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What is meant by an investment?

Investment is often confused with savings. You invest money in an asset with the expectation that its value will increase over time. Your intention is to make profits.

You save money in a bank account to keep it safe and handy. The risk is low, and so are the interest returns.

Savings is a passive method of earning returns while investment is a more aggressive way of wealth making. The risk and the return are low in savings. The risk is high, and so is the possibility of returns in investments.

Investment Plans

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Mutual Funds

Mutual funds are one of the most preferred investment options these days. A mutual fund is a pool of funds collected from several individuals with a common investment objective.
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Public Provident Fund

It is a tax-free savings scheme regulated by the government which came into existence in 1968. The Public Provident Fund (PPF) is considered a great saving and investment tool.
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Senior Citizen Saving Scheme

Senior Citizen Saving Scheme (SCSS) is a savings option given by the government for Indian citizens over the age of 60.
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Monthly Income Plan

A Monthly Income Plan is an investment instrument primarily designed for risk-averse investors. Monthly Income Plans fall under the category of Hybrid Funds.
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Savings Account

It is one of the most trustworthy and secured options to save money that earns interest. The Savings account is a money deposit account an individual maintains in a bank.
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Fixed Deposit

Fixed Deposit or FD is an investment option given by banks and non-banking financial companies (NBFC’s). It is one of the easiest ways to earn more on your deposits.
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Why should you make Investments?

  • Investments are imperative in today’s world, as merely making money is not sufficient.
  • Your hard-earned money may not be enough to help you lead a comfortable and stress-free life without any financial constraints. To do that, you need to make your money work as well.
  • This is where investment comes into the picture.  Merely depositing your money in a bank will not help you meet your financial goals.
  • You need to make good investments to multiply it manifold. This is the main reason why investment plays a significant role in financial planning.

Here are a few advantages of investing your money,

Opportunity

Investments provide an opportunity to increase your wealth instead of staying stagnant with mere savings.

Good returns

Investments help you get good returns, and you can be ready to meet unexpected expenses like medical emergencies.

Minimize tax

You can minimize your tax outgo through various investment schemes.

Future support

The Investment enables you to build a corpus that will support your loved ones after your demise.

Fight inflation

The value of the money that lies in your savings account may depreciate in times of inflation. Investment helps you fight inflation by building value.

Financial goals

You can attain your short-term and long-term financial goals through investment in various financial avenues.

Types of Investments

We can classify investments broadly into two types – Traditional Investment & Alternative Investment. An Indian investor has several options in both these categories,

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Traditional Investments

Investments in financial products that have been around for generations fall under Traditional Investments.

Being a proven model that helps your money grow, many investors still consider Traditional Investments a safe bet.

Some of them are,

Mutual Funds
Mutual Funds have been around for a long time but have gained popularity only recently. Here money from thousands of investors is pooled and invested by expert investors in the capital markets for maximising returns. Mutual funds are classified into three types,
• Equity Mutual Funds - Investment in stocks and equities
• Debt Mutual Funds - Investments in bonds and government securities
• Hybrid Mutual Funds - Investments in a combination of equity and debt
Bonds
Bonds are instruments issued by large companies to raise debt capital from the public through the capital markets rather than borrowing from banks. You can buy these during a public offer, and the borrowing entity achieves its target by pooling money from thousands of investors. Bonds have stated rates of interest called the coupon rate. They also have a face value which is related to the price at which you buy them. They are listed and traded on the stock exchanges, and their market value can increase and, if you sell, this your return. Bonds are relatively safe investment instruments, and they carry a credit rating from a credit rating agency indicating their level of safety. Lower the risk, lower the interest rate.
Stocks
Stocks, the popular investment instrument in India, are equity shares issued by companies to raise capital from the public through the capital markets. By buying shares from the company, you buy ownership of that company and receive profits based on its growth in the form of dividends. Here the returns are not pre-decided or even guaranteed. The shares are listed and traded on the stock exchanges, and their market value can increase and, if you sell, this your return. The returns provided by stocks are generally higher than other investments, and so is the risk.
Fixed Deposits
Fixed deposits are fixed time investments that are safe and offer a guaranteed return. Risk-averse investors opt for fixed deposits, and they are offered by banks and non-banking financial companies (NBFCs) for choice of a specified period. The banks or NBFCs determine the interest rate for it. You have the option to take the interest periodically or at the time of maturity of the deposit along with the principal. As the Reserve Bank of India regulates the banks, there is an element of safety in bank deposits, while NBFC deposits carry a compulsory credit rating. You can take loans against fixed deposits and specified bank fixed deposits carry income tax benefits.
Recurring Deposits
Recurring Deposits are also fixed time investment with a fixed rate of interest, but you contribute the principal at regular intervals rather than in one lump sum. Recurring Deposits are secure as well as offer guaranteed returns.
Employee Provident Fund (EPF)
The Employee Provident Fund (EPF) scheme is a statutory investment option that employers provide to their employees. According to the law, any company with 20 employees has to offer the EPF scheme to its employees. EPF accounts are maintained by the Employee Provident Fund Organisation (EPFO) run by the Government. Each employee has to contribute a specified percentage of his basic pay towards this scheme, and there will be a matching contribution by the employer. The interest rate on this investment is announced from time to time by the Government. Your interest keeps accumulating in the investment, and it also earns interest, so you get the power of compound interest. Each year, the amounts you deposit in your EPF account are eligible for tax exemption under Section 80(C) of the Income-tax Act, 1961. On retirement, you can withdraw the corpus in your PF account tax-free.

Alternative Investments

Non-traditional and complex investments are termed Alternative Investments. It includes investment in gold, precious metals and other commodities that are expected to fetch profit in the future. Hedge Funds, Private Equity and Venture Capital, are a few forms of alternative investments. They have relatively low liquidity and also require a high minimum investment. Hence, they have not become widely popular in the Indian financial markets.

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How to select the best investment plan?

The first step in planning your investments is to shortlist the best investments that fit your requirements and needs. Here are a few things that you need to keep in your mind before choosing an investment plan:

Your age group – Young investors have a longer time horizon. You can select long-term investments with a scope even to increase your investments as you grow in your career. Young investors can afford to take risks as they have time on their side. On the other hand, older investors can opt for safe and guaranteed investment plans like Fixed Deposits. 

Define your goals – Your goals may be either short-term or long-term. For short-term goals, ensure you opt for safer investment options that offer guaranteed returns. For long-term goals, analyze the returns potential of the investments.     

Define your risk appetite – Don’t fall for schemes that promise you huge returns if you cannot afford to make a loss. Analyze the profile of the investments you want to target not only by returns but by their risk profile.

Avoid investing – in plans that are too complex for your understanding.

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