Wealth Creation
For example, a person saved or kept a hundred rupee note in a locker and after few decades, the value of that hundred rupees is 25 rupees because of the inflation. That means the value of the saving is decreased.
If a person invested the
same hundred rupees in any asset class, he would have created the wealth worth
of several lakhs.
In the process of
creating wealth there are so many factors to consider before going further. They
are
#1. Financial Goals
#2. Investment Period /
Horizon
#3. Risk Factor
Financial Goals
Financial Goal is the basic factor and also the most important while planning for investments. Investments
should be linked to goals. There are different schemes/plans which suit
different financial goals. Are you investing for retirement? For a child’s
higher education? For child marriage? To buy a dream home? To buy a car? To go to world tour? One
must keep their goals in mind before heading towards the available options.
Knowing the goals and
the money needed helps you plan realistically and keeps you committed on your
investment track.
Further, when you know
your goals, then selecting investment options becomes easy. In a sense, you
know the returns given by each option and the kind of investment you need to
pick in order to reach the goals.
Investment Horizon
The next factor is for
how long would you like to keep yourself invested- what is the investment
horizon. There are schemes available according to this requirement classified
under Long-Term, Short-Term and Medium-term investments.
Investment Risks
Returns or earning
cannot happen overnight. You need to look for matching time period where the
money can grow sufficiently to fulfill your desired goal. Even after knowing
goals you should not invest hastily on the assets giving highest returns or
assets with the lowest time period. Because of the risk factors and risk-taking
abilities. Both factors differ from person to person.
For example, an individual fresh at a plush job would not mind losing Rs. 25,000 on equity. Whereas the same amount is sufficient for an old person to meet his monthly expenses and the amount needs to be preserved.
A salaried person may have different financial needs than that of the business person. Hence, they have different risk-taking abilities and they face different risk factors. Some investment instruments, majorly of the ones which are market-linked, are prone to some degree of risks such as Equity, Mutual Funds and NPS. Risk tolerance is something which differs in every individual. A young person will have the ability and time to take risk where as a person nearing to retirement will not have both. One must avoid investing hastily on the assets which give higher returns and pay good attention to what degree of risk is involved in the particular investment option. Also, analyse your risk tolerance before investing your assets in any scheme.
Growth
How much will your
investments grow? Of course, there is no point in investing in a scheme which
is not going to give you satisfactory returns. Before finalising an investment
plan, review the historic returns, performance and other different factors to
understand how and to what level your investments will grow in future.
In order to make smart investments, you must have in-depth knowledge of the different investment options available in the market. For most of the investors, the choice of a suitable scheme depends upon financial objective, time period, risk level, etc. Also, do not get confused between savings and investments. These are two broad terms the former refers to a passive way of saving your money whereas the latter one focuses on creating & growing wealth.
How do I go for an investment plan?
The first step in
planning your investments is to figure out the right investment option that fits your
profile and needs. Investment planning requires choosing investments carefully
after doing adequate research and not falling for quick-buck schemes that
promise high returns in a short time.
- Direct equity
- Equity mutual funds.
- Debt mutual funds.
- National Pension System (NPS)
- Public Provident Fund (PPF)
- Bank fixed deposit (FD)
- Senior Citizens' Saving Scheme (SCSS)
- Pradhan Mantri Vaya Vandana Yojana (PMVVY)
- Real Estate.
- Gold.
- RBI Taxable Bonds
- Tax Savings Fixed Deposit
- Insurance
- National Savings Certificate (NSC)
- Bonds
- Debentures
- Monthly Income Scheme of the Post Office
- Un-Listed Stocks
- Sukanya Samriddhi Yojana
Most investors want to
make investments in such a way that they get sky-high returns as quickly as possible
without the risk of losing principal money. This is the reason why many are
always on the lookout for top investment plans where they can double their
money in few months or years with little or no risk.
