Ok!! But where can my money grow?

Thank you for the amazing response to our previous blog post and 1st part of our series on Financial literacy. This is the 2nd part and we’ll mostly be covering different investment products/ asset classes where one can invest in.

We’ll try to keep this blog simple and short keeping your feedback in mind :)

We’ve seen two kinds of people. Those who regard investment as savings and know only a couple of old-school investment products like Fixed Deposits, Recurring Deposits, and the second, who have just heard about these investment products, but don’t know what exactly they are. With a lack of knowledge and a plethora of options to choose from, it’s quite obvious that one would be confused about where to invest to match his/her financial goal (It’s very important to set a financial goal. We’ll cover this in this series if you don’t know how to set financial goals and decide on your risk-taking appetite)

FDs are considered the safest investment option in India as there are hardly any instances of banks going bankrupt and you losing money. Fixed deposit as the name suggests gives you a fixed rate of interest on the amount deposited. FDs give a higher interest rate compared to a savings account. The rate of interest depends upon investment tenure, amount, residential status, and bank. There’s a lock-in period and a mature date.

The average interest rate for FDs in India: 2.5% -7.5% per annum (median being 5%)

Who should consider investing in FDs: If you are looking for a safe investment with zero risks and don’t need your money till FD matures, then you can go with this investment class. According to us, FDs are a good option for someone who has retired and has good capital accumulated. You get a Tax benefit if FD’s tenure is more than or equal to 5 years.

Downsides of FDs: The rate of interest offered by FDs barely beats inflation. Your money is locked in and a penalty is levied in case you need to withdraw your money before FD matures, so someone looking for high liquidity(want to convert investment quickly into cash and cash equivalent) should avoid investing in FDs.

Recurring deposit is an alternative to FDs, but unlike FDs, you have to make fixed monthly deposits in RDs (Yes !! similar to SIP which we talked about in our last series) Similar to FDs your deposits mature on a particular date in the future, along with all the deposits made each month. The minimum period of investment is 6 months and the maximum is 10 years. The rate of interest depends upon the bank with which you are doing RD. Tax is deducted (TDS) on returns accrued from RD.

The average interest rate for RDs in India: 2.5% -8.5% per annum (median being 5.75%)

Who should consider investing in FDs: Similar to FDs a person who wants to do a disciplined investment in an asset class where risk is low should consider investing in RDs.

Downsides of RDs: Rate of interest barely beat inflation. Premature closure leads to high penalties, and partial withdrawal of money is not allowed until the scheme is matured. Similar to what we said in FDs, someone looking for high liquidy should not invest in RDs.

Bonds are high-security debt instruments(Meaning: It’s an asset class that requires a fixed payment to holders usually with interest) that enables companies to raise funds for their capital needs. Simplifying it: Companies/ Government in need of money issue bonds(a piece of paper having terms and conditions on money lent to the company), where investors like us purchase bonds and get a fixed rate of interest every month(can be quarterly, half-yearly, etc). On the bond's maturity date, the investor gets interested for last month with the initial investment done in full. Debentures are exactly similar to bond with the only difference being Bonds are backed by the asset of the issuer (Secured bonds: In case the issuer of bonds defaults, then they can sell the underlying backed asset to pay back the investors) whereas Debentures are issued and purchased only on creditworthiness and reputation of issuing party(Unsecured: In case the company/ issuer defaults, then the investor can lose his money)

The average returns of Bonds in India: 7%-10% per annum

Who should consider investing in Bonds: One can consider parking their funds in Bond when the stock market is very volatile or if there is an economic crisis and the market is going to fall. Someone looking for a safe investment with no risk should always consider investing in secured bonds with a downside of a tad bit of low returns than unsecured bonds. Individuals looking for diversification of portfolio should consider bonds over FDs and RDs as they provide security with good returns compared to FDs and RDs.

Downsides of investing in the Bonds: Returns are not that high as compared to the stock market. Liquidity is limited as invested money is locked in till the maturity of the bond. Bonds are susceptible to inflation risk.

PPF is a popular investment scheme by the Govt Of India and is ideal for individuals with a low-risk appetite. Since the scheme is backed by the government, it’s backed up with guaranteed returns to protect the financial needs of people investing in this scheme. A PPF account has a lock-in period of 15 years on investment, before which funds cannot be withdrawn completely(Baring certain conditions). Investors can invest a minimum of Rs. 500 and a maximum of Rs. 1.5 Lakh annually.

The average interest rate on PPF: 7% and subject to change quarterly

Who should consider investing in PPFs: Individuals looking for low-risk secured investment should consider investing in PPFs. One major advantage of PPF is one can save tax by investing in PPF. Someone looking for diversification of his portfolio should consider PPF as an option to invest in.

Downsides of investing in the Bonds: Returns are not that high as compared to the stock market. Liquidity is limited as invested money is locked in for 15 years. The rate of interest depends on Govt and economic factors.

Gold is considered one of the oldest forms of investment. But in recent times only digital gold is considered a real investment product. One should invest in either Sovereign Gold Bonds, Gold Funds, or Gold ETFs. Tax is levied on the purchase of Gold instruments.

