Grow Your Money - 13 Tools to Invest Smartly
The Importance of Investment
Imagine you live in a dense forest, surrounded by trees. The weather at your place is windy. Trees keep falling. And you have observed that at remote places, there have been instances , where trees fell off, because of aging, winds etc. They brushed up with neighboring trees, giving birth to a wide spread forest fire. You are very well aware of the fact that, your home, your wife, your kids, your precious things at home, could be burned to ashed, IF you are not prepared to fight the fire. So, you decided to dig a deep well, and let the water accumulate overtime, when it rains. You made sure that it is preserved throughout the year, in case of massacres like forest fire.
But wait! By now, you must be wondering "I am here for learning about investment, not a bedtime story!" - I know. I told you the story - because it is a very closely associated metaphor for the life (forest) we live in. The forest fire is nothing but inflation, financial goals, medical emergencies, family requirements and much more. The well is nothing but investment. The money that's accumulated is water. More water, more safety. And that's why investment is very important. Like forests have forest fires, life can have innumerable calamities, totally unprecedented at times. Being prepared for them, is the habit of only the smart, and intelligent people. But what kind of well should we dig to amass maximum water? I have approached the best mason (financial adviser) and here are the tricks to accumulate (grow) more water (money).
My article is divided into two sections. Long Term Investments and Short Term Investments.
Lets go through them.
Important Question - How can MY money work for ME ?
Let's be logical. Your money works for you in only two ways:
- If you purchase something whose value will elevate overtime. For example - House, Gold
- If you give it to someone/some entity, you will get it back along with interests. For example - Fixed deposit, Mutual funds.
Based on the logic above, and based on several researches, I have summed up BEST investment options for you.
Public Provident Fund (PPF)
Public is People. Provident is gearing up for future. Fund is money. So its money that helps people gear up for the future (calamities). I will only highlight the important points here. Lets quickly take a look at the highlights:
- Minimum amount - 500/- | Maximum - 150000 /-
- Lock in period - 15 years. Can not be withdrawn prematurely.
- There can be 12 payments or 1 payment per year.
- 8.7% compounded annually. The Compound Interest Equation is P = C (1 + r/n) nt Where P = future value, C = initial deposit, r = interest rate, n = # of times per year interest in compounded, t = number of years invested.
- Tax saving benefit under section 80C up to maximum Rs.1,50,000
PPF is ranked as #1 investment option. Here is the calculation of PF for a minimum amount of 500/-.
You are well aware of share trading. I will still summarize it for you.If you want to set up a company, you will need money. If you do not have sufficient money, you can ask people to pay you via shares. Investing in mutual funds means investing indirectly in shares. So, in mutual funds, you are not directly investing into shares, but via mutual funds. We will particularly focus on one type of mutual fund out of the three i.e. Systematic Investment Plan, a.k.a. SIP.
SIP is the smart and hassle free mode of investing in mutual funds. You have an option to invest in SIP weekly, monthly, quarterly and yearly. The money gets debited automatically from your bank amount on the date which you decide. You will be allocated certain units based on the ongoing Net Asset Value (the heck is that? - Its Asset Value minus Liability Value of an entity. Don't worry about it.). Now we need to leave the money growth on two things - Rupee-Cost Averaging (money fetches more units when low price and vice versa) and The power of Compounding. These are the top 10 performers in SIP:
- SBI Bluechip Fund
- Birla Sun life Front line Equity Fund
- Kotak Select Focus fund
- ICICI Value Discovery Fund
- ICICI Focused Blue Chip fund
- Kotak Regular 50 Fund
- Axis Long term Equity Fund
- Reliance Tax Saver Fund
- Motilal Oswal Focused 35 Fund
- Goldman Sachs Liquid BEES
Minimum amount can be 500/- or 1000/- per month : depends on the company you invest in. There is no penalty for withdrawal. But for higher returns, it is very important to keep the money invested for a longer period of time. My colleagues have SIPs running in https://www.myuniverse.co.in. And it has helped me in dire circumstances. It might help you too!
Equity investments are one of the most rewarding investment options, as they have outperformed all other investment modes. You are already aware of what a share is. When you buy a share of any company, you are tagged as a share holder of that company. Equity is just the synonym of shares. As a word of caution, equity is sort of gamble. More risk, more money. If the prices move unfavorably, you could lose all your money. But on the contrary, if the market is in your favor, you can earn a handsome reward!
There are couple of things you need to do before investing in Equity Market. You will need an net banking activated for your bank account. Next, a trading account and a demat account. You will be buying shares from the trading account. Money for buying the shares will come from your bank. The purchased shares will be stored in your demat account. Now a days, there are couple of banks that provide demat cum trading account. Some of them are Axis direct, HDFC securities, ICICI direct etc. Zerodha has been rated as one of the best platforms for online trading.
