As a beginner, planning your finances can be an overwhelming experience. Also, with so many options available in the market today, you are bound to be in a dilemma. Several instruments are available in the market that will help grow your money. But how to choose the one that is appropriate for your financial needs? We have you covered!
Firstly, you need to understand about investment. Investments are split into asset classes such as debt, equity, real estate, and gold. Debt refers to any investment that is linked to fixed returns for a specific tenure while equity refers to the stock markets.
Have a look at the various investment options that you may consider.
1. Public Provident Fund (PPF)
PPF offers a fixed interest rate for every year which depends on the prevailing government bond yields. You can invest up to Rs.1,50,000 every year and it helps inculcate the habit of saving. Your investment will be locked for 15 years and is eligible for tax deductions under section 80C of the IT Act. Currently, PPF offers an interest rate of 8% per annum.
Pros: Owing to its 15 year lock-in period, PPF will help you set aside some money for the long-term.
Cons: PPF is a debt product and its returns are limited. Also, investing Rs.1,50,000 lakhs every year may not be sufficient for your retirement security.
Although insurance is a great risk cover, some policies such as money-back and endowment policies place as investments. These policies offer some benefits even on survival. ULIP is a hybrid product in which a part of the money is invested and the remaining gets used up in the insurance cover. ULIPs have several schemes that invest in debt and equity market.
Pros: Insurance offers great protection for you and your family and the premium amount even qualifies for tax deductions.
Cons: Insurance is not an investment. Although the lump sum amount after maturity may appear attractive, their returns are comparatively low for the time you stayed invested. On the other hand, ULIPs give you life cover and returns from the investment. The life cover is also minimal compared to the term insurance. Transparency, liquidity, and comparisons of ULIPs are also not worth. In other words, in ULIP, you will neither get sufficient insurance nor investment.
3. National Pension Scheme
National Pension Scheme or NPS invests in a combination of equity, government securities, and corporate bonds. You can either decide how much you wish to invest in each yourself or allow the system to decide it for you. NPS will mature once you turn 60 years of age. At that time, you can withdraw 60% of the amount while the remaining amount will be automatically invested in the annuity.
NPS allows you to exit after 10 years of opening an account. However, 80% of the amount will be converted to an annuity. Also, though it allows premature withdrawal of a certain amount, it comes with several rigid clauses.
Pros: NPS is similar to PPF as its long lock-in period ensures there is some retirement fund in place. NPS is eligible for an additional tax deduction of Rs.50,000 under section 80CCD of the income tax. Additionally, the inclusion of equity enables you to get better returns compared to PPF or EPF.
Cons: NPS is a bit rigid compared to other investment. Also, the mandatory conversion of a large amount of the end corpus into the annuity is neither tax-efficient nor offers attractive returns.
4. Fixed Deposits (FD)
Fixed deposits are commonly issued by banks but corporate-issued FDs provide higher returns. Fixed deposits have a fixed maturity between seven days and 10 years. Some banks allow premature exit options but most banks keep the FDs locked-in for the entire maturity period. Current interest rates are around 6.5% - 7% per annum while corporate bonds offer around 8.5%-9%.
Pros: Fixed Deposits involve fewer risks and offer guaranteed returns. You can use your bank's sweep facilities to build investments. FD is a great way to ensure that your money is not idling in the savings account and earning only minimal interest.
Cons: FD is not a great option for long-term investment. It does not offer inflation-beating returns and also the interest income is taxed based on your tax slab. You may need to save a high sum if you are dependant entirely on fixed deposits for your financial needs.
You can consider investing in equity (shares) of a company. You can earn returns from the growth of the company and it will reflect in the prices of the stocks. Interestingly, there is no cap to these returns and you can earn multi-fold. Simply put, a small amount can grow into a huge amount. All you need is a trading and Demat account to make the transactions in stocks.
Pros: Historically, equity has a track record of being the highest returning asset class. You can invest a small amount and achieve a large corpus target easily.
Cons: Choosing the right stocks is a risky job and requires a lot of market expertise. Stocks are highly volatile and would, therefore, require you to have a strong risk appetite. Equity is not everybody's cup of tea and you should refrain from investing in stocks if you don't understand the market or have a low-risk appetite.
6. Mutual Funds
A mutual fund is managed by professionals (fund managers) and invests in equity, debt or gold. The fund managers usually suggest the investments you can make and will charge you a fee for managing your portfolio. The returns are decided by the asset class you invest in.
Another major advantage about investing in mutual funds is SIP (Systematic Investment Plan). SIP helps you stagger your investments in mutual funds over a period of time. It is a convenient tool for salaried people who wish to invest in mutual funds regularly and avoid market fluctuations.
Pros: As mutual funds give you professional management of both debt and equity market, you don't have to worry about making the choices yourself. Open-ended funds provide with the flexibility of exiting from it anytime and structure your investments around your financial needs. Also, debt mutual funds have a lower tax compared to FDs. Mutual funds also allow you to invest through SIP which is a convenient tool preferred by most investors.
Cons: The easy –exit and no lock-in feature can hamper the chances of long-term wealth building if not used properly. Additionally, you will have to keep track of your mutual fund investments regularly to ensure that they are all performing well.
Gold has been used as a steady investment for several years now. However, physical gold is not a great investment choice due to challenges such as liquidity, purity, wastage costs and storage costs. Financial gold is a much better way to capture the movement in gold prices. You may consider options like Gold ETF and Gold mutual funds. Gold Sovereign bonds are issued by the government and are an effective way of investing in gold. It also offers tax and interest benefits.
Pros: Its ability to counter inflation and stock prices give gold investment an edge over market risks.
Cons: Gold investment does little to your portfolio as their prices move based on the global equity market sentiments and exchange rate. Also, gold prices can remain stagnant for a long time.
For short term funds make sure to invest in funds such as FDs or debt mutual funds that offer a stable source of returns, easy conversion into and low risks. For long-term wealth building, you may include equity in your portfolio. You may consider consulting an expert financial adviser for more information.