Where should you invest your money?
No one wants his/ her money lie around in their house at all. Everyone wants to invest and get return out of it. There are many ways where you can invest your money or your savings. You may choose from very safe to medium-risk investment and even higher risk options. Basically there are two types of investments; one is safe and another is risky. If you are looking to grow your wealth, you can invest in lower-risk factors which will give you a minimum return or you can go for more risky options which aims for higher return. Secured or risk-free investment is for those who want to keep their money safe and secure by investing in bank, Post Office, bonds. The thing about investment and return is they are proportionate. In low risk investment, you will get lower return. With high risk the chances of return is also high. If someone is looking for higher returns, they should opt-in for higher risk as well with ETF, Mutual Fund, Investing in Stocks, Trading, Option, Future & Currency trading etc.
Investment in Secure Sections:
The downside of investing in secure section is that the rate of return is low in compare to high risk investment. In this section your money would be safe, however the rate of interest or return would be significantly low. Following are the points which will describe you in short about less risky or secured investments.
Bank Deposit: Nowadays, many people try to increase their money by keeping it in Savings accounts, Recurring or Fixed Deposit account. When you keep your money in Savings Account the rate of interest would be significantly lower which stays between 3.5% to 4% per annum, if you have less than 1 lac in your savings account. Some banks offer upto 6% rate of interest for those accounts which has more than Rs.1 lac. In savings account you may choose to deposit or withdraw money as per your requirement, but most of the banks do not allow you to withdraw the entire money you have in your account and leave it as zero balance, and most of them would deduct certain amount of money for non maintaining the minimum balance. The minimum maintenance balance may vary bank to bank, which are usually from Rs.500 upto Rs.1 lac.
You may also choose to save some particular amount of money each and every month for some period of time, which is called Recurring Deposit where you need to deposit particular amount of money for some period of time, and at the end you will get the entire amount you have saved along with the interest on maturity. RD does not allow you withdrawal prior maturity, unless the account is prematurely closed (where additional charge may be deducted by the bank for premature closure). Banks usually offer from 4.50% to 6.25% rate of interest per annum for RD.
You may also choose to Fixed Deposit any amount of money from Rs. 100 to Rs.1 crore depending upon your capabilities. You may deposit the money for minimum period of time of 1 week and upto 10 years. Where you will not be able to withdraw the money just like RD, and if you are in need of money, you would need to close the FD account. Banks usually offer from 6% to 7.5% rate of interest per annum for Fixed Deposits. In this case your money would be safe and secured however you cannot expect more return than the banks are offering. If you are earning more than Rs. 40,000 per annum in interest, in that case you have submit 15G/15H every year. Or else 20% TDS (Tax Deducted at Source) will be deducted from your earned interest.
Post Office: It’s a very handy option for investing in secure way. The minimum amount to open a term deposit account is Rs.200 with no maximum limit. If you want to open more than one term deposit account in post office, then you may also choose to do it. The post office will not deduct any TDS for any kind on fixed deposits. The rate of interest on term deposits can be higher for NSC, KVP etc in compare to bank FD.
Post Office Savings Scheme is just like bank's savings accounts where you can deposit and withdraw money at any point of time. Usually post offices offer 4% interest rate and have the minimum maintenance balance is Rs. 20 for savings accounts.
National Savings Recurring Deposit is also like bank's recurring deposit where you need to pay certain amount of money every month for certain period of time, and you will get the principal and the interest on maturity. It is for those who want to invest for at least 5 years. You’ll get 7.2% interest per annum. You can invest a minimum amount of Rs. 10 with no maximum limit. You can open more than one account as RD.
In Time Deposit Scheme, is just like a bank FD where an investor can open an account individually. Even a minor can avail this service. The minimum investment amount is Rs. 100 and multiple of it. The interest rate is 6.9% for first 3 years and 7.70% rate of interest for 3 plus years.
Monthly Income Scheme (MIS) is a term deposit of Indian Post where you may deposit certain amount of money and the post office will pay you the interest at the end of every month and on maturity you will get the entire deposited amount back. Here you’ll earn 7.6% interest per annum, which is payable on monthly basis. The lowest amount you can invest is Rs. 100 and highest investment limit is Rs. 4.5 lakh for single account holders and Rs. 9 lakh for joint account holders.
