I AM A NEW INVESTOR, WHERE SHOULD I INVEST?

Dear Readers,

As a child, we all had piggy banks to save our pocket money or the money that we received on festivals such as Diwali or New Year eve. And remember the joy we had, when the savings created a sum and we were able to utilize those funds to buy something, be it a toy or a new dress, a greeting card for our parents on some occasion?

Investments and savings are closely related. Once you save your earnings, investing your savings will fetch you income on your savings too, i.e. your money earning money for itself!

It is always said that it is better to start off early when investing. So probably when you are 21/22 and have just started working/ earning, you can start investing your savings.

Let us look at various options available for an individual to start invest their savings when they have newly started a job/ working:

1. Employee Provident Fund Scheme: Here, the employer invests 12% of your basic salary and dearness allowance in the employer Provident Fund scheme and a similar amount is invested by employee in the said account.

For example: If your basic salary plus dearness allowance is Rs. 20,000 then Rs.2400 will be automatically be deducted from your salary every month and shall be invested in EPFO.

Currently the rate of return of EPFO is 8.55% p.a. Also, the Rs. 2400 invested per month, summing up to Rs. 28,800 is also liable to claim exemption under Section 80C of the Income Tax Act.

The best part of this investment is that this amount is deducted from your salary every month for as long as you are working, and over a period of years will create a huge corpus.

2. Public Provident Fund: For those who could not invest in Employee Provident Fund, they can start investments in Public provident fund. Payments can be made on monthly as well as annual basis.

However, it is to be noted that PPF has a lock-in of 15 years and minimum Rs. 500 has to be paid every year.

But the benefit here is that you can start with an amount as small as Rs. 500 per annum and the interest rate here is 7.6% p.a.

Also, the amount so invested is exempt up to Rs. 1,50,000 per annum under sec 80C of Income Tax Act.

3. Equity Linked Savings Scheme: ELSS is one of the highest returns providing investment schemes. It is market based and has provided a return of 15-20% per annum in the past and the lock- in here is only 3 years.

The best part here is the investment has a lock in of only three years and a sum up to Rs. 1,50,000 is exempt under sec 80C the Income Tax Act.

Due to the power of compounding, the investment value, over a period of years creates a huge corpus.

4. Mutual Fund Sips: I am sure you all must have come across the television advertisements saying that Mutual Funds Sahi hai. And mutual funds are the safest and surest way to invest in markets. When it comes to Mutual Fund SIPs, i.e. Systematic Investment Plan, every month a fixed amount/ predetermined amount shall be invested in Mutual Fund Scheme (ideally the schemes should be advised by a mutual fund advisor)

The best part here is the “Power of Compounding”. If one starts investing Rs. 5000 per month for 10 years, 20 years and 30 Years compounding annually at 14% the resulting sum would be Rs. 13,10,500, Rs. 65,81,731, Rs.2,77,85,278 respectively!

Also, this payment can be made in lump sum. Another benefit that we have with the Mutual Fund SIP is that today the sum of Rs. 5000 won’t matter much, but cumulatively it will make a huge impact.

5. Life Insurance: Life Insurance is one of the most important policy that one needs to undertake for any working individual, so as to support the dependent individuals in case of any casualties. Life Insurance is not an INVESTMENT, it is just an Insurance, and one should pay premiums only for the sake of securing the dependent members and not for Investments. Ideally, a person should opt for Term Insurance. The premium is much lower than that of normal life insurance policy.

The amount of life Insurance should be based on the future financial needs of the person. The sum assured should be chosen carefully, since higher the sum assured, higher will be the premium payable. The excess premium on the contrary can be utilized in better investment avenue.

6. Gold, Gold Bonds and Gold ETF: Gold has been a treasured investment since ages. The government has introduced Gold Bonds, which can redeemed after 5 years of investment. Also, the capital gains on Gold bonds are tax free after completion of 8 years. Gold ETF stands for GOLD Exchange Traded Fund, which can be traded on stock markets like any other fund/ shares.

To know more on investment in Gold, Bonds and ETF, please refer our previous article. The link for the same is here.

7. Chit-Fund and Patpedhi: Chit Fund is considered as micro-finance in smaller villages. However, it is largely based on luck. All the members in a chit fund need to invest some fixed amount every month in the chitty, and this amount is distributed to the members on lucky draw basis, assuming all the members will get this amount at least once through lucky draw.

Patpedhi is a Registered CREDIT CO-OPERATIVE SOCIETY, formed & registered under Societies registration Act 1960 by its members & shareholders contributing Capital in the form of Deposits among themselves & distributing Loan to its members.  There are some patpedhi societies who follow this practice even in metro-cities.