Again, couple of rules that you need to keep in mind while trading in shares.
- You need to do a survey of the best performing companies, that is looking out for growth and is sustainable. Choosing the right company is very important.
- Invest for a longer period of time for better returns.
- And finally, diversify your investments. You should hold 15 to 20 different shares, as recommended by best share trading platforms.
If you find share trading a daunting task, its better to create a portfolio (bunch of best performing companies by experts) , and invest in mutual funds.
Hold the Gold
When I was a newbie, I never thought that investing in gold can be a boon. Turns out that gold is an all season asset, quotes financial experts. It will help you fight against inflation (increase in price of a commodity, fall in purchasing value of money). For example, if the investment in equity (or, any other medium) does not show returns overtime, and if you have gold as an investment, it will help you reduce the overall volatility of your portfolio (collection of assets that you have in the form of bonds, stocks etc). Should you invest in gold? - Yes, because, it has maximum returns as compared to other investments (a staggering 35% on an average). Again, the demand for gold is 10,000 tones more than supply.
Next, how to invest in gold? Simple. Purchase jewelry, gold coins or gold bars. Sell them off at the right time. That's something you would have anticipated as a means of investment, before even I explain it. But what you are unaware, and what you really need to know is Gold EFTs. That is Gold Exchange Traded Fund. Hey, whats that? - That is mutual fund schemes, that will invest money collected from you in gold. The money you paid will be indicated in units, and will be listed in stock exchange. To do that, you need to buy gold EFTs from the stock exchange, by having trading and demat account.
To bypass the hassle of having demat account, you can use another investment option called Gold Funds. This will invest in gold EFTs on your behalf. You know SIP right? This is similar to the process of investing in SIPs. But which one should I go for - EFTs or Funds? - For buying gold in less quantity, go for funds. For more quantity, go for EFTs.
Note that this is an equity based fund, so there is high risk. Do a survey of all the gold schemes, and then choose your EFTs and mutual funds wisely! Also, there is no right time for investing in gold. You can start, right now!
Company Fixed Deposit
You know what a fixed deposit is. A deposit that is fixed for certain years, aimed to give you some amount more than you invested. I guess I made it more simpler than it should be. And when I said that, you imagined your favorite bank. Isn't it? But what you do not know is there are companies that provide fixed deposit too. And rate of interests of a company fixed deposit is more than that of a bank fixed deposit (1% to 3%). It has few changes as compared to a bank fixed deposit. But it comes with risk. More risk, more money. To summarize, bank FD has less risk, less interest, while a company FD has more risk, more returns. But whats the period of investment? - It ranges from 1-3 years.
Whenever risk is involved, you need to play carefully. You need to check these three things before choosing a company to invest into:Company background, Credit rating, Repayment history, Interest rates offered, Minimum and maximum amounts, Penalty on pre-closure of deposits, option to assign a nominee,
But how are the interest rate determined? - duration of the term deposit, cumulative or non cumulative rate of interest (non-cumulative is interest payable on half yearly basis. Cumulative is interest on overall duration of investment), age (- senior citizens get more interest!), family schemes (if each family member opens a FD with the same company) etc.
Remember, company fixed deposits are unsecured loans, repayment of principal and the interest thus accumulated are not guaranteed. If you really want to invest in company FD, checking the credit rating is very important. How can I do that? - Familiarize with the acronym CIBIL - Credit Information Bureau of India. Because they give credit ratings to companies. Just visit https://www.crisil.com/ and put in your the company's name in which you wish to invest. When you see something like AAA, invest in that company right. Refer the image for rating related information.
ULIPs - A Combo Pack
What is ULIP? - Its abbreviated for Unit Linked Insurance Plan. What if I told you that you can have a plan, that is a combo pack of both - Investment + Insurance ? That's exactly what ULIP is. So such plan will also provide a risk cover along with returns. The investment can be in stocks, bonds or mutual funds. This plan is solely linked with capital market.
If you are someone who closely track your investments, are looking for medium/long term investment,and are ready to take calculated risks - this plan is for you. Age is no bar, as there are variety of plans suited for most age groups.
There are lucrative options in ULIP plan. You can have one single investment instead of regular premium deductions. You are having a risk cover along with an investment with good returns. You can partially withdraw funds, abiding to the terms and conditions of the company you invest in. Switching between funds is possible i.e. when the market is volatile, or when there are interest rate fluctuations, you can choose between equity and debt funds (switching limit depends on what plan you invest in).