National Savings Certificate (NSC) is similar to bank FD but it has a lock-in-period of five years. It means if you open a bank FD, you can withdraw it before maturity date and get the money in case you need it. However for NSC, you will not be able to withdraw the amount before maturity period, which is 5 years. Here you will receive 7.9% interest rate and the minimum investment amount is Rs.100. You can transfer certificates from one person to another person between the date of issue to date of maturity at any point of time without any issue.
Kisan Vikas Patra (KVP) is also like bank FD, unlike NSC KVP can be withdrawn prematurely, it is a government scheme by post office where the lowest investment amount is Rs. 1000 with 7.6% interest rate, it has no maximum limitation for investment.
These schemes are tax exempt under section 80c and the tax exemption is up to Rs. 1,50,000. Which means NSC, KVP are eligible for tax deduction for the year of investment, however taxable at the time of maturity.
Sovereign Gold Bond: This is a government scheme which offers investors another process to purchase gold. This is the substitute for holding physical gold, and that is the reason it is also called paper gold. Its value is entitled by grams of gold. The bond is issued by Reserve Bank of India. You may purchase gold in ‘certificate’ which is just like bank's FD. The limitation of gold investment in bond is from one gram to 4 kg maximum. TDS is not applicable on gold bond. The bond also offers fixed interest rate of 2.50% per annum on the nominal value.
Investment in Risky Sections:
As we have discussed earlier rate of return is proportionate with risk. Risk increases with the chances of higher return. Here are some brief descriptions of risky investment.
Exchange Traded Fund: ETF is an investment fund which involves a collection of securities such as stocks, bonds, commodities (gold, silver), currency, real estate, Indices (like Nifty 50 or Sensex etc.). Among ETFs Index funds are most favourite of billionaire Warren Buffet, as one Index contains multiple stocks of that particular segment (such as IT, Infra, Pharma) and over the year Index funds are more profitable and less risky than general stocks. As it holds the marketable security that means it can be easily bought and sold for low cost. An Index shows average price of the stocks which are listed under that particular Index (For an example Nifty contains top performing 50 stocks on NSE. The price of Nifty is average price of each stocks. If we add all stock’s price which are listed under Nifty, and divide by 50 the value will be equal to Nifty’s current price.) Apart from Index fund, a new investor can also invest in ETFs , which is issued against gold reserve or other securities. With time and demand the ETF price rise and fall, however ETFs have less volatility and offers steady growth than general stocks.
Mutual Fund: As the name itself explains it is a fund where an Asset Management Company (AMC) creates a pool of fund and invites institutional or retail investors like us to invest into that fund. Once investors invest in that fund, the AMC collects all the money and invests the money in various securities like stocks, bonds, Index Fund such as Nifty & Sensex, Commodities such as gold & silver or debt. Investors get equal part of ownership of that fund which is called units. Investors can buy mutual fund by themselves or by fund experts. As Mutual funds are operated by professional money mangers so there are a higher chances of highest possible returns, where investors do not need to monitor worry about the portfolio. There are different types of Mutual Funds available which are associated from lower-risk to higher risk. Investors can choose the risk categories depending upon their return expectations. Investment in Mutual Funds also have certain amount of market risk, however investor can reduce the same by diversifying their investment in at least 4-5 different mutual funds.
Investing in Stocks: If you want to make more money then you have to take a little bit of higher risk. This is an excellent way to grow wealth. Stock is none but an ownership of a company. When you purchase a company’s stock, that means you’re purchasing a small part of ownership of that company and that is called a share and you are called a shareholder. If you purchase as stock at Rs.100 today and after a year if the stock price rises at Rs.115, and if you sell the same stock you make Rs.15 as profit. This process is called Investing. Investing in stocks takes lots of time, knowledge and preparation to read and analyse news, to go through company’s financial reports and understand technical chart to understand current market trend. Investing in stocks poses higher risks than investing in Mutual Funds, however the risk can be reduced by investing in various companies instead of investing all your money in one company, which is called diversification.
