Why do people save money?
Moreover, from where will you save this money?
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Usually, people like to save some money from their regular income.
Saving money is a part of financial planning. It is done for future requirement and emergencies.
Future needs can include your child’s education, medical needs, house construction, festivals, marriage, car purchase etc.
In order to acquire any asset, mere saving doesn’t help as saving money and putting the same in a bank locker doesn’t really provide the benefit of return.
With time, value of money decreases.
Remember, the value of Rs.100 today will continue to decline in the future.
Thus, it is important that you adopt a proper investing plan to ensure you beat inflation and generate a substantial return for your investments.
As an investor, your main motto would be to attain returns. The money kept in a bank fetches some interest, but there are other avenues that can give you higher returns.
Selection of an investment instrument depends on multiple factors and is driven by the psychology of the investor.
What are the various investment options available to an investor?
People who are very conservative and not willing to take risks may find bank deposits a good investment option.
Though bank deposits offer low interest, the money kept in a bank is safe, liquid and the investor need not bother with reviewing the performance.
Bank deposits could be fixed deposits (also known as term deposits) or recurring deposits.
The returns offered can vary from 6-10% typically.
2. Go Gold!
Gold is a good investment avenue.
The price of gold has been increasing over the past decade, but the metal is not very liquid and may not be a good investment option for medium term.
In fact, people are shifting towards financial assets from precious metals.
Provident Fund is another area which is basically a safety net after retirement.
It comprises of Public Provident Fund (PPF) and Employee Provident Fund (EPF).
It is a risk-free investment, but the returns are in the range of 8-9% and thus face the risk of inflation.
This sort of investment is a traditional in nature and is viewed more as a source of money for the future that may be required for children’s education, marriage, and income after retirement.
Also Read: Mutual Funds vs PPF – Which one to choose?
4.New age investment instruments – Mutual funds
Depending on the investor’s psychology, a good number of investments are made in direct equity, equity mutual funds and debt mutual funds.
These instruments tend to provide higher returns than any other instrument available in the market, but at the same time, it comes with a higher degree of volatility.
Thus, success in these instruments requires a good understanding of the capital market, periodic review of investments and fundamental thesis behind the same.
Following table details the kind of investment instruments available with an investor:
Investment instruments and their profile
|Direct Equity||High||Can be sold anytime||High||Market linked||STCG – 15%
LTCG – 10%*
|Mutual Fund Equity||Moderate-high||Open-ended^||High||Market linked||STCG – 15%
LTCG – 10%*
|Real Estate||High||Can be sold anytime||Low||Market linked||STCG – slab based
LTCG – 20%**
|Gold||Low-moderate||Can be sold anytime||Varies||Market linked||STCG – slab based
LTCG – 20%**
|PPF||No risk||15 years||Partial withdrawal^^||7-8%||Interest tax-free|
|Bank deposit-fixed||Low||7 days to 10-year||Premature exit||6-10%||Interest taxable as per income slab|
|Debt Funds||Low-high||Open-ended||High||Market linked||STCG – slab based
LTCG – 20%**
|RBI Taxable bonds||No risk||7 years||Low||7-8%||Interest taxable as per income slab|
|NPS||Low-high||Below 60 years entry age||Limited||Market linked||40% of corpus tax exempted|
|Senior Citizen Savings Option||No risk||5-Years||Low||8-9%||Interest taxable|
Note: STCG – Short-term Capital Gain; LTCG – Long-term capital gain; Gains up to Rs. 1 lakh exempted;
** Post indexation; ^ELSS comes with 3-year lock-in period; ^^ Subject to conditions
For physical and paper gold, and debt funds, long-term is 3 years; For real estate, long-term is 2 years
Source: The Economic Times, Author’s note
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