BEST INVESTMENT OPTIONS FOR SALARIED INDIVIDUAL IN INDIA
1. SIP in Equity Mutual Funds
Equity Mutual Funds schemes majorly invest in equity stocks. As per the current SEBI regulations for Mutual Funds, an Equity scheme must invest at least 65% of its assets in equity-related instruments.
A young investor has fewer duties and responsibilities in the initial phase of his/her career and the potential to take high risk. Therefore, they should consider investing in equity-related instruments. Within equity class, the investment should be done in a disciplined and systematic way i.e. instead of putting the money once in a year or so, it should be invested in installment every fortnight, month, or quarter. Within this alternative, one should choose a scheme which diversifies assets as per return and risk expectation and financial goals.
For instance, in the long run, one can invest in a mid-cap or small-cap fund for high return and high-risk options. And similarly, for the medium-term, one can go for a large-cap equity fund for getting a high return at moderate to high risk.
This alternative reduces the risk in the long run and if one has diversified the investment, then it further curtails the volatility risk.
2. SIP in Debt Mutual Funds
Debt-based funds majorly invest in fixed return instruments such as corporate bonds, money market instruments, Govt. bonds, etc. Debt Mutual Funds are relatively less volatile than most hybrid and equity fund categories as money market-linked fixed income instruments are less volatile than equities. Being invested in fixed income instruments, this alternative usually generates higher returns than fixed and savings deposits.
3. Public Provident Fund
PPF is one of the safest alternatives among all options because of the sovereign guarantee from the government. PPF investments also qualify for tax deduction under section 80C of the Income Tax Act. However, from this financial year, if one opts for tax assessment under the new tax regime, you would not be entitled to Sec 80C enefits. With a lock-in period of 15 years, PPF offers an interest rate of 8% which is compounded annually. However, the MoF (Ministry of Finance) reviews the interest rate every financial quarter on the basis of govt bond yields. Additionally, one can extend the investment period with a five years block after the maturity of 15 years.
The minimum amount to invest in PPF is Rs 500 in a financial year and the maximum is Rs 1,50,000.
The biggest drawback here is a lack of liquidity. Partial withdrawal is permissible only from the 7th financial year onwards. Premature termination of the account is allowed after the 5th financial year for serious ailments or medical treatment or life-threatening diseases or for higher education.
4. National Pension Scheme
The NPS is a government-backed retirement cum pension scheme. One gets high safety for investment with the sovereign guarantees backing the scheme. This alternative provides a monthly pension when one retires. Also, investing in NPS is eligible for additional tax benefits upto Rs 50,000 under Section 80CCD (1B) depending on the type of account one holds.This deduction is above regular deductions available under Sec 80C, 80CCC, and 80CCD where one can up to Rs 1,50,000 a year. Moreover, under Sec 80CCD(2), if you are in the high tax bracket, you can have your remuneration structured in a way that your employer contributes 10% of your salary without you having to do the same.
5. National Saving Certificate
Investing in NSC qualifies for tax deduction under sec 80C and comes with a lock-in period of 5 years. Being managed by MoF (Ministry of Finance), this alternative also has a sovereign guarantee. The interest rate is reviewed on a quarterly basis and the interest component accruing annually is deemed to be reinvested under Section 80C. Therefore, only the interest portion earned in the last FY of investment is taxable as per the tax slab of the investor. This gives NSC an edge over bank FDs in terms of tax efficiency.
6. Unit Linked Insurance Plan
ULIP combines market-linked investment with life insurance. A part of the premium is invested in bonds, stocks, market instruments, etc and the other part goes towards insurance of your life. They offer both maturity and death benefits. This alternative comes with a lock-in period of 5 years and qualifies for tax deductions under Sec 80C of the Income Tax Act. To suit carrying risk appetites, insurers also offer various fund options. One can also switch between these fund options to cater to the changing market conditions or risk appetite.
7. Small saving schemes of the post office
This alternative is extremely safe and tends to give higher returns than bank deposits. For instance, one can look at the National Saving Scheme which can fetch you a return of around 7.9% pa. Time Deposits can also be considered as they fetch an interest rate of 6.9% for 1 and 3 years and about 7.7% for 5 years. While the interest rates may not be the highest, they are still much higher than what banks in the nation are offering. And the cherry on the cake is, all post office schemes are very safe!
8. Recurring Deposits
An RD is an investment cum saving alternative for those who want to save a regular amount over a specific period of time and earn a higher interest rate. Every month, a fixed amount of money is deducted from a current or saving account. At the end of the maturity period, investors are paid back their principal along with accrued interest. At private banks, the minimum amount to initiate an RD can range from Rs 500-1000, while, at a public sector bank, an RD account can be initiated with a minimum amount of as less as Rs 100, whereas in a Post Office one can start a SIP with just Rs 10. The interest rate may differ from bank to bank, but it typically ranges between 7.25% to 9.25%, p.a., and at the post office it is nearly 7.4% (depending on prevailing market conditions). Senior Citizens may get 0.5% extra.
9. Corporate Fixed Deposits
Recommending any bank FD will be not a good choice as the returns on them are abysmally low at the moment and in most cases, they do not even cover the inflation rates. However, if you are a salaried individual, you can look at corporate FDs, which are AAA rated and offer a high amount of safety. The returns on these deposits can range from 8%-8.5%, while yields on a 3-year deposit can be as high as 9.5% on cumulative deposits.
But it’s important to remember that company FDs do carry a higher default risk as well and hence, one should look for high-quality and AAA-rated instruments. There would be a TDS that would be applicable if the interest amount exceeds Rs. 5000 in any calendar year.
For years, we have seen gold to be considered as the safest hedges against inflation. Instead of buying physical gold, one should accumulate the metal by investing in SGB i.e. Sovereign Gold Bond in a regular interval and get the benefit of interest income at 2.5% per annum along with the capital appreciation benefit in the long run. The redemption is tax-free on completion of tenure. So, by investing in SGB, one can get benefits like interest income, capital appreciation, and tax benefit on redemption.
Salaried investors should make investing a regular practice. They should not wait for the perfect time and sufficient income to start, but instead, start at whatever age they are and with whatever income they have. One can also seek a Financial Advisor’s or consultant’s help in deciding about one’s investment according to the income.