In my last post ‘Compounding- The 8th Wonder’, I had shared how small investments can give you wonderful returns. In this post I’ll share what are different investment avenues available for investing the money.
There are two types of avenues available for investment, Financial and Non Financial. The Financial avenues of investment can broadly be categorized in Debt, Equity and Insurance. The Non- Financial avenues of investment can be categorized into Real Estate, Gold, Commodities etc. To invest in non financial instruments of investment we require a large sum of money. In my current post I’ll explain the financial avenues of investment.
Insurance: Insurance is the first step towards financial freedom and one should start his investment planning by investing in insurance. There are different insurance policies like Term Plan, Endowment Plan, ULIPs, Pension Plans, Health Insurance etc. Each insurance plan covers a specific risk of the assured. Term Plans cover the risk of life of assured and are very low cost. Endowment Plans help plan mid to long term financial goals. ULIPs are market linked insurance plans and give very good returns in the long term and Pension Plans ensure you don’t change your life style even after retiring from work. Health Insurance takes care of all the medical emergencies of the assured. Investments done in life insurance and Pension Plans are eligible for deduction under Sec. 80-C of IT Act- 1961 and investments made in Health Insurance are eligible for deduction under Sec. 80-G of IT Act-1961.
Debt and Debt Instrument: Debt is a loan you give to someone. Debt instrument is one through which you lend money to a company. There are different types of debt instruments like Savings Account, Fixed Deposit, Bonds (Debentures), Govt. Securities, Post Office Securities, Money Market Instruments etc.
- Saving Account:
- Fixed Deposits:
- Recurring Account:
- Bonds (Debentures):
- Public Provident Fund:
- Govt. Securities:
- Post Office Instruments:
One should keep an amount equal to at least six months of his salary in savings account at all point of time. This amount should only be used as contingency fund. If you get a hike in your salary you should also increase this fund by six time of your salary increment. Banks pay 4-8% annual interest on savings accounts.
FD’s has varied maturities but had assured returns. The longer the time period better the returns will be. Penalty is charged on the premature encashment. FDs done for a period of 5 years and above are eligible for deduction under Sec. 80-C of IT Act-1961 subject to a limit of Rs. 100,000/-.
Recurring deposit are term deposits in which a fixed amount is deposited every month. The interest paid is almost equal to the interest paid to FDs. R A/c helps you to build up their savings through monthly installments of a fixed amount over a fixed period of time.
Bonds has fixed maturity date and provide regular income. The market price is sensitive to interest rate and credit rating. Corporate bonds offer higher returns than the Govt. bonds. The returns are of the tune of 7-10% per annum.
One can invest from Rs. 5,000/- to Rs. 100,000/- in PPF in a financial year. The deposits can be made in lump sum or 12 installments. PPF gives a return of 8.7% per annum (in FY 2014-15). Investments done in PPF are eligible for deduction under Sec. 80-C of IT Act-1961 subject to a limit of Rs. 100,000/-.
Govt. Securities are issued by central or state Govt. with a fixed maturity of period of 2 to 30 years. These provide regular income and have high liquidity low volatility.
Monthly income scheme, Kisan Vikas Patra (KVP), National Saving Certificate (NSC), Time Deposit etc. are Post Office Instruments. They are low volatile and offer returns in the tune of 8-9% per annum.
Money Market Instruments:
They mature within a year. They offer high liquidity, low volatility and low returns (3-4%).
Equity and Equity Share: Equity is ownership in a company. Equity share represents proportionate ownership in the company. It means you own a part of the company. There are two types of equities, Equity Share and Preferential Share.
- Equity Shares:
- Preferential Shares:
There is no maturity date of equity share. If you need money you can get it by selling your equity to another buyer. Returns on equity share are given by dividends and by capital appreciation. These days equity Mutual Funds are very popular as they help the investors to get maximum returns of their investments by pooling their money to invest in diverse portfolio. Investments made in Equity Linked Saving Scheme (ELSS) Mutual Funds are eligible for deduction under sec. 80-C of IT act- 1961 subject to a limit of Rs. 100,000/-. Equity shares and MFs offer high risk and high returns of the investors. One should invest in equities and MFs only after reading the offer documents carefully.
Preferential Shares are hybrid instrument of debt and equity. Preferential shares pay a fixed dividend that doesn’t fluctuate. The major benefit of preferential shares is that the owner has a greater claim over company’s assets than any other shareholder. If the company goes bankrupt, the preferred shareholders are paid off before the common shareholders.
I have tried to cover most of the financial avenues available for investment. One should start investing early to reap the benefits of compounding and should take utmost care while investing and keep updating themselves about various avenues of investment to get better returns.
Happy Investing ????