- Tax Benefits: ULIP premiums up to INR 1,50,000 are tax exempted under Section 80C of the Income Tax Act 1961. Furthermore, the maturity benefits are also tax-exempt under Section 10 (10D) of the Income Tax Act, 1961.
4. National Pension Scheme (NPS)
National Pension Scheme (NPS) is a retirement scheme available to Indian citizens (residents and non-residents) who wish to make regular contributions to their retirement accounts. In addition, it is a safe and long-term investment solution that offers market-based returns.
NPS subscribers can make regular contributions to the NPS scheme until retirement age. The investor may withdraw a portion of the funds in a lump sum upon retirement. And the remainder must be used to purchase an annuity plan.
Following are the reasons why NPS is a suitable option for self-employed individuals:
- Regular Source of Income: NPS is a suitable retirement alternative for investors who wish to generate a steady income stream during retirement.
- Tax Benefits: NPS contributions up to INR 1,50,000 per annum are tax exempted under Section 80C of the Income Tax Act, 1961. Furthermore, the gains and maturity amount are also tax exempted.
- Automated Risk Reduction: NPS scheme has a built-in risk reduction strategy that ensures that the equity exposure is automatically reduced as you near retirement years. The equity portion is dynamically reduced, and the corpus is diverted to safer schemes.
5. Public Provident Fund (PPF)
Public Provident Fund (PPF) is a long-term post-office savings scheme. Since the Government of India backs the scheme, it is a risk-free savings scheme. PPF generates a fixed return on investment. PPF is a long-term investment scheme with a 15-year lock in period. The interest rate on the scheme is revised every quarter by the RBI. It is mandatory for PPF subscribers to make a minimum investment of INR 500 every year to keep the account active.
Following are the reasons why PPF is suitable investment option for self-employed individuals in India:
- Tax Benefits: Contributions of up to INR 1,50,000 per annum towards PPF are tax exempted under Section 80C of the Income Tax Act, 1961. Furthermore, the returns and maturity amount are also tax exempted.
- Loan Against PPF Account: PPF subscribers can avail loans against their PPF balance. The loan facility is available between years three and five.
- Lumpsum Retirement Corpus: Since PPF is a long-term investment scheme (15 years), it is a suitable option for creating a good retirement corpus. Furthermore, since the returns are guaranteed, investors need not worry about losing money.
Things to Keep in Mind While Investing
Investing does not mean parking funds in an instrument. It is crucial to shortlist the appropriate asset. Additionally, you must evaluate several factors before investing. The following are certain parameters that you must keep in mind while investing:
1. Investment Purpose
Each asset type has its own distinct aim. It is essential to link your investing objective with that of the asset class in order to reach your investment goals. Not all financial instruments suit all investors. Investments that suit one investor may not suit everyone. Therefore, your investment goal must be properly aligned with the objective of the investment option. In addition, your investments will help you create a corpus for retirement or no income days. Since the income is irregular, you must be well prepared to face any kind of financial hurdle.
2. Investment Horizon
There are several investment opportunities available for different investment horizons. For example, for the long term, you can pick equity mutual funds, PPF or NPS schemes. Similarly, for the short term, you can choose debt mutual funds. A suitable tenure for this is around three years to attain the desired returns. Therefore, choosing the right investment option with the investment horizon that best suits your investment goal is prudent.
Every asset type has a certain degree of risk. In other words, it is the sensitivity of an asset’s price to changes in market conditions. For example, equities and equity investments are highly volatile securities. On the other hand, government-backed savings programs and fixed deposits are low-risk schemes that offer assured returns. Not all investors are comfortable with risk. Therefore, you should consider assets that suit your risk tolerance levels.
Each investment offers a unique rate of return. Some generate high returns. However, it carries a high risk. On the other hand, some promise guaranteed profits that can be modest. Therefore, you must pick the investment option that suits your needs and goals. Thus, carefully analyse the assets and their past performance. Historical returns don’t guarantee future returns, it is a useful metric for evaluating the performance of an asset across market cycles.
Every investment has certain costs and expenses. For example, stocks incur transaction fees. Mutual funds incur fund management fees, exit load fees, and other expenses. In addition, certain investments impose a fee for early withdrawals. Therefore, you must examine the associated costs and expenses while picking an asset for investment. Pick assets that have low expenses, as this will help you maximize returns.
Liquidity is one of the parameters that you must consider while picking an asset. This is because you must be able to get quick access to funds during unanticipated circumstances. With little or no impact on your overall returns. Mutual funds are an example of highly liquid investments. It is quite easy to convert your investments to cash. Thus, it is essential to hold liquid assets in your portfolio.
7. Investment Lock-in
Certain investments are subject to a lock-in period. The lock-in period is the minimum required holding period for an investment. For instance, the PPF has a 15-year lock period. ELSS mutual funds have a three-year lock-in term. Investments with a lock-in period do not allow partial or premature withdrawals. However, under special conditions, you can prematurely withdraw the corpus.
Your net returns are often lower due to taxes. Depending on the investment holding period, mutual fund investments are subject to long term capital gains tax and short-term capital gains tax. On the other hand, returns from PPF are completely tax-free. Therefore, you must be aware of the tax obligations and benefits before investing. The Scripbox Income Tax Calculator is a useful tool that helps you estimate your tax liability.