I saved my first 10,000 rupees in 2001 when I was a student and worked part-time, playing as a DJ at wedding functions. I invested in a Fixed Deposit because my father said that FD is the safest investment option.
I realized that FD hardly provides any return when I saw my FD value not growing after 3 years. The 10,000 rupees that I had invested had increased to just 12,000 rupees. But I was expecting my investment to grow to at least Rs. 18,000 in 3 years.
I started looking at other options that can provide 2-3x returns in a few years. I discovered multi-level marketing schemes, chit funds, forex trading, betting, stock trading and safe investments like PPF, post office savings schemes and recurring deposits.
I got fascinated by stocks as I could learn analyzing business and economics. I started investing in stocks after I got my first corporate job. I made the common mistake of investing in stocks without proper knowledge and ended up losing 30% of my money within a year of investing.
After this loss, I reflected on my personal financial goals. I also read a lot of books on investing and realized that targeting unrealistic returns is foolish. Also, putting all the money in one investment is also not wise.
Then on, I started diversifying my investments across different instruments with a target return of 15% per annum.
Before you start investing, take some time to analyze your personal financial goals – your target corpus, cash flow needs, time horizon and risk appetite. Once you are clear about your goals, you can design your investment portfolio accordingly.
I have explained in my course CashCow- how to use 3 variables to design a balanced portfolio that can give more than 15% annual return.
The 3 variables are –
- Existing investing experience
- Return potential of investment asset
- Associated risk
Now, let us understand a few investment fundamentals before jumping into investment selection.
There are no quick rich schemes that can double your money overnight. It can happen only in dreams.
But you can rely on an easy formula to estimate the amount of time taken for your money to get doubled.
If someone promises to double your money in 2 years, then he is giving you 36% returns, which is unrealistic. Most likely it’s a scam.
Stock investment is one of the most attractive investment options due to its high return potential. Stock investments carry higher risk and therefore have the capacity to generate high returns.
You can expect an annual return of 15% – 18% from stocks if you know the art of investing in the right stocks at the right time. I would recommend you to start with a small investment in stocks with an intent to learn before making big investments.
Demat account is mandatory to start investing in the stock market. I would recommend you to open an account with Upstox if you don’t have any demat account.
PRO TIP – Start early, keep a longer time horizon and do not withdraw your principal amount or interest till your investment goals are achieved.
Here is the list of the 26 best investment plans in India 2021
Apart from your regular pension contribution, investment in a PPF account can save you a lot of tax. That is because investment in PPF can be claimed as a deduction under section 80C on the IT Act.
Further, the accumulated principal and interest amount are also exempt from tax at the time of withdrawal.
You would also like to read – best tax saving options under 80 C in India
NPS is a pension scheme that is portable across jobs and locations. You do not have to change your fund while changing your job or city.
The additional benefit is that you get returns from equity and debt investments as compared to PPF where you invest only in the interest-earning instruments.
All your contributions up to Rs. 1.5 Lacs into Tier I capital are exempted under section 80C. Apart from that, you can claim any additional self contribution up to Rs. 50,000 of tax benefits under section 80CCD(1B).
So here you can save Rs. 2 Lacs of tax.
You may also like to check – 5Paisa Review (cheapest brokerage Demat account in India)
You get a higher return of 15% to 18% while investing in ELSS. Investment in ELSS funds have a lesser lock-in period of 3 years and any earnings over and above Rs. 1 Lac are taxable.
If you want to have a safe investment option without worrying about market fluctuations 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 5% to 7.25%.
Check out – How to start intraday stock trading in India
Investments in ULIPs gives you a wealth creation option along with life cover. The premium paid for ULIPs is eligible for deduction under section 80C. Additionally, 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 I Don’t Recommend “Insurance Policy” as an Investment Option.
Note that investment and insurance are separate assets with different objectives.
