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Personal Finance- Popular Investment options in India

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When it comes to personal finance/investment for the long term, many people will get confused with so many products available in the market, and many will look for best investment options which can double your money in few months or years with low risk, but in reality, such an option doesn’t exist, in fact, Risk and returns are proportional i.e Higher the returns, higher is the risk and vice versa.

Popular Investment options available in India

  • PPF/EPF
  • Fixed Deposits
  • Insurance
  • National Pension Scheme
  • Gold
  • Stocks/Shares/Equity
  • Mutual Funds

 

  1. PPF

Public Provident Fund is considered as one of the safest investment options in India, where your capital is fully protected. Maximum deposit allowed in PPF is 1.5 Lac per Financial Year, lock-in period for the account is 15 years.

EPF will also fall under this category.

Major reasons to consider PPF as investment

  • Safest investment monitored by Govt. of India,  Promotes saving habit of even low-income group as you can invest as small as 500Rs.
  • PPF can be used in a Tax deduction under Section 80C, while you save a small amount each month.
  • All the returns including interest earned under PPF are completely tax-free.
  • If you are not a disciplined investor, with such long lock-in period of 15 years, PPF ensures you to keep all your investments growing for a longer period.
  • PPF is a very good investment scheme of government of India. Since it is a scheme of GOI it has low risk attached to it. It can be started with a  small amount and interest earned under PPF are tax-free.

Reasons not to consider PPF

  • PPF is a Fixed income product, its returns are limited even after having a high lock- in time.
  • Even if you invest maximum allowed limit of 1.5 lac per year, you will not get the required amount during retirement.
  • PPF returns are just beating the inflation rates, means you are just saving your money for future use with same purchase power of amount today.

  1. Fixed Deposits

Fixed deposits most commonly available in all banks, and there are Fixed deposits issued by corporates with relatively higher rates.

Reasons to consider FDs as investment

  1. They have a fixed maturity period and varies from a few days to 10 years. You can choose based on your requirement.
  2. Fee banks are more flexible in offering premature withdrawals and without any exit charges.
  3. Few corporate deposits offer up to  8 to 9% returns based on risk ratings.
  4. These are Low risk investments, few banks are offering sweep facilities, means you can withdraw as a savings bank account but will earn FD returns if not withdrawn.

Reasons not to invest in FDs

  • FDs are not good investments for a longer period, they won’t even give inflation costs.
  • Interest income earned from FDs is taxable as per your income slab in that year.
  • You won’t be able to earn high from FDs for your long term goals, it will be a big opportunity loss for your investments.

Also, read How to earn High Returns from your cash/ Bank Balance

  1. Insurance

Consider insurance as an essential tool, this will allow your dependents to live life after you, this amount should take care of your loved ones. All your family dreams should not get sacrificed in case if you are not around.

But some agents sell insurance plans similar to endowment plans, Money back etc as an investment, just because they give you small returns on maturity or survival of insured.

Reasons to consider insurance:

  • I suggest going with Term insurance plan of 10 times your yearly salary.
  • It provides protection to your loved one in case if you are not around.
  • You can show all your insurance premiums as a deduction under 80C

Reasons for not considering insurance as an investment

  1. National Pension Scheme (NPS)

NPS is a pension plan launched by Govt of India,  your amount will be invested in a mix of equity, corporate bond funds  and government bond securities.

The best part is you will be able to allocate your funds in these three categories, or you can allow for auto-allocate based on your age.

The main reason to invest in NPS

  1. You can show additional 50,000/- as a tax deduction under 80CCD (1b)

The major disadvantage of NPS

  • Complicated withdrawal rules and compulsory annually plan during withdrawal.

Read Complete guide on NPS here 

  1. Gold

Gold is one of the oldest ways to save money and has traditional values.

Unlike other investment, your money invested in Gold is not used for any development, like if you invest in PPF/Govt bonds your money may be used for national development, money invested in any shares will be used to do business and generate income.

But Money invested in Gold is a Dead investment, Your money will not be at work, its pure expense.

Reasons to invest in Gold

  • Though it is not a fixed income avenue, Gold prices will not go down in value all of a sudden.
  • Generally, Gold prices will be inversely proportional to inflation.
  • If you require gold in the future for any ornaments for special occasions, Gold ETF/Gold Mutual funds come without any hassle, which will provide direct returns of Gold prices in the market

Reasons to not to invest in Gold

  • Buying Gold in physical form will attract heavy other charges like wastage, making charges, Storage cost etc.
  •  Concerns on the purity of gold you purchase.
  • Liquidity issue, you cannot make cash out of Gold at market price, you need to forgo heavily on the cost.

  1. Stocks

Investing in stocks of any company, you will become a part owner of that company. This is a great way to own your favorite companies.

Your Returns are proportional to the profits made by that company.  You may read these Rules before investing in Equity

Reasons to invest in stocks as an investment

  • Stocks( Equity) markets have delivered high returns over the long run. You can achieve large sums with stocks.
  • Inflation rates in stocks are automatically adjusted as all the companies deal with business with Raw material and Sales will be at market prices
  • Returns in these stocks are unlimited, there is no limit on returns, the stock you select can give you huge returns if it does well. Whereas your loss is limited to your buy value.
  • You can exit /enter any time based on your convenience. Very high Liquidity.

Please read Low-Cost Demat Brokerage Firms

Reasons not to invest in Stocks

  • There is no capital guarantee/No Guaranteed returns in the stock market.
  • If the stocks selected by you does not do well, you may end of losing.
  • Picking stock and holding it for a longer period is key to success in between if some bad news hit the stock holding it will be really difficult as you do not know what is cooking inside.
  • You should better avoid investing in stocks directly if you are scared of such volatility, you may choose the Mutual fund route who manages your amount in the equity market.
  • Liquidity of Stocks will be a drawback if not used appropriately, You will miss the opportunity if you see shorter-term volatility and exits.
  1. Mutual funds

The mutual fund means investment from you and others will be added to an account and the same will be managed and invested by a Professional Full-time Fund Manager under the regulation of SEBI. This investment can be in Fixed income, Equity ( Stocks) and both depending on the fund category. Returns will depend on the type of fund you select, whether Equity, Debt or a combination.

Mutual funds will charge minor fees on your amount by the Fund manager & AMC. Read about investing in Direct Mutual Fund Schemes here.

Reasons to invest in Mutual funds

Reasons to not to consider Mutual funds

  • All reasons as mentioned in Stocks.
  • Some funds will charge Early exit fees, it may hit you if you wish to exit within a specified time.
  • You need to keep track of your Funds performance on a periodic basis, if not doing well you may have to switch.

Conclusion:

Having so many options for investment around us, we tend to enter into most of the plans either knowing or unknowingly or will not do anything.

It is always better to know how much we can expect from each option and how much we may lose in each option.

Below Points may help in making your decisions.

  • Option for Term insurance cover is a no brainer than Usual traditional endowment plans. Read here 
  • If you very high conservative you can invest part of your money in PPF/EPF and NPS ad take tax benefits.
  • If you require money in the long term, Equity is the best option!. You must consider part of your money to be invested in Equity to get high sum.
  • If you are new to equity or stocks, go with Mutual Funds, start with Balanced Funds who invest both in Equity and Debt.
  • Investment in Gold and Real estate is a matter of individual Choice, it may not be considered as an investment!
  • Any time frame above 5 years, Equity will give more returns over all other investment options. It is always better to add some part in equity for any type of investor for longer-term goals.

Happy Investing!

 

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