Where to invest:
A basic question which is not easy to answer and opinions galore to increase the complication. The question is best answered by analysing your risk appetite and spreading the risk over various asset classes. Lots of jargon? Let’s demystify fundamentals of investments for you and attempt to present it in simple terms with an Investment in India perspective.
Identifying disposable surplus:
The first step of the process involves identifying how much you need for sustenance, education, travel, entertainment, rent, shopping, EMI’s, Insurance and any other daily needs. This exercise will result in discovering your investible surplus out of your post-tax income.
One can set aside the surplus of the family income and allocate it in various financial instruments available in the market:
1. Fixed Deposits with banks: maturity depending on when you may need the money. For e.g. you don’t need the money for Insurance every month, the premiums hit you at fixed intervals. You can set aside the premium amounts in a fixed deposit maturing when you actually need it. Likewise, you can invest in recurring deposits setting aside a fixed sum every month which matures when you need the amount for a specific purpose. This ensures that your money earns while it waits to be paid or invested.
2. Tax saving investments: The Indian Income Tax Act offers incentives by way of tax saving by encouraging investments in specified securities. These include long term fixed deposits with banks, Public Provident Fund (PPF), Equity Linked savings schemes (ELSS), Life Insurance Premium, Medical Insurance Premium etc. This ensures you save tax and left with a greater investible surplus.
3. Other Fixed Income Securities: Based on your risk appetite decide on balancing your portfolio with investments in Debt funds, Fixed Maturity Plans (FMP), Bonds, Debentures, Company Fixed Deposits, Post Office Saving Schemes, Recurring Deposits etc. (Interest income from fixed income securities is taxable)
4. Direct Equity investments: Investments in equity shares of listed companies, subscription to Initial Public Offerings (IPO), Mutual Fund investment in Equity Funds, Balanced Funds, Index Funds, Sector Focused Funds.
5. Systematic Investment Plans (SIP): This is the best way to beat the volatility of the Stock / Equity Markets. A fixed sum invested on a fixed date every month ensures that the investment catches all cyclical movements of the market and achieves a great average price over a period of time (ideally 3 – 5 years or more) to beat the index and yield a higher return than Fixed return securities. As an icing on the cake, dividend yield and capital gains (for investments above one year) are tax-free. The longer the period of investment, the higher the return.
6. Systematic Transfer Plans (STP): This gives you the best of both worlds. You can park your investment in fixed return yielding debt mutual funds and give standing instructions to transfer a fixed amount at regular intervals to the Equity Fund or balanced fund.
7. Pension Plans: These plans are offered by insurance providers whereby you pay annual premiums during your working years and get a return after retirement. This is especially beneficial for Self Employed people who don’t end up savings in Provident fund or get a pension at the end of their career.
8. Real Estate Investment: Real estate is an exciting class of investment altogether. Here you may choose to invest in ;
Residential property in anticipation of future appreciation,
- Commercial property in anticipation of appreciation as well as a good rental yield.
- Co-ownership of Property: you have the choice to own the property individually or you have to get into co-ownership arrangements which have started mushrooming and options are beginning to appear.
- REIT (Real Estate Investment Trust): If you want to avoid getting into transactions, paperwork and the risks involved you may invest in a REIT (Real Estate Investment Trust) which is a fund which invests in real estate assets and holds them in trust for the investors and distributes the rental yields and capital appreciation among the investors after deduction of management charges.
There are tax incentives on repayment of principal and payment of interest on housing loans which makes leverage an attractive proposition for investing in residential real estate.
An ideal portfolio allocates investible surplus among the various options based on:
- Risk appetite (higher the risk, higher the return and vice versa!)
- Target return on investment
- Need for liquidity to manage immediate and forthcoming needs
- Need for a steady passive income v/s reinvestment of the income
- Planning for setting aside sums for acquiring assets
- Planning for children’s education
- Planning for retirement and post-retirement needs
Two words on Investments in India:
India’s investment landscape provides high returns on fixed investment products as compared to other countries in the west and offers relative safety on such investments as the markets are well regulated and matured. This offers a good hedge against investment in riskier equity-related investment options (which is well regulated as well and has many unicorns in the making) and offers a better balance to the portfolio in order to achieve our short term and long term objectives. Thus it makes perfect sense for NRIs to Invest Abroad (in India) and ensure that their investments increase with the rise of Indian Economy.