IT executive Ashok Gopinathan sets aside 40% of his salary every month. The 26-year-old from Chennai has been doing this for the past two years. For the time being, he parks the money in his savings bank account. Ashok knows this is not enough. He needs to make the money grow as well. But how? The young techie has so many questions:
What would be the best place to invest?
Would stock markets work for him?
What about mutual funds?
Should he look at the tried and tested Public Provident Fund (PPF)?
Understanding Ashok’s predicament is not difficult. Many people face a similar situation. You need to be smart about the choice of investment. Yet, this is easier said than done. One wrong choice and you may have to pay the price.
What qualifies as a good investment?
Before Ashok starts looking for investment avenues, he must answer a basic question:
How much risk is he willing to take?
For investors above 40 years of age, it should not be much. For 20-somethings, the risk profile can be higher. But there are exceptions to both cases.
Four factors are important in deciding a ‘good’ investment:
The investor’s age
The income profile
The risk appetite
The return expectation
What should junior-level IT industry executives like Ashok do? It could be a good strategy to split investments between stock markets and mutual funds of varying risk. He could then add a layer of protection with a Term life insurance. This strategy of separating investments from insurance could be ideal from the point of maximising both protection and return generation.
But Ashok’s 60-year-old father would have to use a different tactic. Bank fixed deposits, senior citizens schemes, and post office schemes could work better in his case.
But these aren’t your only options. Here’s a look at some lucrative options for investment keeping in mind different risk profiles:These are your 7 best investment options – ppt
A list of the best investment options
Public-provident Fund (PPF): Here is a popular option and a low-risk one too. This government-backed fund generates a fixed income for investors. The current interest is 8.1% with a lock-in period of 15 years. An investor can contribute as little as Rs 500 towards the fund each year. The upper limit is Rs 1.5 lakh per year.
Insurance: This low-risk option is ideal for long-term wealth creation. Insurance products have evolved and offer more than just life cover today. In fact, they come with several added benefits. This makes many insurance policies useful as tools for saving. The typical returns on investment-linked insurance plans are 6–8%. Besides, there are different kinds of plans. You can choose policies that will give you a regular monthly income. Or get a plan that helps you create a fund for your child’s education or wedding. Some schemes allow you to withdraw a part of your savings to meet expenses.
National Pension Scheme (NPS): This scheme offers low-risk, long-term wealth creation. This is another government-backed option. You get to invest in equities and bonds through the NPS. In 2016, the returns of various funds were 9.46%. The returns are tax-free. The best part is it can get you an extra tax deduction of Rs 50,000—over and above the Rs 1.5 lakh limit.
Mutual Funds: MFs are popular and carry different levels of risk. There are plans for everyone. For example, debt mutual funds come with minimum risk. They are ideal for elderly people like Ashok’s father. Such investments can even provide a fixed income if preferred. The returns here usually do not exceed 8%, but have touched 10-12% in some years. Equity mutual funds, on the other hand, generate returns up to 20% yearly returns. But the risks are higher. Equity funds are ideal for long-term wealth creation.
Stock Market: Investing in the stock market is risky. The risk may be medium to high. You can use stocks for short-term and long-term wealth creation. But it helps to be cautious and to make informed choices. The average return for the past 15 years has been 12.5% for the benchmark index NSE Nifty. And if your stock selection has been good, then you could even get higher returns.
Bonds: These are ideal for long-term wealth protection and relatively safe. Bonds function in a regulated environment and have government backing. A 10-year bond may generate a return of 8%. This is a good option for risk-averse investors. Some even offer tax benefits.
Fixed Deposits: Fixed deposits are low-risk, fixed-income options. The returns vary from 5% to 8%, though the rates change often. The tenure of investment varies from as little as seven days to 10 years. The only risk is that interest rates could fall over time as inflation comes down.
It’s quite amazing that you are proactively thinking about money—just like the efficient Ashok Gopinathan. This itself can get you far in life. The only thing that can make this journey better for you is choosing the right investment option. However, remember to diversify. Don’t limit yourself to one investment option.