You should keep in mind that there are couple of charges levied when you go for ULIP. Let me give you an example of SBI Life Wealth Insurance (which is rated as top ULIP investment option). Minimum premium is 50k. 3% of single premium goes for premium allocation charges. Policy admin charge is Rs. 45/- . There might be fund management charge and morality charges as well (don't worry - they are minimal). And in this plan, you can switch your fund twice in a year. Likewise different plans have different conditions.
We never talked about tax, did we? - No. You will get tax benefit under section 80C, 80D and 10(10D). You can google out what these sections are meant for.
To choose a good ULIP plan, be clear with your insurance and investment objectives, evaluate risk and financial stability, understand all charges levied, compare all ULIPs available in the market and finally, checkout the performance of the plan you've chosen for the past years.
Note: ULIP is a subset of what is called an Endowment Plan. These plans can also be non-ULIP based.
Post Office Monthly Income Scheme
MIS is not a well known term for urban investors. People living in a city or town choose all the other schemes apart from MIS. This is the most promising mode of investment with myriad possibilities. Here, you get a assured, fixed amount, or you can say salary every month depending on the amount you invested. This is the most preferred and risk-less investment, provided you have a handsome amount to invest. Everyone is eligible to open an account in MIS. Let's get into specifications.
You can nominate anyone before or after the account creation. The account can be transferred from one post office to another. Joint account can be opened by two to three individuals. Single can be converted into joint account and vice versa. Maximum amount for single account is 4.5 lakh and for joint account it is 9 lakh. For this scheme, the interest rate is 8% and bonus that you get after maturity period is 5% of the amount you invested.
See the image for example. I have used https://www.investmentkit.com/government/pomonthlyscheme-calculator.shtml to demonstrate the example.
As you can see from the image, investment of 3 lakh for a year will grow to 3.15 lakh after maturity period. Isn't this great? I will leave it to you to decide.
The Tax Saver Investment - ELSS
ELSS? What's that? - Equity Linked Saving Scheme i.e. Saving scheme linked to equity, a short term investment option. And why is this preferred investment option - It gives you tax deduction along with investment in equity market. So summarizing it simply it is a investment scheme, that offers twin advantages - capital appreciation and tax saving. Let's get into the specifications.
Lock in period is another benefit - 3 years. The returns are linked to equity market. You can start with a minimum amount of rupees 500/-. There is no upper limit defined. As it is an equity scheme, earning potential is high.During the lock in period, if you wish to earn, you can opt for dividend option. Please consult a tax consultant or a financial advisor before investing in this scheme.
Check out the image for illustration.
Money Market Funds - Easy access to money!
This is another best short term investment plan. The synonym for MMF is Liquid funds. It is a category of mutual funds which invests in several money market instruments. This plan focuses more on liquid money. It offers higher returns than savings bank account. You can go for this plan if you want your money to be easily accessible in case of unforeseen events. You get reasonable return, with low risk along with high liquidity.
Your portfolio will be made of short term debt securities aimed at keeping a steady growth of Net Asset Value. This plan has no lock in period. The redemption request is processed with 24 hours on working days, generally before 2 pm. During inflation, the reserve bank usually keeps the interest rates high, helping liquid funds to gain more value.
What to keep in mind while investing in liquid funds? - Fund size, credit score of the underlying securities and its track record. There are various plans available for this scheme - growth plans, daily/weekly/monthly dividend plans; you can choose the plan best suited for you needs.
ICICI Pru Money Market Fund (G) and HDFC Liquid Fund (G) are top rated plans so far. SBI Premier Liquid – RP (G) stands third in this category.
Senior Citizen Saving Scheme
This is the best plan for investment if you are 60+ years of age i.e. senior citizen. Why? -
- regular income
- high safety
- tax saving
After retirement, people are hesitant to put their hard earned money in high risk platforms, which do not allow premature withdrawal and comes with certain lock-in period. This scheme is backed by Indian Government, so it assures good returns.
You can visit a post office or a scheduled commercial bank to open an account. The account can be single or a joint account. You can invest up to rupees 15 lakhs. There is no limit to number of accounts that you can create, however, money invested should not exceed maximum limit.
You can open an account in a post office only if you have a running post office savings account. Same applies to scheduled banks i.e. you should have an account with that bank. The duration of this investment is 5 years, you can add 3 more years once the 5 year-tenure is completed. Premature withdrawals are allowed, but only after a year, and that too with some premature charges. Nomination facility is available, so the depositor can nominate, say his minor with some processing formalities.
This section qualifies under section 80C of income tax, but only under the overall ceiling of 1.5 lakh rupees fixed for all investments.