But a high-return, low-risk
combination in an investment product, unfortunately, does not exist. Maybe in
an ideal world but not at present. In reality, risk and returns are directly
related, they go hand-in-hand, i.e., the higher the returns, higher the risk
and vice versa.
While selecting an
investment avenue, you have to match your own risk profile with the associated
risks of the product before investing. There are some investments that carry
high risk but have the potential to generate higher inflation-adjusted returns
than other asset class in the long term while some investments come with
low-risk and therefore lower returns.
There are two buckets
that investment products fall into and they are financial and non-financial
assets. Financial assets can be divided into market-linked products (like
stocks and mutual fund) and fixed income products (like Public Provident Fund,
bank fixed deposits). Non-financial assets - many Indians invest via this mode
- are the likes of physical gold and real estate.
Here is a look at the
top investment avenues people look at while saving for their financial goals.
1. Direct equity
Investing in stocks
might not be everyone's cup of tea as it's a volatile asset class and there is
no guarantee of returns. Further, not only it is difficult to pick the right
stock, timing your entry and exit is also not easy. The only silver lining is
that over long periods, equity has been able to deliver higher than
inflation-adjusted returns compared to all other asset classes.
At the same time, the
risk of losing a considerable portion or even all of your capital is high
unless one opts for stop-loss method to curtail losses. In stop-loss, one
places an advance order to sell a stock at a specific price. To reduce the risk
to certain extent, you could diversify across sectors and market
capitalisations.
2. Equity Mutual Funds
Equity mutual fund
schemes predominantly invest in equity stocks. As per current rules, the Securities
and Exchange Board of India (SEBI) Mutual Fund Regulations, an equity mutual
fund scheme must invest at least 65 percent of its assets in equity and
equity-related instruments. An equity fund can be actively managed or passively
managed.
In an actively traded fund, the returns are largely dependent on a fund manager's ability to generate returns. Index funds and exchange-traded funds (ETFs) are passively managed, and these funds track the underlying index. Equity schemes are categorised according to market-capitalisation or the sectors in which they invest. They are also categorised by whether they are domestic (investing in stocks of only Indian companies) or international (investing in stocks of overseas companies).
3. Debt Mutual Funds
Debt mutual fund
schemes are suitable for investors who want steady returns. They are less
volatile and, hence, considered less risky compared to equity funds. Debt
mutual funds primarily invest in fixed-interest generating securities like
corporate bonds, government securities, treasury bills, commercial papers and
other money market instruments.
However, these mutual funds
are not risk free. They carry risks such as interest rate risk and credit risk.
Therefore, investors should study the related risks before investing.
4. National Pension System (NPS)
The National Pension
System (NPS) is a long-term retirement - focused investment product managed by
the Pension Fund Regulatory and Development Authority (PFRDA). The minimum
annual (April-March) contribution for an NPS Tier-1 account to remain active
has been reduced from Rs 6,000 to Rs 1,000. It is a mix of equity, fixed
deposits, corporate bonds, liquid funds and government funds, among others.
Based on your risk appetite, you can decide how much of your money can be
invested in equities through NPS.
5. Public Provident Fund (PPF)
The Public Provident
Fund (PPF) is one product a lot of people turn to. Since the PPF has a long
tenure of 15 years, the impact of compounding of tax-free interest is huge,
especially in the later years. Further, since the interest earned and the
principal invested is backed by sovereign guarantee, it makes it a safe
investment. Remember, interest rate on PPF in reviewed every quarter by the
government.
6. Bank Fixed Deposit
(FD)
A bank fixed deposit
(FD) is considered a comparatively safer (than equity or mutual funds) choice
for investing in India. Under the deposit insurance and credit guarantee
corporation (DICGC) rules, each deposit in a bank is insured up to a maximum
of Rs 5 lakh with effect from February 4, 2020 for both principal and interest
amount.
Earlier, the coverage
was maximum of Rs 1 lakh for both principal and interest amount. As per the
need, one may opt for monthly, quarterly, half-yearly, yearly or cumulative
interest option in them. The interest rate earned is added to one's income and
is taxed as per one's income slab.
