Financial Investments in India

12:05:00 PM

Last month we discussed on the importance of saving money. Learning to save money is the first step in ensuring a healthy financial sheet in the longer run of life. Once we start saving, as the money accumulates, investing it becomes the next priority.

American Investor and business man Robert Kiyosaki says, "It's not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for."

It’s important for us to make our money work for us. I remember reading the story of the twins Ramu and Shamu from a children’s magazine ‘Tinkle’ about how they had gone to the bank and saw a notice where in it said, “Watch your money grow.” Ramu and Shamu stare at the money for nearly as long as ten minutes and run back to their mother crying out,  “Mom, this bank is a fake!” The manager of the bank gets startled and asks the children why they thought so. Ramu replies, “We have been watching the money closely and we haven’t seen the money grow.” The manager laughs and replies to the mother, “You will have to explain to them how it grows.” 

When it comes to investing money, I have learnt a lot from my financial mentor, Santosh Mathew who is also my brother in law. I want to turn the rest of this post to him.

Santosh Mathew writes:

“Here we intend to capture the basics of sensible money management. Particularly of interest is, how to begin investing and to have a basic knowledge of the avenues of investment available to youngsters who have started working. Financial planners say that your investment towards your retirement should begin the day you get your first salary. Most of us get the point, but don’t know how to, or where to invest to get maximum returns.

At the onset we need to understand one thing. The old idea of putting money in bank fixed deposits (FDs) and living off it, like a generation or two earlier to us did, is not working any more  This is because the inflation is high, bank interest rates are market linked and there is no clue what market interest rates will be 10 years down the line. This puts people investing in FDs at tremendous risk and they may not even get their money’s worth when they take it out after 10 years. This is a serious issue.

The other side is the high gains that can be potentially made by investing in stock market. That is very risky too. Unless someone really has a deep knowledge of specific companies, it is generally not a great idea to put your money there. But all of us are not experts on companies. Is there a way out where normal folks like us can also invest and make money from the stock market in the long run? Fortunately there is... We will discuss it as we move on.

Most of us are aware of FD (fixed deposits in nationalised or private Indian banks) and post office deposits. They are good instruments indeed. However, they fail to beat inflation by any significant margin, many times lagging behind inflation rates. So they cannot be long term investment vehicles for today’s youngsters. Besides, FDs invite tax too. Adjusting for inflation and tax, there is hardly any positive benefit.

One of the venues young employees have is EPF or the Employee Provident Fund. This is a fund to which the employer and employee puts 12% of the basic salary. Currently it earns 9% per annum, but the good thing is it is completely tax free at withdrawal. EPF discourages frequent withdrawals and can be done only between job changes or for major events like marriage, house purchase, daughters marriage etc. EPF  can continue while you shift jobs and can result in a huge corpurs by the time an individual retires, if constant contributions are done. You can put extra money into EPF too (employer may not match it) and it earns 9% tax free interest.

For business people who don’t have an EPF account, the government provides them the PPF or the Public Provident Fund. The duration of PPF is 15 years, extendable by 5 years thereafter. The maximum contribution per year is 1 lakh, and it gives you tax deduction under section 80C. The final withdrawal is also tax free. The long lock-in period is seen as a  problem and many individual don’t give this wonderful vehicle a high priority. PPF is open to all citizens of India.
The above two instruments are fixed return instruments – you know the interest rate you get. Thats because they are invested by the government in very conservative money instruments. However, to get higher interest rates in the long term, the best venue is stocks. Again, I repeat, stocks tend to be very risky at times. Now, the government has introduced a new scheme called NPS (National Pension Scheme) that gives an individual the possibility of higher return by allowing a max of 50% invested in large cap stocks (biggest companies in India). This fund is professionally managed too. The remaining 50 can be divided between government securities (very safe)  and corporate bonds (slightly higher risk). There is also an “auto” option which invests into all three categories based on ones age, if the individual is not able to decide for himself.

NPS has two accounts: tier 1 and tier 2. Tier 1 is long term. You can withdraw at age 60 only, that too max of 60%. Rest will be converted to pension that will be given life long. However, this pension will purely depend on the amount of money you have deposited there during your life time and what modes of investment (equities, corp bonds or government bonds) you have chosen. NPS is currently tax free. If you decide to withdraw before 60, you can take only 40% and rest 60% will be converted into pension.  NPS Tier 2 account is intended as a placeholder for your money, like your regular bank account. The advantage is that while you money is parked there, you can choose to invest in the same options that Tier 1 gives you. You can completely withdraw the money, any number of times......"

Thanks a lot Santosh....This is a brief overview of some of the available options in India. Like I said in my previous post, It is ultimately a choice that we have to take. We all want to save money and have it grow. Something that I have learnt over the years is that: to take a wise decision, burning one's hands is not always necessary. We can learn from other's mistakes as well! I have made my share of mistakes and hence pray that this post helps you get started.

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  1. for those who dont have an option to put a lumpsum in FDs, there is the option of Recurring deposits - a fixed amount every month for a period of your choice ( usually multiples of 3 months ) and on the fixed date, you will get the amount back with the interest ( which is comparable to fd rates ).. minus point is that, like in FD, you dont get tax breaks for either amount invested or interest gained.

    1. Yeah that's another option too... Also you've got something in normal SB account... in Corporation bank its called a CLSB account wherein you can get more interest on the amount you've put in than the normal saving bank account!

  2. PPFs are a good option for tax saving since u can put upto 1 lakh there a year.. the 15 year lockin is a big drawback unless u really plan ahead well... it offers 3 key advantages - the amount u put in & the amount u take out are both tax free - as well as you save upto 30,000 ( provided ur in highest tax bracket ) because of this tax deduction.
    So in a rough example, ud put in 1 lakh a year for 15 years - investment is 15 lakhs : 8.8 % interest compounded gives u nearly 100% so ud get close to 30 lakhs at the end of 15 years AND save 30,000 a year on taxes.

    OF course, for those who play the market well, this will seem petty cash, I guess :D

    1. Yup... but not sure if you can put upto 1 lakh... last I heard the bracket was upto 80,000 per year...

  3. Good post, i really like the part that says one should think about investing right from the time he get's his first salary. Now there are multiple online instruments availiable for freshers to avail of sound investments.

    1. Thanks Brian!
      It's true there are multiple instruments to invest in today, but one needs to take care to make it a regular routine!

  4. thats very interested so if i deposited about 30000 to 40000 how much will be my monthly interest in come?????

    1. It depends on where you invest it... If it's going to be a bank here in India... you won't get more than 9-9.5% interest for that money... Again if it's in the stock market as in direct shares and mutual funds.. there is a higher chance of interest again depending on the market....
      Don't put all your eggs in one basket is what they say... maybe the better option would be is to split up the money in different instruments...

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