Equity Trading: Trading is almost similar as investing. In case of investment once you purchase a stock, its upto you when you will sell it; you can sell it after a week, month, year or a decade. However for trading, once you purchase the stock you have to sell the stock within the very same day or the stock will be sold automatically before the market closes, that’s why it is also called Intraday trading. There are two major benefits of Intraday trading. The very first benefit, your broker will likely to offer you 5 or 10 times more margin than your deposited money. It means if you deposit Rs. 100 in your demat account, your broker will let you purchase or sell shares worth Rs. 500 or Rs.1000. And the second benefit of trading is, if you can calculate if a stock price will decrease in a particular day; you can sell the stock at higher price first and later at that day, once the stock price decreases you can buy it, which is actually called squaring off. This option is not available for investment and the entire process where you sell a stock first and buy it on later called shorting. With all these eye catching benefits, day trading or Intraday trading also poses potential threat of loss. As stock market is highly volatile and it is very difficult to predict when and till what extended a stock price may rise or fall within the very same day. So, one miscalculation can cause you chunk of money. And on the other hand since your broker will allow you higher margin if you make a mistake, you stand to make 5 or 10 times loss.
For an example: When ABC Limited’s stock is trading at Rs.100 at morning, you calculate the stock price will decrease upto Rs.95, where you stand to make Rs.5 in each stock you sell. Now you allotted Rs.100 in your Demat account and your broker will let you sell 5 shares of ABC. Now you have 5 shares. Suddenly the stock price start going up and reached Rs.105. In fear of more loss, you squared them off at Rs.105. Now you made a loss of Rs.5 for 5 shares which will be Rs.25.
Option Trading: Option trading is a contract through which a seller gives a buyer the right to buy or sell but not obligation a specified number of shares at a predetermined price within a certain period of time. Originally option was created as insurance against investment. Lets assume you purchase a stock of XYZ Limited at Rs. 100. Now if the price rises you will make profit, however if the price falls you have to face loss. So, you made an agreement with an option seller if the stock price goes below Rs. 100 with in a month he will purchase your stock and you paid Rs.10 as premium. Now if the stock price rises at reaches at Rs. 125, then your profit would be Rs.25 (actual profit) – Rs.10 (option price) where your net profit will be Rs.15. However if the stock price falls and reaches Rs. 75, you ask the option seller and exercise your right to sell the stock. Where the option seller will be bound to purchase the stock at Rs. 100 from you as that person and you have predefined contract. In here you will make loss of only Rs. 10 which you paid as option premium. However the seller either has to hold the stock till it reaches Rs.100 or sell it on Rs. 25 loss. However now days people have started trading option as trade method. It is not recommend for new trader at all and it involves higher risks than trading shares. Option is always time bound usually options expire in every month’s last Thursday for Indian stock market. It’s upto you if you want to exercise option or not and that’s why it’s called right but not obligation.
Future Trading: Future trading is a financial contract that allows the buyer to purchase an asset or the seller to sell an asset at a pre-fixed future date and agreed price. It is an right and obligation as well. Lets say you have a stock of ABC Limited which you purchased at Rs. 100, and you want to sell it at Rs. 110 after a month. But you are not sure if the stock price will be higher or less than Rs. 110. So, you entered into a future contact with a buyer where you both agreed that after a month you will sell that stock to that person for Rs.110. Now after a month if the stock price increases at Rs. 120, you are obligated to sell it for Rs.110 where you make Rs.10 loss. However, if the stock price decreases at Rs.97 you have the right to ask that person for Rs.110 to purchase that stock, since you both agreed on pre-fixed price earlier. In this case the buyer will be in loss of Rs.13 and you will make sweet profit of Rs.10. Future trading is considerd even riskier than option trading. Hence it is not recommend unless you are a seasoned trader.
Currency Trading: It refers to as ForEx Trading, which is the purchasing and selling of foreign currencies to make profit. Where you can purchase USD for low and sell for higher price. However, it is one of the most risky investment. Predicting currency change is a rigorous process as currency price might rise and fall depending upon various factors including Geo-political disputes or tensions, economical and political situation of different countries as well as stabality. Since the risk is the high, the chances of return or loss is also high for currency or ForEx trading. Currently RBI allows trading of GBP, USD, EURO, JPY.
New investor always look forward to increase their money as quick as possible which is a big mistake. Instead every investor should be focused on increasing their wealth with well balanced investment options which suits their needs and capabilities instead trying to find a get rich quick idea or find shortest route to success. The good thing about investing is that you don’t need a lot of money to get started. Investment should be everyone’s habit not an option.