One of the most difficult things about money is not saving it but investing it wisely. While all of you would be aware about the myriad investment options available to you, the number of possibilities makes it impossible to make the correct investment choice. Many a times, you spend so much time analysing the investment options that you end up not investing at all. And when it finally needs to be invested, it might be done for all the wrong reasons. However, in order to make your hard-earned money earn for you and become a passive source of income it is important that you invest it wisely.
The most important reason for investment is the goal for which you need to invest. For example, an investment for retirement is differently planned than one for wealth accumulation or child education or buying a house. Once the purpose for investment is decided, choosing the product becomes rather easy.
How to choose the best investment product, once the goals are decided:
Broadly, investments can be made in financial assets like ULIPs, equities, mutual funds, bank deposits and non-financial assets like gold, real estate etc.
The top 10 investment options in India for 2019 include:
Unit linked Insurance plan (ULIPs)
Unit linked insurance plan (ULIP) offered by life insurance companies are excellent insurance-cum-investment plans which serve dual purpose of providing a life cover and also an opportunity for wealth creation over the long-term.
Read more about Types of life insurance
Working of a ULIP:
The premium paid toward a ULIP is invested in the market, thus, allowing the investor to earn market-linked returns and at the same time there is a fixed sum assured in the event of death. Policy holder can choose to invest in equities or debt funds as per his own risk appetite. Aggressive investors with high risk taking capacity can opt for equity funds and conservative investors can invest primarily in debt funds or even a combination of the two. One can also move from one fund to another as and when desired.
The Tax edge of ULIPs:
ULIPs also are advantageous from taxation point of view as premium paid up to Rs. 1,50,000 is exempt from tax under Section 80C. Unlike traditional investments like Public Provident Fund or PPF which have long lock-in periods, ULIPs have a lock-in period of 5 years only. Also, the entire amount received on maturity is exempt from tax just like PPF.
Investments in ULIP can be switched from equity to debt and vice-versa without any short-term or long-term tax impact, unlike mutual funds.
Though there are many tax saving options like PPF, tax saving Mutual Funds called Equity Linked Saving Scheme or ELSS, insurance policies, etc. which are available for investment but investments in ULIPs stand to gain the most as it is a comprehensive plan which provides all the advantages of a tax savings and at the same time provide the opportunity to earn market-linked returns.
Other than ULIPs, ELSS is the only option which earns market returns but again they do not have the advantage of switching between the funds and are restricted to equity schemes only. In a ULIP both equity and debt funds enjoy tax-free returns, unlike ELSS.
Thus, ULIP is an excellent combination investment option for investors looking for market-linked returns along with tax benefits and a life cover.
Read more about 5 best ULIP plans to invest in 2018
Read more about Different types of ULIP’s before you buy one
PPF (Public Provident Fund)
PPF offered by the Government of India is one of the safest and oldest investment options and can be opened at any nationalised or private banks and even at the post offices. PPF account can be opened with a minimum amount of Rs. 500 and investments upto Rs. 1.5 lakh are exempt from tax each year. The interest rate offered on PPF accounts are compounded annually and this rate is revised each year by the government. The current rate of interest is 7.6%.
PPF investments enjoy the triple Exempt-Exempt-Exempt or EEE benefit and the entire corpus of PPF is exempt from tax on maturity as PPF, like ULIPs. However, one of the biggest disadvantages of PPF is that the lock-in period is 15 years, though partial withdrawals are permitted from 6th year.
Conservative investors looking for long-term investment option with no risk can look at investing in PPF.
Equity investments are purchasing shares of a company directly thus indicating part ownership in that company.
Direct equity investments have the potential to generate huge returns but these investments carry potentially higher risks as direct equity investments can be extremely volatile. Since the returns are marked to the market, i.e. it rises and falls with the market performance, this type of investment is volatile and best suited for people with higher risk appetite or some proficiency in investing.
Historically, the returns generated by equities have outperformed the returns of all asset classes and have huge earning potential, but there is no guarantee of returns and there is always the risk of losing your capital too. Picking the right stock, time of entry and exit, market conditions all such factors play a significant role in determining the returns generated in direct equities.
Taxation in Equity Investment:
Investments in equities are extremely liquid and such investments can be withdrawn in part or full anytime.
However, unlike before, returns in excess of Rs. 1 lakh at the time of sale of such investments will attract Long-Term Capital Gain or LTCG tax of 10%. This has been recently introduced by the last budget. If the investment is liquidated before a period of 12 months, then the returns will attract a flat Short-Term Capital Gain or STCG tax of 15%.
Aggressive investors who are willing to take fairly higher risks for higher returns can look at investing in direct equities. Equity investments can be done by opening a DEMAT account with SEBI registered stockbrokers.
Equity Mutual Funds
The mutual fund industry has grown manifold in the last two decades. Equity mutual fund schemes are very popular investment choices amongst investors who want to invest in equities as these funds invest in equity stocks of various companies.
