Investment Tips for Beginners: Part 4

Now that you have a brief overview and knowledge of the type of investment and savings option you have, let’s get started with things you can do to get your investment ball rolling with minimized risks.

As this post is all about helping beginners with investments, I have listed down more traditional and tried and tested ways to invest in India.

1.       Get yourself an LIC:

The first investment for anyone should be a life cover, and LIC seems to be a good enough choice for simple no frills insurance plans. It is advisable to get a life cover ten times your annual income. Usually getting a simple term plan is a good option as you can get more sum-assured for lower premium amount paid. Though it does not have any monetary returns, consider this as an investment for your loved ones, who may be affected in your absence. For good returns there are various Unit linked Insurance plans or ULIPs and endowment policies etc, which can also be opted for. But initially a term plan can get you started, and the younger you start the lower your premium will be. This term plan should be your primary life insurance and later on you can opt for top up insurance and other plans as mentioned above for life cover plus return on investment. There are various reputed private and public sector companies apart from LIC who offer good and competitive policies, but as I said for starters LIC is a good choice. You can even avail a loan against policy from LIC.

2.       Get a public provident fund (PPF) account:

Irrespective of your company providing for EPF, you can and should opt for a PPF account. The Government of India provides public provident fund which is sort of a savings cum tax saving account having a lock in period of 15 years and can be held with the Indian Post Office or any Nationalized Bank branches. ICICI is the only private sector bank in which you can open a PPF account. The great thing about PPF account is that the amount you invest in it is completely tax free and it gets a compounded interest of 8.70 % p.a. and this interest is also tax free. Further, you can also avail loan from the PPF account from the 3 rd financial year onwards. This can be great option for those self employed individuals or professionals on who most banks frown upon for personal loans. The best part is the minimum amount required is just Rs. 500 to be deposited at least once in a year and a maximum of Rs. 1,00,000 can be deposited in a single year, with not more than 12 deposits in a year. You can freely add more to your PPF contribution as and when as long as it does not exceed the maximum limit. The 15 year lock in also serves as a good way to ensure forced savings and when you actually withdraw the amount you will be pleasantly surprised at what you get. A lot of people consider PPF as a pension fund for their retirement years as well.

3.       Start an SIP in good Mutual Funds or Exchange Traded Funds (ETF):

Mutual funds or ETFs invest in stock markets and various commodities like Gold etc and SIP is the best way to invest in mutual funds. SIP is systematic investment plan, which lets you invest a small amount on a regular basis thus protects you from volatility of the markets. It works on the law of averaging and you should get good returns on investments if you invest money for a long term, say 5-7 years. How it benefits you is that say you can spare 500 or 1000 bucks every month but this small amount may not be able to buy substantial number of shares or gold for you. Just like you a lot of people may invest their money in mutual funds. This helps fund houses to build a corpus large enough and as mentioned before, they have experienced fund managers who know when to enter and exit the markets. You earn returns proportionate to your contribution and you get Units allotted to your portfolio which have a value known as Net Asset Value (NAV) which helps you keep track of your fund value. The best part is it automates your purchases in a sense that it is always advisable to buy more when the markets are down and less when they go up. This is automatically taken care of by the SIP. You pay a fixed amount say 500 a month, if that month the markets are down, you automatically get more units allotted to you as they are cheaper, and when the markets are up, your same 500 will buy you less units, thus averaging the profit and loss over a long run. As your income increases you can increase your SIP amount. There are a lot of tax-saving mutual funds known as Equity Linked Savings Schemes (ELSS), which also help you save tax. Be sure to check the ratings of the funds before you make an investment.

4.       Recurring Deposits:

Recurring Deposit account can also be great as a savings and investment option and has good interest rates. It is also a great option to get the money rolling. It simply works like this, you give the recurring deposit application to the bank, and it deducts the said amount from your said bank account every month. On this amount the bank gives an interest as per the applicable rates and you get the principal plus interest amount at the end of the deposit tenure and you can easily renew it for same value or lower or higher value. A great example of how RD can be used is let us say you are in the first year of first job and are still learning about your finances but still want to save say 1000 a month. RD can be a good start. You can have a deposit Rs. 1000 per month in the RD account with your bank for a year. This way you cannot use that 12000 for a year and at the end of the term you get the principal amount along with the accumulated interest. This amount you can now invest in any other way say an SIP of 1000 a month and this is not even going from your current income as this is the money you put away last year. You can still have the same Rs. 1000 be deducted from your account this year for RD as well. Thus your outgoings remain the same at 1000 but you get the double benefit of multiple investments just by the money you saved previously thanks to your RD account and still you have some additional interest money.

5.       Never be lazy to file your IT returns:

Ever since I started working, I have had some people around who never bothered with filling their Income Tax Returns as they never felt the need to go through the ‘jhanjhat’ as they had a handsome salary. Cool, but what happened was, the company deducted TDS at 10% p.a. and even if an individual was drawing say a start-up salary Rs. 15,000 at that point he paid 18,000 as tax ([15,000X10%] X 12 months) even before filling his/her ITR. Well here’s where and why you lose out. As per the current IT laws, you are not liable for tax if you do not fall under the minimum tax bracket of 2 lac – 5 lac, where you are taxed at 10 %. Thus your 18,000 should be refunded to you, (TDS is compulsory deduction which is unavoidable, but a refund can be claimed at the end of the financial year) which is as good as having an extra bonus salary and hence filling a return is necessary even if one ignores the legal and taxation laws. Also it is a proof of your income over the years and in the future if you apply for a loan of any kind, ITR copies are needed for at least the last 3 years. Even if your income is in the taxable brackets, still only the amount of your income that crosses the minimum tax bracket will be taxed. Moreover certain investments are totally exempt from tax and thus this reduces your tax liability and you will most likely get some sort of refund once you file your ITR. This can be an additional source of income in the next financial year, and this refund is tax free so it will not be included in your annual income for taxation purposes.

Investing early and investing smart is always a healthy way to build a corpus for those rainy days. The sooner you start the longer you have to multiply your money and also you will most likely have less responsibilities and outgoings early on in your career than at a later stage. The investment options mentioned above are just a tip of the iceberg and once you get hold of and have sufficient comfort level understanding and handling your investment and money, you can invest in other avenues as well. These investment habits will generate some good extra money and as you go along you can have various other investment options and develop a sense of savings in you, which will go down well for years to come.

Aniket Vaishnav