Last Updated: 18 Sep 2019
We all have investment plans and we all are constantly in search for a better investment option. But we all fear of investing in the wrong place.
You should invest only after understanding the pro and cons of the investment option. I am trying to keep things easy for you.
I have done in-depth research on all available investment options and listed the best legitimate investment options in India. You can invest based on your needs and risk-taking abilities.
Let us understand a few investment fundamentals before jumping into investment selection.
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- How to Double your Investment
- Grow Wealth With Power of Compounding
- Best Investment Options for a Salaried Person
- Best Investment Plan with High Returns
- Best Investment Plan for 1 Year
- Best Investment Plan for 3 Years
- Best Investment Plan for 5 Years
- Best Investment Plan for Monthly Income
- Basic Things to Keep in Mind Before Investing
There is nothing as doubling money overnight. It can happen only in dreams, but let me tell you that there is an easy formula to estimate the amount of time taken for your money to get doubled.
If someone promises you to give double money in 2 years then he is giving you 36% returns, which are unrealistic. Most likely it’s a scam.
We have heard the word compounding right from our school days. But very few have effectively used the power for long term wealth creation. You might be surprised if you let the magic work over a period of time.
Compounding is simply- earning interest on principal, reinvesting all the earnings and then getting not only interest on principal but also interest on interest from next year onwards.
In a way, compounding, helps you build a large corpus over a period of time even with a small initial investment.
But for the magic to happen, you require two things. One is starting early and the other is keep on reinvesting over a time period, say 10 years to 20 years.
The more you let that happen the more you amass wealth.
Let us see how
Suppose today you invest 1 Lac at a compound rate of 8% and kept reinvesting all the earnings. Then after 10 years, the money will become Rs. 2.15 Lacs, then turn into Rs. 4.66 Lacs after 20 years, and then Rs. 10.06 Lacs in 30 years.
In the initial period, you see that the earnings are not as much but in the later years, the earnings increases exponentially. Which is due to the compounding effect.
Starting early allows more time for the magic, i.e. compounding to happen. Let us see three scenarios.
The goal is to accumulate a corpus of wealth by the age of 60 years. Investment amount Rs. 1 Lac every year and assuming that the compound interest rate is 8%.
You can see that the results are strikingly different even when the investment is for 20 year period in each scenario.
You build a corpus of Rs. 2.13 Crores just by starting early at the age of 20 years as compared to Rs. 46 Lacs when starting late at the age of 40 years.
This is because you get an extra time period of 20 years for the money to get compounded.
In this way, compounding amplifies the growth and maximizes the earning potential of your money.
PRO TIP – Start early, keep longer time horizon and do not withdraw principal or interest.
Apart from your regular pension contribution, an investment in PPF account can save lots of tax as all the deposits made are deductible under section 80C.
Further, all the accumulated principal and interest are exempted from tax at the time of withdrawal.
You would also like to read – best tax saving options under 80 C in India
NPS scheme is portable across jobs and locations. The added benefit is the returns from equity and debt investments.
All your contributions up to Rs. 1.5 Lac to Tier I capital are exempted under section 80C. Plus you can claim an additional up to Rs. 50,000 of tax benefits.
So here you can save Rs. 2 Lacs of tax.
You get a higher return of 15% to 18% while investing in ELSS as compared PPF or other investment options.
Investment in ELSS funds have a lesser lock-in period of 3 years and any earning over Rs. 1 Lac are taxable.
If you want to have a safe investment option without investing in equities then pick tax saving fixed deposit of any bank or post office.
The interest rates vary from bank to bank and are in the range of 6% to 8.5%.
Investments in ULIPs gives you wealth creation option along with life cover. Premium paid are eligible for deduction under section 80C. Plus the returns on maturity are exempt under section 10(10D).
The returns vary depending on the combination of equity, debt or hybrid funds.
Read Carefully: Why We Don’t Recommend “Insurance Policy” as an Investment Option.
Please note that investment and insurance are separate assets with different objectives.
Investments are focused on generating returns and thus carry a higher risk. Whereas insurance is for protection of life and assets in case of loss and death.
Therefore, both should be considered separately and not to be combined.
I have written a guide on best ways to save income tax in India
All the equity investments carry higher risks and hence are also capable of generating very high returns. Opt for equity investment option if you are comfortable losing as much as 50% of the capital.
The last 1-year return of NSE is 12.40% and in the last 2 year generated a 26.5% returns. Likewise, shares of blue-chip companies have delivered huge returns in the near past.
Mutual funds are the safest and the most convenient way of investing in the markets when you do not have the time and expertise.
The equity mutual funds have generated consistently higher returns. With funds like L&T India Value, Mirae Asset India and ICICI Prudential Blue Chip delivering 3 years return in the range of 14% to 18%.
The investment in mutual funds can be a lump sum or monthly SIP for an amount as low as Rs. 500.
Commercial real estate provides rental income and capital appreciation. The higher appreciation is due to demand for office space and growth of corporate environment.
But the location, building quality, market space rent and the demand-supply plays a major factor in deciding returns.
A good investment in office and shop spaces not only fetches higher returns but also helps in the diversification of investment assets.
The best part of investing in IPO is that the money gets blocked only for 7 to 15 days. Prudent investment in a good company coming out with IPO can fetch returns as high as 20-25% over a period of time.
FDs are the safest and secure investment options provided by banks and post offices which earn higher interest rates than a savings account.
Any excess amount which you are not going to use for a certain period of time can be safely put into a fixed deposit.
