Do you wish to multiply your income? Classy as it may sound, money is not something that can be earned only with hard work. As the saying goes, “Let money work for you rather than work those hated extra hours, to add a little more to your pocket.” I believe these lines to be absolutely true, when it comes to making right investment choices, tailored specifically to meet your financial goals. In finance, right investment choices are termed as an evenly balanced portfolio. Now you may ask: What’s a portfolio? In easy terms, it is a collection of all your money/ savings, divided into proportions of the amount you invest in each type of financial products- stocks, bonds, mutual funds, insurance policies, etc.
It’s basically a risk minimizing structure, designed to overcome misfortunes or economic failure. Let this line explain you better: Never keep all your eggs in one basket. Because if the basket tumbles, you are at a huge risk of breaking them all. Likewise, putting all your money in one type of financial product, could make you lose it all. Also, as I stated in my previous article, every investment option carries certain level of risk with it and you should always consider it, while taking your decision. Having said that, I know, how eagerly you must be rolling down your eyes, searching for those strategies, that will answer the question I quoted above! Well search no further.
Here are top 5 strategies/financial products you should park your money in and “enjoy the beauty of compounded returns” (Disclaimer: These strategies are long term in nature and only give a general view of some of the best financial products- with taxation benefits*)
Mutual Funds: Investing your money in a mutual fund, could turn out to be the best source of generating long term profits. With a risk factor varying from high to medium, the right way to participate in this type of investment class is through a SIP (Systematic investment plan), under which you are required to invest a standard minimum amount of Rs 500 (on a monthly basis). There’s no upper bar as to the amount you can invest and it solely depends on your capacity. Mutual funds, especially the ones focused on equity are known to even generate a compounded return of nearly 20% in a 5 years time.
Here are top 5 strategies/financial products you should park your money in and “enjoy the beauty of compounded returns” (Disclaimer: These strategies are long term in nature and only give a general view of some of the best financial products- with taxation benefits*)
1. Mutual Funds: Investing your money in a mutual fund, could turn out to be the best source of generating long term profits. With a risk factor varying from high to medium, the right way to participate in this type of investment class is through a SIP (Systematic investment plan), under which you are required to invest a standard minimum amount of Rs 500 (on a monthly basis). There’s no upper bar as to the amount you can invest and it solely depends on your capacity. Mutual funds, especially the ones focused on equity are known to even generate a compounded return of nearly 20% in a 5 years time.
2. In general, there are various types of mutual funds, which are managed by experienced fund managers, meaning your only job is to invest and the asset management company’s job is to manage it and reap good returns for you. Most important things to look out in a mutual fund scheme is the rate of return it is offering, the experience/ credibility of the manager who’s in charge of your funds and the net asset value of the chosen scheme. From taxation view point: Equity-linked Saving schemes (ELSS) are considered to be the most effective tax-saving instrument under section 80C, allowing you to save long term capital gains/ earnings (i.e,exceeding 12 months) uptoRs 1 lakh
3. National Pension Scheme: NPS is one of themost trustworthy and best low-risk investment scheme backed by the Pension Fund Regulatory and Development Authority (PFRDA). With no minimum limit for making an investment, this investment class offers a diversified portfolio in equity, fixed deposits, corporate bonds, liquid funds, etc. This investment option is a good way to secure your retirement life, especially when you aren’t that good at personally allocating assets for your future needs. Under NPS, there are different classes of investments, and just to make you aware of the returns it offers you, I am quoting the current on-going compounded returns of Class E funds: 1 year return: 9.5%, 3 year return:8.5% and 5 year return:11%. From taxation view point, NPS qualifies under section 80C, 80CCC, and 80CCD, where you can save whooping Rs 1.5 lakh every year. Tax deduction doesn’t end there. Under Section 80CCD(1B) an additional amount of Rs 50,000 can be saved. Furthermore, under section 80CCD(2) if your income is in the high tax bracket, you can ask your employer to contribute 10% of your salary, without you having to do any effort for the investment sake. Sounds fair enough?