A recurring deposit
is a special kind of term deposit offered by banks which help people with
regular incomes to deposit a fixed amount every month into their recurring
deposit account and earn interest at the rate applicable to fixed deposits.
7. Senior Citizens'
Saving Scheme (SCSS)
Probably the first
choice of most retirees, the Senior Citizens' Saving Scheme (SCSS) is a
must-have in their investment portfolios. As the name suggests, only senior
citizens or early retirees can invest in this scheme. SCSS can be availed from
a post office or a bank by anyone above 60.
SCSS has a five-year
tenure, which can be further extended by three years once the scheme matures.
The upper investment limit is Rs 15 lakh, and one may open more than one
account. The interest rate on SCSS is payable quarterly and is fully taxable.
Remember, the interest rate on the scheme is subject to review and revision
every quarter.
However, once the
investment is made in the scheme, then the interest rate will remain the same
till the maturity of the scheme. Senior citizens can claim deduction of up to
Rs 50,000 in a financial year under section 80TTB on the interest earned from
SCSS.
8. Pradhan Mantri Vaya
Vandana Yojana (PMVVY)
PMVVY is for senior
citizens aged 60 years and above to provide them an assured return of 7.4 per
cent per anum. The scheme offers pension income payable monthly, quarterly,
half-yearly or yearly as opted. The minimum pension amount is Rs 1,000 per
month and maximum Rs 9,250 per month. The maximum amount that can be invested
in the scheme Rs 15 lakh. The tenure of the scheme is 10 years. The scheme is
available till March 31, 2023. At maturity, the investment amount is repaid to
the senior citizen. In the event of death of senior citizen, the money will be
paid to the nominee.
9. Real Estate
This option requires huge money as compared to other investment options.The house that you live
in is for self-consumption and should never be considered as an investment. If
you do not intend to live in it, the second property you buy can be your
investment.
The location of the
property is the single most important factor that will determine the value of
your property and also the rental that it can earn. Investments in real estate
deliver returns in two ways - capital appreciation and rentals. However, unlike
other asset classes, real estate is having highly liquidation problem. The other big risk is with
getting the necessary regulatory approvals, which has largely been addressed
after coming of the real estate regulator.
10. Gold
Possessing gold in the
form of jewelry has its own concerns such as safety and high cost. Then there's
the 'making charges', which typically range between 6-14 per cent of the cost
of gold (and may go as high as 25 percent in case of special designs). For
those who would want to buy gold coins, there's still an option.
Many banks sell gold
coins now-a-days. An alternate way of owning gold is via paper gold. Investment
in paper gold is more cost-effective and can be done through gold ETFs. Such
investment (buying and selling) happens on a stock exchanges (NSE or BSE) with
gold as the underlying asset. Investing in Sovereign Gold Bonds is another
option to own paper-gold. An investor can also invest via gold mutual funds.
11. RBI Taxable Bonds
On the other hand, RBI
taxable bonds were offering 7.75 per cent per annum. However, the bonds have a
long tenure and have a seven year lock-in period. ... The minimum investment in
the bonds starts at Rs 1,000. An investor of these bonds can opt to receive
interest payment either in cumulative or non-cumulative forms.
Earlier, RBI used to
issue 7.75% Savings (Taxable) Bonds as an investment option. However, the
central bank has stopped issuing these bonds with effect from May 29, 2020.
These bonds were launched by replacing the erstwhile 8 percent Savings
(Taxable) Bonds 2003 with the 7.75 per cent Savings (Taxable) Bonds with effect
from January 10, 2018. These bonds had tenure of 7 years.
The Central Bank with
effect from July 1, 2020 has launched Floating Rate Savings Bond, 2020
(Taxable). The biggest difference between earlier 7.75% savings bonds and the
newly launched floating rate bond is that the interest rate on the newly
launched savings bond is subject to reset in every six months. In the 7.75%
bonds, the interest rate was fixed for the entire duration of the investment.