IPOs - Companies Going Public
IPO stands for Initial Public Offering. For the first time, we can say that a company is going public by asking people to purchase its shares. Until then, it is called private. As stated before, every company needs money for various purposes. One of the means is to ask money from people. It will offer shares to people, which are also listed in the Stock Exchange. If you buy it from the companies directly, it is called buying from the primary market. If you buy shares form brokers, it is called buying from the secondary market. Once you buy those, you can sell them off, when their price rises, just like you do it in an equity market. You need to be watchful of IPO advertisements. Once you see an add, you can either get it from nearest financial agents, or online too. Do a through out survey about the company you buy IPOs for, there are companies who might put you in a trap.
Big Question - Should I invest in IPOs?
There is a mix opinion about investing in IPOs. Not all IPOs are bad. The downside is - they under perform in the long run and they are usually expensive. To be a smart IPO investor, you need to carefully scrutinize the company's details - About us | Introduction | Risk Factors | Financial Information and then take a final call.
NSC - Tax Savings with Guaranteed Returns
National Savings Scheme caught my attention, when I calculated the annual returns for PPF and NSC. I found it to be better than PPF. How ?
If I invest 30k in PPF and the same amount in NSC, PPF yields Rs. 32,400, while NSC gives me Rs. 32,448.
NSC is a post office saving scheme, backed by the government, which assures tax saving along with returns. You need to purchase either of the two certificates - NSC issue VIII (maturity period - 5 years, 8.5% interest) or IX (maturity period - 10 years, 8.8% interest). They are sold in the denomination of 100, 500, 1000, 5000 and 10000. So if you want to invest 30k, you need to buy 3 certificates of 10k each. The minimum amount remains Rs. 100/-, and no upper limit. You can have a single or a joint account.
Premature withdrawals? - This can be under three conditions. Death of account holder, forfeit pledge by a government officer and when ordered by the court of law. If these do not occur, then three conditions exist. Encashment in less than a year will give you no profits, just all the amount you invested. In more than one, but less than three years will give you profits that are accumulated by simple interest. For more than three years, you get you get the money with full interest.
As an example, check out the image. I have used http://www.icalculator.info/india/finance/nsc-calculator.html for showing you the returns.
We know that any company needs money to grow. One of the way we saw in the above tools is by issuing shares. Investor purchases a share, becomes owner of that company, and sells it off when company is in profit. That is called equity trading. Debt means the sum of money that is due. Debt investment is a way by which an organization raises money by selling bonds, bills notes etc. to an investor. The investors receive the principal amount back with interest. So, a company gets a loan and promises to repay the loan overtime, with interest. You will hear the word bonds very frequently, which is one of the types of debt investment.
Your profit is not dependent on the profit of the borrower. So, if you invest Rs. 1000/- in Microsoft, and if Microsoft makes a profit, your profit remains the same, irrespective of the profit gained by Microsoft. But what about the risk? - If Microsoft is unable to pay back your money, and if they declare that they are bankrupt, you are at a loss. You will face complete loss of investment.
Having said that, you should note that they are less riskier than equity investments. Debt funds are even better than fixed deposits and savings bank account. you can consider investing in debts if you financial goal is less than 5 years away, and you do not want much risk.
What should I look for, while deciding best debt plan - You should check for the past performances, risk profile and credit quality of the plan you want to go for. You can buy bonds either in the primary market (directly from the exchange) or in the secondary market (through a broker). Company will issue a bond, and you will need to fill out an application form and submit it to any branch of issuing company. You need few proofs along with application fees. The bonds gets credited in demat account if you have one. Else you can receive them in physical format.
Bonds are safe investments, which provides predictable returns. When you do not want to risk your money, investing in debt tools is wise.
Real Estate Investment - A bad investment!
You will also notice that I have not enlisted Real Estate as best investment option. Why? - You are investing huge in a non-regulated market. It is non transparent with less tax benefit. It is hard in terms of liquidity, has black money involved, might have non authentic data and the documents are physical. Just flip all these conditions for equities. Yes, its is true. Do not go for real estate investments.
Investment helps to create more money. Now you should be in a good position to decide, as to where you want to put your precious money into. You do not want to have your house burned amidst forest fires. You want enough water resources to defend the wrath of fire. And you can never afford to collect water, when fire already starts engulfing the forest.
When you have enough wealth, you can be prepared for emergencies, you can fight inflation and fulfill financial goals. But investing wisely and in a proper investment tool is very important. I would love to hear from you about which investment tool helped you grow your money. Also, if you have any suggestions/feedback, do write to me and I would be glad to acknowledge it.