a. Public Provident Fund: Considered one of the best risk averse mean of multiplying your income, a PPF account can be opened via approaching a bank or even at a local post office. Backed by the government of India, it serves as a long term savings fund with an impressive rate of return, currently at 8%, which compounds annually. Annual deposit limit for investment is Rs 500 at minimum and Rs 1,50,000 at maximum. Generally the tenure of this scheme is 15 years, which can be further extended to 5 years.
b. However an early withdrawal after the 7th year of opening an account can also be made. You are even entitled to avail a loan of 25% from the balance of your PPF. But I don’t recommend it, as the interest rates charged on it is generally 2% higher than the prevailing rate of a normal loan. However, the best thing about this fund is the unmatched tax benefit. The compounded interest rate that you earn on this fund is absolutely tax free, which means the amount you will normally collect after 15 years, will go straight into your pocket.
However an early withdrawal after the 7th year of opening an account can also be made. You are even entitled to avail a loan of 25% from the balance of your PPF. But I don’t recommend it, as the interest rates charged on it is generally 2% higher than the prevailing rate of a normal loan. However, the best thing about this fund is the unmatched tax benefit. The compounded interest rate that you earn on this fund is absolutely tax free, which means the amount you will normally collect after 15 years, will go straight into pocket your pocket.
4. Gold/ Gold ETF: Gold is one of the oldest investment class, that has existed for centuries, even before the financial system was established. In India, the love for Gold is no secret. A little heavy on the pocket, owning gold is a necessity, if you wish to reduce the risk factor from your portfolio. Unlike other financial products, the value of gold is far less volatile (fluctuating in nature) and the rule of time value of money isn’t applicable over it, meaning when the inflation rate is on the rise, gold has shown a track record of appreciating in value, unlike fiat money which shows a trend of depreciation in value. This positive trait of gold, can be used as a hedge, whenever the economic condition of the country dingles over a long period of time. Talking about the ownership, people often find it uncomfortable to store gold bars and coins at their homes, in fear of theft and therefore use bank vault facility, adding further cost. To breakthrough this, financial technology has come up with a modern way to own gold- Gold ETF (Exchange Traded Funds). Gold ETF is a commodity stock, which trades on the stock market like any other normal stock, with the only difference that it represents the real time value of gold as an underlying asset, meaning you are the owner of your gold, but only in papers. This type of asset has two benefits:
a) It allows you to own gold without the hassle of possessing it in physical form.
b) It is far more a liquid asset than real gold, meaning it can be easily bought and sold on the stock exchange anytime, generating cash-flows for you instantly. The investment cost is comparatively a little less in Gold ETF, as compared to that in buying physical gold. The current price of 10 grams of gold is around Rs. 34,110 with a daily price variation of around Rs. 100.
5. Cryptocurrencies: A completely new asset class, still under constant technological development, cryptocurrencies are the future of the finance industry. Thanks to the blockchain powered technology,enabling peer to peer transactions, meaning you will soon be able to transfer funds from your personally owned account to another, without the need of any intermediary (bank). This will give you complete ownership over your funds and its movement. But hey, this article is not dedicated to crypto, so lets limit our approach to the investment part only.
In the year 2011, the cost of 1 unit of Bitcoin (the first cryptocurrency to ever release) was around $0.31 meaning if you purchased around 100 units of it, that would have amounted to a mere investment of $31 equivalent to Rs 2,137.58 only. The next thing I am about to tell, might make you stand on your toes. On December 11, 2017, the value of one unit of Bitcoin shot as high as $ 17,549.67, meaning if you held your investment for only 7 years, you would be sitting on a net worth of $17,54,967 ($1.7 million) without spending any extra penny. Yes you read that right, you would have been a millionaire! However, the value depreciated again falling to $ 3,895.63 (current market value). Highly volatile in nature, this asset class is only for those having a high risk appetite and good funding. However in India, the use of digital money is still illegal, but that doesn’t mean we should be sitting ducks and not look beyond the potential crypto has to offer in the near future. Today, there are many types of cryptocurrencies, with new ones launching every year including the JPM coin, released this year, by the international banking giant JP Morgan Chase. Currently, the most well knowncryptos are Litecoin, Ripple, Ethereum, Ethereum Classic and Bitcoin Cash other than Bitcoin itself.
Blog by : Aman Sharma
Email : 1995amansharma@gmail.com
Contact : +91 91493 71029