Currently, the bonds are offering interest rate of 7.15 per cent. The first reset
on the interest rate is due on January 1, 2021.
12. Tax Savings FD
Tax saver fixed deposit
(FD) is a type of fixed deposit, by investing in which, you can get tax
deduction under section 80C of the Indian Income Tax Act, 1961. Any investor
can claim a deduction of a maximum of Rs. 1. 5 lakhs by investing in tax saver
fixed deposits.
13. Insurance
It is the first and
most considered savings. Even though it is meant for risk
cover we consider it as safe and secure investment tool. Insurance is one thing
which every earning person should have to safe guard his family when unexpected
death happened to the bread winner of the family, which will take care of his dependents
for certain period.
14. National Savings Certificate
(NSC)
We have plenty of
options when it comes to investments. You can choose any as per your financial
goals. National Savings Certificate or NSC, a post office savings product, is
one such option. As a low-risk investment, it comes with a host of benefits.
The National Savings
Certificate is a fixed income investment scheme that you can open with any post
office.
A government
bond is a debt instrument issued by the Central and State Governments. Issuance of such bonds occur when the issuing body (Central or State
governments) faces a liquidity crisis and requires funds for the purpose of
infrastructure development.
16. Debentures
The definition of a
debenture is a long-term bond issued by a company, or an unsecured loan that a
company issues without a pledge of assets. An interest-bearing bond issued by a
power company is an example of a debenture.
Post Office MIS is seen
to offer higher interest as compared to other fixed-income investments
including some bank FDs but the returns from the MIS investments do not beat
inflation.
The Post Office Monthly
Income Scheme (MIS) is a low-risk investment scheme offering steady income and,
hence, is suited for conservative investors and senior citizens. It is one of
the small savings investment schemes wherein you can start investing with a
minimal amount of Rs 1000.
This scheme is one of
the popular investment options in India, as it is a government-backed scheme
and the invested amount is protected by the government until maturity. The MIS
is a fixed income scheme and is a low-risk investment. The money deposited is
not subject to market risks and stays safe.
18. Un-listed Stocks
Stocks which are yet to
list in stock exchanges are also can be pursed. For this investment time frame should
be 3 to 5 years.
19. Sukanya Samriddhi Yojana
Sukanya
Samriddhi Yojana is a small deposit scheme of the Government of India meant
exclusively for a girl child and is launched as a part of “Beti Bachao Beti
Padhao” Campaign. The scheme is meant to meet the education and marriage
expenses of a girl child.
Attractive interest
rate of 7.6%, that is fully exempt from tax under section 80C.
Minimum 1,000 rupees can
be invested in one financial year
Maximum investment of 1,50,000 rupees can be made in one financial year
Deposits in an account
can be made till completion of 14 years, from the date of opening of the
account
The account shall mature
on completion of 21 years from the date of opening of the account, provided
that where the marriage of the account holder takes place before completion of
such period of 21 years, the operation of the account shall not be permitted
beyond the date of her marriage
How you will go?
Some of the above
investment options are fixed-income while the others are financial market-linked. Both
fixed-income and market-linked investments have a role to play in the process
of wealth creation. Market-linked investments offer the potential of high
returns but also carry high risks. Fixed income investments help in preserving
the accumulated wealth so as to meet the desired goal. For long-term goals, it
is important to make the best use of both worlds. Have a judicious mix of
investments keeping risk, taxation and time horizon in mind.
While selecting an
investment avenue, you have to match your own risk profile with the risks
associated with the investment product before investing in it.
As you are reading this
article, so you want to know where to invest money for better returns.
We all have investment
plans and we all are constantly in search of a better investment option. But
has the fear of investing in the wrong investment plans.
You should invest only
after understanding the pros and cons of the investment options. I am trying to
keep things easy for you.