Investment assets are focused on generating returns by taking a certain amount of risk. Whereas insurance is for the 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 the best ways to save income tax in India
All the equity investments carry higher risks and therefore capable of generating very high returns. Opt for an equity investment option if you are comfortable losing as much as 50% of your capital.
The last 1-year return of NSE is 12.56% and in the last 2 years generated a 28.94% return. Likewise, shares of blue-chip companies have delivered huge returns in the near past.
To invest in equity, you need a Demat account. You can read the full reviews of my favorite Demat accounts
Mutual funds are the most convenient way of investing in the stock markets when you do not have the time and expertise.
The equity mutual funds have generated consistently higher returns. With funds like Canara Robeco Bluechip Equity, Axis Bluechip and Kotak Bluechip Fund delivering 2 years return in the range of 15% to 19%.
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 with the growth of corporate environment.
But the real estate 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 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||2.5% to 7.5%||4% to 6.7%|
|Time to double investment||9.6 to 28 years||10.74 to 18 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 a fixed deposit, RD too earns a higher interest rate than a savings bank account.
RD let you invest any amount (that can be as small as Rs. 5 per month) and is the best option for promoting the habit of savings.
You may also like to read – how to do forex trading in India
Liquid mutual funds carry the least amount of risk and are for persons who have idle money for short period of time.
The liquid mutual fund invests your money in highly liquid short term instruments like the bank’s CD, T-bills and commercial papers with a maturity period of less than 91 days.
Unlike, liquid MF the money is invested in bonds and other instruments with a maturity period of more than 91 days but less than 1 year.
Ultra ST debt MF does carry interest rate risk, is not so liquid and hence gives you higher returns.
You enjoy flexibility in managing your savings with a sweep-in facility and also get higher returns from a fixed deposit.
Any excess money lying in your savings account, above a particular threshold level gets automatically converted into a fixed deposit and vice versa.
Short-term debt mutual fund 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.
Also read – Best discount broker in India 2021
Returns on a 3-year FDs vary from bank to bank, usually in a range of 5% to 6.5%. 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 corpus. 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 50% of the money. The best way is investing through mutual funds.
Still, you can invest in index funds and expect 18-24% returns.
If you don’t have a 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 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 the 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 with a modest 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 by owning an asset, adding diversification to your investment portfolio and even saving on taxes (exemption benefits through housing loans & depreciation).
NSC is a low risk, fixed income instrument that 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 only 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 6.8% p.a. NSCs can be pledged with banks for taking loans.
Tax saving FD 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 6.6% p.a.Then you get a monthly income of Rs. 2,475 per month.
You can start by investing Rs. 1,500 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 6.6%||Market movement|
|Time to double||10.9 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
You should know the purpose for which you want to invest, it can be anything from creating a retirement corpus, marriage of children, buying a house, vacation or luxury car.
Knowing your goals helps you plan realistically and keeps you committed on your investment track.
When you know your goals, selecting investment options becomes easy. In sense, you know the returns given by each option and the kind of investment you need to pick in order to achieve your goals.
#2. Investment Period
Returns or earning is not possible overnight. You need to look for a matching time period where your money can grow sufficiently to fulfill your desired goal.
#3. Risk Factor
Even after knowing goals you should not invest hastily in assets giving highest returns within the lowest time period.
Your investment decision should depend on the risk factors and your 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 investment. 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 a business person. Hence, they have different risk-taking abilities and they face different risk factors.
Grow Wealth With Power of Compounding
We have heard the word compounding right from our school days. But very few have effectively used the power of compounding 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 the 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 long 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.
I have explained all the different types of investment plans available in India.
Lack of knowledge regarding investment options should not be a reason for you anymore to start investing. There are many lucrative investment options, so do not put all your eggs in one basket.
Frame your investment goals, define your risk capacity and chalk out an investment plan best suited to your needs. The best would be to put your plan on paper or an excel sheet.
Take control and stay committed to your financial goals. And trust me, you will gain the power to change your fortunes by using the power of compounding!
If you have any queries, let me know in the comments.