Most investors want to invest in a way that achieves high returns as quickly as possible without the risk of losing principal money. This is why many are always looking for the best investment plans where they can double your money in a few months or years with little to no risk.
However, the combination of high return and low risk in an investment product, sadly, does not exist. Perhaps in an ideal world, but not today. In fact, risks and rewards are directly related, they go hand in hand, which means that the higher the return, the higher the risk and vice versa.
When determining the investment avenue, you must match your risk profile with the risks associated with the product before investing. There are some investments that carry a high risk but have the potential to produce higher inflation-adjusted returns than the other asset class in the long term, while some investments carry a lower risk and therefore a lower return.
There are two types of categories in which investment products fall and they are financial and non-financial assets. Financial assets can be divided into market-linked products (such as stocks and mutual funds) and fixed-income products (such as a public provident fund and fixed bank deposits). Non-financial assets, many Indians invest through this mode, such as physical gold and real estate.
Here's a look at the top 10 investment methods Indians see while saving for their financial goals.
Investing in stocks may not be everyone's cup of tea as it is a volatile asset class and there is no guarantee of returns. In addition, it is not only difficult to choose the correct stock, and the time of entry and exit is not easy either. The only silver lining is that, over long periods, equities have managed to deliver higher returns than an inflation-adjusted return.
At the same time, the risk of losing a significant part or even all of your capital is high, unless the stop loss method is chosen to minimize losses. In a stop loss, one places an anticipated order to sell a stock at a specific price. To reduce risk to some degree, you can diversify across sectors and with market capitalization. To invest directly in stocks, you need to open a Demat account.
Banks also allow you to open a 3 in 1 account. This is how you can open an account to invest in stocks.
Equity Mutual Funds
Mutual fund plans invest primarily in equity stocks. According to the Securities and Exchange Board of India (SEBI) regulations, the mutual fund scheme must invest at least 65 percent of its assets in stocks and equity-related instruments. An equity fund can be actively or passively managed.
In actively traded funds, returns are highly dependent on the fund manager's ability to generate returns. Index funds and exchange-traded funds (ETFs) are passively managed and track the underlying index. Equity Schemes are categorized as market capitalization or the sectors they invest in. They are also classified according to whether they are domestic (investing in shares of Indian companies only) or international (investing in shares of offshore companies).
Debt mutual funds
Debt mutual fund schemes are suitable for investors who want stable returns. They are less volatile and therefore considered less risky compared to equity funds. Debt mutual funds invest primarily in fixed-interest-generating securities, such as corporate bonds, government securities, treasury bills, commercial paper, and other money market instruments.
However, these mutual funds are not without risk. Carry risks such as interest rate risk and credit risk. Therefore, investors should consider the related risks before investing.
National Pension System (NPS)
The National Pension System is an investment product focused on long-term retirement administered by the Pension Funds Regulatory and Development Authority (PFRDA). The minimum annual contribution (April to March) for the 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. Depending on your appetite for risk, you can determine how much of your money can be invested in stocks with the NPS.
Public Provident Fund (PPF)
The Public Provident Fund is one of the products that many people turn to. Since the PPF has a long tenure of 15 years, the effect of compounding the tax-free interest is significant, especially in subsequent years. Also, since the accrued interest and invested capital are backed by a sovereign guarantee, it makes it a safe investment. Remember, the government reviews the PPF interest rate every quarter.
Bank Fixed Deposit (FD)
A fixed bank deposit is a relatively safer option (than stocks or mutual funds) for investing in India. According to the deposit insurance and credit guarantee corporation DICGC rules, each depositor in the bank is insured with a maximum of Rs 5 lakh as of February 4, 2020, for both the principal amount and the interest amount.
Previously, the coverage was a maximum of Rs 1 lakh of principal and interest. As needed, you can choose the option of monthly, quarterly, half-yearly, yearly, or cumulative interest on them. The interest rate earned is added to the person's income and is taxed according to the person's income level.
Senior Citizen`s Savings Plan (SCSS)
Perhaps the first choice for most retirees, a senior Citizen`s Savings plan is a must-have in their portfolios. As the name suggests, only seniors or early retirees can invest in this plan. Anyone over 60 can use SCSS at a post office or bank.
SCSS has a five-year period, which can be extended for three years after the plan expires. The maximum investment is 15 lakh rupees, and more than one account can be opened. The SCSS interest rate is paid every three months and is fully taxable. Remember that the interest rate of the system is reviewed and revised every three months.
However, once the investment in the scheme is made, the interest rate will remain the same until the scheme expires. A senior citizen can claim a deduction of up to Rs 50,000 in a tax year under Section 80 TTB on interest earned from SCSS.
Pradhan Mantri Vaya Vandana Yojana (PMVVY)
PMVVY is intended for people over the age of 60 to provide them with a guaranteed return of 7.4 percent per annum. The system offers retirement income payable monthly, quarterly, semi-annually, or annually depending on your choice. The minimum pension is Rs 1,000 per month and the maximum is Rs 9,250 per month. The maximum amount that can be invested in the scheme is 15 lakh rupees. The duration of the program is 10 years. The scheme is available until March 31, 2023. Upon maturity, the investment amount is repaid to the senior citizen. In the event of the death of an elderly person, the money will be paid to the nominee.
The home you live in is for self-consumption and should not be considered an investment. If you do not intend to live in it, the second property you buy maybe your investment.
The location of the property is the most important factor that will determine the value of your property, as well as the rent you could earn. Investments in real estate generate returns in two ways: Capital appreciation and Rental. However, unlike other asset classes, real estate is very liquid. The other big risk is getting the necessary regulatory approvals, which were largely addressed after the arrival of the property regulator.
Owning gold in the form of jewelry has its own concerns such as security and high cost. Then there are the "making charges," which generally range from 6 to 14 percent of the cost of gold (and up to 25 percent for private designs). For those who want to buy gold coins, there is still an option.
Many banks sell gold coins today. An alternative way of owning gold is through Paper gold. Investing in paper gold is more profitable and can be done through gold ETFs. This investment (purchase and sale) is made on a stock exchange (NSE or BSE) where gold is the main asset. Investing in sovereign gold bonds is another option for owning gold on paper. An investor can also invest in gold mutual funds.
RBI taxable bonds
Previously, the Reserve Bank of India used to issue 7.75% savings bonds (subject to tax) as an investment option. However, the Central Bank stopped issuing these bonds as of May 29, 2020. These bonds were launched replacing the previous 8 percent savings bonds (taxable) for 2003 with the savings bonds (taxable) of 7.75 percent as of January 10. , 2018. The duration of these bonds was 7 years.
As of July 1, 2020, the Central Bank launched a Floating Rate Savings Bond, 2020 (subject to taxes). The biggest difference between the previous 7.75% savings bonds and the recently released floating rate bonds is that the interest rate of the newly released savings bonds is subject to reset every six months. In the 7.75% bond, the interest rate is fixed for the entire duration of the investment. The bonds currently offer an interest rate of 7.15 percent. The first-rate reset is scheduled for January 1, 2021. Read more about RBI floating rate bonds.
What should you do?
Some of the investments mentioned above are fixed income while others are related to the financial market. Both fixed-income and market-linked investments play a role in the wealth creation process. Market-linked investments offer the potential for high returns, but they also carry high risk. Investments in fixed income investment help maintain accumulated wealth to achieve the desired goal. For long-term goals, it's important to get the most out of both worlds. You have the right mix of investments considering risk, taxes, and time horizon.
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