However, it is always advised to take loans from banks rather than resorting to such Patpedhi.

8. Bank Recurring Deposits and Fixed Deposits: Bank RD are one of the safest investments to start with, however the rate of interest are quite low. Recurring deposits are periodic investments incurred on monthly or quarterly basis of a fixed amount which is pre-determined by the investor.

Likewise, a Bank Fixed deposit is a deposit kept for a fixed period of time say 1 year with the bank. And after 1 year the bank will return the principal amount along with interest.

The current rate of interest with bank is 6.25% for a fixed deposit.

It is said that Bank deposits are the safest form of investment, however, it is to be noted that only a sum of Rs. 1,00,000/-  per FD is insured, in case a bank goes in debt.

9. Equities: Equities are investment in share markets, which is highly risky form of investment. Like it is said, No Risk No Gain, equities brings with itself good returns, only if you are investing under the right guidance and monitor the funds on regular basis. The returns of few stocks such as TCS, Infosys, Wipro, Eicher Motors etc have been almost 5-10 times in the past. The investment in Equities are made in stocks of listed companies and over a period of years, as the company performs better, the prices of the stocks increases and so does the value of investment!
10. Post- Office savings schemes: Some of the post office schemes are really good such as the Senior Citizen Savings Scheme, Kisan Vikas Patra, National Savings Certificate, Sukanya Samridhhi Accounts and so on.

These schemes provide tax benefits up to Rs. 1,50,000 per annum under Sec 80C of Income Tax and some of these even provide decent returns of 7 to 8% per annum. However, most of these schemes have a lock-in period, and if the investments are redeemed before time, some of the benefits such as Tax exemption and exit load are charged.

Let us look at a comparative chart showing all the pros and cons of the all above mentioned schemes:

SR. NO.	NAME OF THE SCHEME	RISK PROFILE	RETURN RATE	LOCK-IN PERIOD	RECOMMENDATIONS BY RICHVIK
1	EPFO	LOW	8.55%	Till retirement	There is no option to avoid this investment if your establishment has opted for EPFO. However, if given a chance, there is a better way to invest.
2	PPF	LOW	7.60%	15 years	It’s a decent form of investment for long term, however the period of investment is quite long, though partial withdrawal and loan is available from your PPF account.
3	ELSS	MODERATE	12%-15%*	3 Years	One of the best Tax saving option is ELSS. The lock-in period is pretty low i.e. three years only, also the gains from ELSS are exempt up to Rs. 1,00,000 from tax.
4	MFs	MODERATE	8%-15%*	1 Year*	Mutual Funds are one of the most reliable source of investment. Under the right guidance, MFs can generate great returns and help in achieving the financial goals of the Investors!
5	LIFE INSURANCE	LOW	4%-5%*	3 – 5 years*	It is always advised to indulge in a Term Insurance or ULIP plans, rather than policies which pretend wealth creation.
6	GOLD RELATED	LOW	2.5%- 5%*	5-8 years*	Gold Bonds and Gold ETF are good options to invest when one aims at investing in Gold. Physical gold should be purchased only when one needs to put the apparels to use.
7	CHIT FUND & PATPEDHI	HIGH	6%-8%*	VARIABLE	These should be strictly avoided. Wealth can never be created by lucky draw contests and practices as followed by Chit Fund and Patpedhi. It is always advised to approach a Bank in case one needs loans and invest in regulated schemes rather than Chit funds.
8	BANK RDS & FD	LOW	6%-8%*	VARIABLE	Bank FDs and RDs are one of the safest options for Investments, however with the falling interest rates it is advised to opt for alternate options providing better opportunities such as Mutual Funds! Also, they do not help in beating inflation!
9	EQUITIES	HIGH	10%-15%*	VARIABLE	Equity Shares are considered to be riskiest options while investing, however under the right guidance, Equities can create Wealth for the Investor over a long period of time!
10	POST OFFICE SAVING SCHEMES	LOW	7%	1-5 Years*	Some of the post office schemes such as the senior citizen schemes, Sukanya Samriddhi scheme give decent returns to the investors and also helps the government in undertaking the rural development activities.

Note: The rates with the * mark are variable, they depend upon the type of scheme and the time horizon for which you chose to invest.

We at RichVik, provide end to end financial services to our clients on their existing as well as prospective investments, based on client’s risk profile, time horizon and Goals.

To know more on investments, whether you are a new investor or an existing investor who wishes to upgrade their portfolios, feel free to contact us.

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