Bank vs. Post Office Fixed Deposits
|Particulars||Bank FD||Post Office FD|
|Interest Rates||5.75% to 8%||6.6% to 7.4%|
|Time to double investment||9 years||9.7 years|
|Tenure||7 days to 10 years||1 to 5 years|
|Min deposit amount||Vary from bank to bank||Rs. 200|
|Tax benefit||On 5-year tax saver||On 5-year tax saver|
Like fixed deposit, RD to earns a higher interest rate than a savings account.
RD let you invest any amount which can be as small as Rs. 5 per month and is the best option for promoting the habit of savings.
The option carries the least amount of risk and is for persons who have idle money for short period of time.
The mutual fund invests your money in the highly liquid short term instruments like the bank’s CD, T-bills and commercial papers generally with a maturity period of less than 91 days.
Unlike, liquid MF the money is invested in bonds and other instruments with maturity more than 91 days and less than 1 year.
Ultra ST debt MF does carry interest rate risk, are not so liquid and hence gives you higher returns.
The sweep in option lets you enjoy flexibility in managing your savings and also enjoy higher returns from a fixed deposit.
Here, any excess money lying in your savings account, above a particular threshold level gets automatically converted into a fixed deposit and vice versa.
Is a good option for generating stable returns with modest risk.
The funds are locked for up to 3 years and there is a 1% penalty for premature redemption. Still you can expect returns a bit higher than the fixed deposit in a range of 8-10%.
There are numerous benefits when you invest in ELSS like tax savings, higher returns (15% to 18%), option to invest monthly (SIP) and can be started with as low as investing Rs. 500.
Returns on a 3-year FDs vary from bank to bank, usually in a range of 6.5% to 8%. Also there are no associated tax benefits in this investment option.
The returns generated are almost the same as a fixed deposit for a 3 year period.
Equity is the best option for persons looking for growth and building wealth. The returns on individual stocks are high (>20%) for fundamentally strong and growing companies over a longer period of time.
For example, Eicher Motors generated a 5-year CAGR of 28.77%.
Nevertheless, the huge returns entail high risk, where a bad pick can erode more than 70% of the money. The best way is investing through mutual funds.
Still, you can invest in index funds and expect 18-25% returns.
If you don’t have demat account, then choose one from the list of best demat and trading accounts in India.
I have written a complete guide on how to Start Investing in Share Markets in India (even with 10,000 investment)
Over the years, investment in gold has given consistent returns of around 10% beating the inflation and providing diversification. A better way to invest in Gold is through a gold mutual fund, Gold ETF and gold bonds.
You can also invest in Sovereign Gold Bond Scheme regulated by government and RBI. You will own gold in ‘certificate’ format. The value of the bonds is assessed in multiples of the gold gram. The initial minimum investment is 1 gram of gold.
You would earn 2.5% interest per annum on amount invested. The Lock-in period is 8 years.
The investment in residential real estate generates regular rental income and appreciation. All with ma odest amount of risk as compared to equity investments.
The growth in residential real estate investments is due to individuals looking for a better urban housing needs and government housing initiatives.
You benefit of owning an asset, have diversification and even save on taxes (exemption benefits through housing loans & depreciation).
Is a low risk, fixed income instrument and can be easily opened at any post office. National Savings Certificate comes with two fixed maturity periods of 5 years and 10 years.
You are free to invest any amount, but investments up to Rs. 1.5 Lac helps you in tax deductions. The interest earned over the period of time is not tax-free.
The earnings are 7.6% p.a. NSCs can be pledged with banks for taking loans.
The option gives complete capital protection with additional interest income for 5 years at a similar rate to 5 years FD.
However, there is no premature withdrawal (allowed only in case of death) and the interest earned is taxable.
Long term debt investments can generate steady returns over inflation. Bond investments carry interest rate risk.
The bond investments are for persons looking for principal protection, steady income or tax savings. Investments in the bond can be done through AAA rated bonds by PSU, Govt. and Corporate NCDs.
MIS investment option best for generating desired monthly cash flows.
For example, if you invest Rs. 4.5 Lacs (individually) for 5 years at the present rate of 7.7% p.a.Then you get a monthly income of Rs. 2,888 per month.
You can start by investing Rs. 1500 and the maximum investment can be Rs. 4.5 Lacs (individually) or Rs. 9 Lacs (jointly).
|Particulars||MIS – Post Office||MIS – Mutual Fund|
|Interest Rates||Fixed 7.7%||Market movement|
|Time to double||9.35 years||N A|
|TDS applicability||No TDS||TDS applied|
|Investment Limit||Rs. 4.5 Lacs – Individual|
Rs. 9 Lacs – Jointly
Basic Things to Keep in Mind Before Investing
#1. Goals & Expected Returns
There is a purpose for which you want to invest, which can be anything from creating a retirement corpus, for the marriage of children, buying a house, vacation or luxury car.
Knowing the goals and the money needed helps you plan realistically and keeps you committed on your investment track.
Further, when you know your goals, then selecting investment options becomes easy. In a sense, you know the returns given by each option and the kind of investment you need to pick in order to reach the goals.
#2. Investment Period
Returns or earning cannot happen overnight. You need to look for matching time period where the money can grow sufficiently to fulfil your desired goal.
#3. Risk Factor
Even after knowing goals you should not invest hastily on the assets giving highest returns or assets with the lowest time period. Because of the risk factors and risk-taking abilities. Both factors differ from person to person.
For example, an individual fresh at a plush job would not mind losing Rs. 25,000 on equity. Whereas the same amount is sufficient for an old person to meet his monthly expenses and the amount needs to be preserved.
A salaried person may have different financial needs than that of the business person. Hence, they have different risk-taking abilities and they face different risk factors.
Below is the list of the best investment option available for maximizing your hard earned wealth.