If you are reading this article, it is time to pat your back because you have already won half the battle. Deciding to start investing is the best step forward to a financially secure future.
But what is investment? In simple terms, it is the process of putting your surplus money in shares, schemes, bonds, and different financial products where it can grow over time. Keeping the money in a savings account would give you around 4% to 6% returns, depending on the bank. But the inflation rate in India varies between 6% and 7%. So, if you are only saving your money, you are practically losing it. That is why investing your money is a better option than saving.
Why is it important to invest?
When you invest your money, it makes your future secure and enables you to accumulate substantial wealth in the long run. It helps you achieve financial objectives and fulfill your dreams like going on a Europe trip, buying a car, or purchasing a property. You may choose a financial product depending on your goal. Moreover, you can develop investment planning skills and discipline by regularly putting money in financial instruments.
Types of investments
There are different types of investments to choose from based on your risk appetite and requirements. While low-risk options offer moderate returns, taking a high risk can help you earn significant profits. However, avoid putting all your money in risky options as they expose you to the possibility of huge losses.
The good thing is that there are plenty of investment avenues to choose from in India. So, you can always pick the ones that are aligned with your goals. Below is a list of four popular investment products in the country.
1. Employees’ Provident Fund (EPF)
Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 mandates that all employers must provide this investment option to their employees. Your company puts 12% of your Basic Salary and Dearness Allowance in your EPF account on your behalf. They also contribute the same amount to your EPF. You also get an interest on the amount and receive the total accumulated fund at the time of retirement. Moreover, if you leave the company and remain unemployed for over two months, it makes you eligible to withdraw the money.
2. Public Provident Fund (PPF)
It is a long-term investment option with a lock-in period of 15 years. The extended period allows your money to grow into significant wealth. You can also withdraw a portion of the fund after staying invested for five years in case of specific emergencies. The yearly investment limit of PPF ranges between ₹500 and ₹1.50 lakhs. Moreover, the tax benefit is one of the primary reasons that makes it a profitable investment avenue. Section 80C of the Income Tax Act, 1961 makes your entire annual contribution to this fund tax-deductible. PPFs are backed by the Central Government, making it a completely safe option.
3. Fixed deposits (FDs)
If you are looking for a low-risk investment option that offers moderate returns, FDs are for you. As the name suggests, the interest rate offered on these deposits remains fixed during the entire investment period. The tenure ranges from 7 days to 10 years, giving you the flexibility to decide as per your investment goal. There is a tax-saving FD option that has a lock-in period of five years. Your contribution to this product is tax-deductible up to ₹1.50 lakhs a year under Section 80C of the Income Tax Act, 1961.
4. Mutual funds
Among the popular financial assets in India, mutual funds are one of the moderately riskier options. But this investment product is still preferred by many due to its high returns and flexibility. Professional fund managers handle your mutual fund investments, ensuring the best possible returns while minimizing risk. They pool money from multiple investors with similar goals and buy stocks of different companies. The profits are distributed among the mutual fund investors after deducting their fees. The risk quotient of these funds depends on the stocks bought by the fund managers. High risk means high chances of earning huge returns in mutual funds.
How inflation affects your investments
The price of services and goods increases with time due to inflation. This essentially means that money loses its purchasing power due to inflation. So, you need to invest in instruments that offer higher returns than the inflation rate, like mutual funds, stocks, gold, and property. You should also choose tax-saving schemes that help you save money.
How to plan your investments
If you are wondering, “where should I invest my money,” the first thing to do is determining which products meet your financial goal and risk appetite. Check out the below tips before planning your investment.
- Conduct thorough research about each product before making an investment.
- If your risk appetite is low, avoid financial products that promise high returns in a short period.
- Regularly check the performance of your investment portfolio and make necessary changes when required to spread out risk.
- Avoid investing in options that you do not clearly understand.
- Learn about the taxation rule of every investment product before putting your money in it.
Importance of variety in your investment portfolio
You must always build an investment portfolio that consists of various investment products across different sectors. As this process diversifies your investments, it reduces risks and helps you reach your long-term goals. So, if some stocks in your portfolio take a hit, the profits from other investment products will cover for it.
Things to keep in mind while investing
Now that you have an idea about choosing from different types of investments, the next essential step is making the right financial decisions. Here are some things to keep in mind while investing.
- Ask an expert: Always consult an expert before investing your hard-earned money. An experienced professional can help you make informed decisions based on your needs.
- Think long term: You cannot build a significant corpus in a short time. You must always keep your money in a product for an extended period and let it grow.
- Be patient: The financial market goes through regular ups and downs. So, do not decide based on market fluctuations. Be patient and stay invested for the long run.
Rules for risk appetite assessment
If you are not sure about your risk appetite, you may follow the rules given below:
- Hundred minus your age: This rule helps you determine how much of your money should be invested in risk-oriented options. If you are currently 30 years old, you may put 70% (100-30) in equity. As you grow older, you can lower the risk following this rule.
- 10,5,3 rule: As per this rule, you can expect 10% return from equities (high-risk options), 5% return from bonds (low-risk options), and 3% return from bank savings accounts (zero-risk options). You must make your investment decisions accordingly.
Why should you start investing early?
The longer you stay put in investment options, the higher will be your profits. So, you must start investing from a young age. Let us assume you are investing ₹1 lakh a year in a mutual fund offering a 10% return. If you start investing at the age of 25 and continue until you are 58 years old, the total return will be ₹2,70,02,437. But, if you start at 35, you will get only ₹97,34,706. So, do yourself one favor - Start investing today!
Choosing the best investment options is essential to generate high profits and minimize risks. You must first set an investment goal, which helps you select the right instruments. You should also analyze the investment products carefully before putting your money in them. Most importantly, evaluate your investments periodically, but do not be obsessed with them. Be patient and do not try to micromanage everything.
This is a companion discussion topic for the original entry at http://jupiter.money/resources/what-is-investment-and-what-are-the-best-investment-options/