The average returns of Gold based investment in India: 11%–12% over the long term

Who should consider investing in Gold: Individual looking for high liquidity and want to diversify their portfolio should consider investing in gold

Downsides of investing in Gold: The price of gold is dictated by the foreign market, so there’s risk involved with an investment in gold and not considered as a safe form of investment as opined by elders.

The average interest rate on NPS: 10%-12% per annum

Who should consider investing in NPS: Individuals looking for low-risk investment options with moderate returns, and not in need of liquidity until retirement should consider investing in NPS. It’s a good option for the diversification of portfolios.

Downsides of investing in the NPS: One cannot maturely stop or withdraw investment from NPS(baring certain circumstances) till they retire. A post-retirement maximum of 60% amount can be removed lump-sum and the remaining amount will be paid in form of interest every month.

Mutual Funds in simple terms are a basket of stocks created by professional companies(AMCs) after researching companies. Mutual Funds are crafted by Asset Management Companies who collect money from individuals like you and me and invest in companies on behalf of us. There are many types of mutual funds which an investor can invest in and with each mutual fund, one gets unit and NAV(net asset value) which when multiplied sums up to the amount which we have invested. As per fluctuation in the price of the stocks in our investment basket, the price of NAV changes, thus changing our profit/ loss status. Mutual funds are considered less risky than directly purchasing stocks as research firms and analysts, research and then purchasing stocks from the collected money pool. As per the category of the mutual funds, tax can be saved or levied depending on the tenure of investment.

The average returns of Mutual Fund in India: 14% to 22% over the long term. A good mutual fund gives around 20% returns in long term(Power of compounding)

Who should consider investing in Mutual Funds: Individuals having low to medium risk appetite and interested in investing in the stock market, but don’t have time to do research have mutual funds as the best option. We believe that every individual as per his financial requirement should invest in Mutual funds(There is a mutual fund for each and every financial requirement). A wide range of mutual fund categories gives comforts to investors to select a suitable basket of stocks as per their needs.

Downsides of investing in the Mutual Find: Like the stock market, mutual funds are also volatile in nature(Obviously as they are directly related to the stock market). Expense ratio and other fees are levied for the research done by AMCs on behalf of us, so a part of our investment is taken by fund houses. The right selection of mutual funds is important based on past returns and fund managers, otherwise, you might incur a loss if the fund performs poorly.

Stocks also referred to as shareholder’s “Equity” or “Shares” are market-linked investments (Indian stock markets where public companies are listed) where an individual can buy shares of the company and owe a part of the company. Confusing? In simple terms, you invest in a publicly listed company and enjoy profit/ loss whenever the stock price of the company changes as per the performance of a company. Just like the price of vegetables changes as per demand and supply, in the same way, the price of stock changes on daily basis. If people feel that “X” company is doing an amazing job and they have high growth and the company is making good profits, then they buy stocks of that company thus increasing the share price of that company. Similarly, if people feel that the “Y” company is not doing good, and they hold the shares of “Y”, then they can sell the shares thus bringing down the share price of the company. There is this huge myth created by elderly people that the stock market is gambling(in that sense everything in life is gambling :) ) which we disapprove of. The rationale behind this myth is the stock market is considered a risky form of investment where due to high volatility(swing in the movement of share price) elderly have seen many people losing massive amounts of their investment. But the flip side of the coin is with high risk comes high reward, so people have made massive profits too from the stock market. Our personal opinion is if one invest’s in fundamentally(We’ll be covering this later in our series) sound stocks after researching about that company then risk minimizes to a greater extend. On gains/ losses as per the investment period, short-term or long-term gains tax can be charged.

The average returns for the stock market in India: Nifty(Consider this as benchmark Index of Indian Stock Market) has given returns of 12–14% annually for the last 10 years. Investing in good stocks can give returns of 25–50% and investment in multi-bagger stocks entered at right time can amass up to 100x to 500x returns in the long term 😮

Who should consider investing in the stock market: Individuals having a medium to high-risk appetite should consider investing in the stock market. We personally believe that each and every millennial and coming generation should have first-hand experience of this market. If one spends some time studying about this market and takes sound investment decisions then the risk to reward ratio increases exponentially. Stock market investment if done right gives excessive gains over time due to the power of compounding. Someone who wants high liquidity can consider investing in the stock market.

Downsides of investing in the Stock Market: If not done right, the stock market can be risky and you may incur a loss on your investment. The stock market is 80% psychology, so if you are not disciplined and don’t stick to your principles then you are at greater risk of losing money. Tips which we always give: Stay away from “tips” and “penny stocks” and always do your “research” before buying stocks(covered in upcoming articles). Sometimes the stock market doesn’t work in our favor, so due to panic and fear people tend to lose money (Again, we believe that staying invested for the long term in the right stocks can reap massive gains)

We hope this blog gave you some idea on different investment products where one can invest in. We know that this might have confused as to which products should one choose for investment. Don’t worry in the next blog we are going to write about how one should diversify their portfolio and which investment asset classes they should choose as per their age, financial goals, and economic condition.

You can reach out to us on Twitter & LinkedIn for questions, feedback, and advice.

By, Varun Gujarathi & Savan Nahar

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