As per Securities and Exchange Board of India (SEBI) guidelines any scheme to qualify as equity scheme must invest minimum 65% of its total corpus in equities and related instruments. Equity mutual funds can be managed actively or passively depending upon the scheme. The minimum investment in a mutual fund scheme can be as low as Rs 500.
Tax Treatment of Equity Mutual Funds:
The tax treatment on the returns generated by equity funds is same as that of direct equity with the only exception being ELSS schemes. ELSS is a type of equity mutual fund and investments in ELSS upto Rs. 1.5 lakh is exempt from tax and even the returns generated are tax-free. However, ELSS, unlike other equity schemes, have a minimum lock-in period of 3 years.
As these funds are professionally managed, equity mutual funds are good option for investors who are looking to invest in the stock market but do not have the expertise for the same.
Debt Mutual Funds
Apart from equity mutual funds investors can also look at investing in mutual funds through debt funds. Debt funds invest most of their corpus in fixed-interest securities such as bonds, government securities, treasury bills, commercial paper and money market instruments.
One can safely look at investing in debt funds without having to take the risk of equity funds and enjoy the safety of traditional debt instruments at higher returns.
To know more about mutual funds visit site https://www.mutualfundssahihai.com/en
Find the difference between ULIPS & Mutual fund with the help of below video
Gold is considered as one of the safest investment option in times of economic uncertainties. Gold, as an investment, has been one of the most favoured assets amongst Indians also because of the ornamental value attached to it. However, gold is also one of the most volatile assets and investing in physical gold risk is considerably risky and storage is also a concern. Apart from this, gold in the form of jewellery involves high making charges with lower the overall returns. ETFs of gold and sovereign gold bonds are a cost-effective solution to make investments in gold.
Real estate has always been considered as one of the most lucrative investment option as the Investments in real estate fetch returns in two ways as rental income and by way of capital appreciation at the time of sale. The location of the property and development around its vicinity are important factors that determine the returns on real estate.
However, real estate is an extremely capital intensive investment and real estate as an asset class is extremely illiquid. More and more people are realising this fact and with the evolution of financial markets in the last two decades not too many people opt for real estate as an investment.
It is ideal for investors who have surplus funds and have no requirement for such funds for a long-term.
National Pension Scheme
NPS is a voluntary long term retirement scheme which is managed by the Pension Regulatory and Development Authority (PFRDA). Investments in NPS can be made in funds in various asset classes such as equities, real estate, G-secs, etc. depending upon the risk appetite of the investor. Investments made up to Rs. 1,50,000 lakh are exempt from tax under Section 80C. Additionally, investments of Rs. 50,000 are exempt from tax under Section 80CCD thus taking the overall exemption to Rs. 2,00,000. Pre-mature withdrawals from NPS are not permitted and withdrawals are partially taxable on maturity.
NPS is a good long-term investment for retirement planning.
Bank Fixed Deposits
Investing in Bank FD is still the most prevalent investment option in India. Investing in Bank FDs are considered as safe and most convenient investment option. Bank FDs come with a fixed tenure and premature withdrawal results in penalty. The interest rate offered by Bank FDs is nominal and varies from bank to bank. 5 year Bank FDs do get 80C benefit on investment but the interest income is fully taxable and added to the total taxable income of the investor.
Conservative investors looking to invest their savings for some returns and want complete capital protection can invest in Bank FDs.
Fixed Deposits made with private companies instead of Banks, are called Company Deposits and functionally they perform the same way as Bank FDs. The only difference is that there is no 80C benefit even for 5 year deposits and the rate of interest is usually a little higher than Bank FDs.
Tax free bonds
Tax free bonds are long term investment options primarily offered by government backed entities with minimal default risk. These bonds come with investment tenures ranging from 10, 15 to 20 years and pay a fixed coupon on the investment amount. The interest income received from these bonds is completely exempt from tax and there is no upper limit for investment in these bonds. However, the interest received on such bonds is very nominal.
Tax-free bonds are good for conservative investors looking for a fixed interest income over a long-term.
The choice of above investments should be made after taking into consideration of some important factors such as:
- Tenure: The duration for which you want to invest your money. For example, the ideal choice of investment for an investor looking to invest for a year viz-a-viz someone looking to invest for 10 years or more will be very different.
- Financial Goal: You should be clear about the future goal or goals you wish to achieve through your investments. Goals can be anything from wanting to build a corpus for child’s education or marriage, buying a house, planning for retirement etc.
- Liquidity: Liquidity is another aspect to consider while making investments. Some assets like real estate may provide higher returns, but, not suitable if you are looking to invest for a short period of time, as real estate is most illiquid asset.
- Risk taking capacity: The return generated by any investment is directly proportionate to the amount risk associated with such investments. The choice of investment should match your risk bearing capability. A conservative investor would not be comfortable investing majority of his surplus in high risk investment options.
- Taxation: Certain types of investments such as PPF, ULIPs etc. are extremely tax-efficient. However, investments in such instruments should be a part of your overall financial planning and not the entire financial planning in it.
Here is an overview on these investments on the above parameters