I have done in-depth
research on all the available best investment options and listed the best
legitimate investment plans in India. You can invest based on your needs and
risk-taking abilities.
Let us understand a few
investment fundamentals before jumping into investment selection.
How to Double your
Investment
There is nothing as
doubling money overnight. It can happen only in dreams, but let me tell you
that there is an easy formula to estimate the amount of time taken for your
money to get doubled.
The formula is Rule of
72.
The estimated time
period to double = 72/ rate of interest.
For example, if you
want to know quickly, in how much time Rs. 10,000 will become Rs. 20,000
provided that you invest at an interest rate of 8%.
Then the answer would
be, 72/8= 9 years.
If you invest in
something that gives 24% returns?
72/24 = 3 years only to
double your investment
If someone promises you
to give double money in 2 years then he is giving you 36% returns.
You must review your stock and mutual fund investments regularly and keep an eye on the tax implications on returns and capital gains that you make form specific investments
Tax Benefits
Majority of
investors seek options which not only save their money but also give tax
benefits. In that case, you should analyse different Tax-saving investments and
select the one which gives you the best of both worlds.
Grow Wealth with Power of Compounding
We have heard the word
compounding right from our school days. But very few have effectively used the
power for long term wealth creation. You might be surprised if you let the
magic work over a period of time.
Compounding is simply-
earning interest on the principal, reinvesting all the earnings and then
getting not only interest on principal but also interest on interest from next
year on wards.
In a way, compounding,
helps you build a large corpus over a period of time even with a small initial
investment.
But for the magic to
happen, you require two things. One is starting early and the other is to keep
on reinvesting over a time period, say 10 years to 20 years. (Ex. SIP in Mutual
Funds)
The more you let that
happen the more you amass wealth.
Let us see how Power of
Compounding
Suppose today you
invest 1 Lac at a compound rate of 8% and kept reinvesting all the earnings.
Then after 10 years, the money will become Rs. 2.15 Lakhs, then turn into Rs.
4.66 Lakhs after 20 years, and then Rs. 10.06 Lakhs in 30 years.
In the initial period,
you see that the earnings are not as much but in the later years, the earnings
increase exponentially. Which is due to the compounding effect.
Starting early allows
more time for the magic, i.e. compounding to happen. Let us see three
scenarios.
The goal is to
accumulate a corpus of wealth by the age of 60 years. Investment amount Rs. 1
Lac every year and assuming that the compound interest rate is 8%.
Scenario 1
Investing Rs. 1 lakh every year from the age 20 to 40 & Rs. 2.13 Crores corpus created at the age 60 years.
Scenario 2
Investing Rs. 1 lakh every year from the age 30 to 50 & Rs. 0.99 Crores corpus created at the age 60 years.
Scenario 3
Investing Rs. 1 lakh every year from the age 40 to 60 & Rs. 0.46 Crores corpus created at the age 60 years.
Power of Compounding
You can see that the
results are strikingly different even when the investment is for 20 year period
in each scenario.
You build a corpus of Rs. 2.13 Crores just by starting early at the age of 20 years as compared to Rs. 46 Lakhs when starting late at the age of 40 years.
This is because you get
an extra time period of 20 years for the money to get compounded.
In this way,
compounding amplifies the growth and maximizes the earning potential of your
money.
Final Words
I have explained the different types of investment options available in India. Analyse your
investment goals and your risk capacity and then Choose your best investment
plan.
There are several
factors associated with investment planning which are indicative of how much
returns you can earn, how secure your investments will be and what the benefits
are. Firstly, you must consider your investment horizon and goals which will
further help you select from the best investment plans.
- Save at least 30% of your income every month.
- Set up an Emergency Fund equal to 6-9 months expenses.
- Take Life Insurance equal to 20 times of your annual income.
- Get a Health cover of at lease 10 lacs.
- Allocate 30% of your investments to Pension Fund.
Always involve your family members while choosing the investment tool.
The early you start, the more you create wealth.
Happy investing
