Is your wealth growing with your annual increments in salary? In today’s world of consumerism, it’s hard to keep your lifestyle expenses in check. One way to fix your spending is to implement an investment plan and ensure regular investments out of your income.
However, your expense will grow with general inflation. This is why you should know how much and how to invest your money. A good investment plan will help you strike a balance between your living expenses and savings.
So, you can ensure a good lifestyle today and a better lifestyle tomorrow.
Why should you Invest Money?
Investing money is the third step towards prosperity. First, you need to save and then plan your investments to meet your short, mid and long-term needs. The prices for everything generally keep rising. The income that is more than adequate for you now will be too little a few years later. Also, your life is full of financial milestones. If you want to have a stable financial life you should know how to invest money.
1. To Beat InflationYou need to beat inflation to ensure your money does not lose its purchasing power. You should invest in such financial instruments that give returns higher than inflation.
2. Grow your MoneyInvesting helps you to grow your money. Most financial instruments offer good returns on investment that allow you to create wealth over time.
3. Achieve Financial GoalsIt helps you reach your financial goals as your money will be earning a higher rate of return. With high return rates, you can achieve your financial goals faster.
4. To Save TaxesInvestment options like ULIPs, ELSS, etc also help you save tax. The amount you invest in these financial instruments is eligible for tax deduction up to a specific limit.
Types of Investment in India
You can invest in several types of financial instruments in India. Your choice of investment option may change depending on your investment term and risk appetite:
- Life Insurance Savings Plans – Guaranteed benefits, long-term, financial safety
- Unit Linked Insurance Plans (ULIPs) – Market-linked returns, multi-asset portfolio, financial safety, medium to long-term
- Fixed Deposits – Safe returns, short to mid-term
- Public Provident Fund (PPF) – Safe and guaranteed returns, mid to long-term
- National Savings Certificate (NSC) & Other Small Saving Schemes – Safe returns, short to mid-term investments
- Equity Stocks – High-risk, long-term investment recommended
- Mutual Funds – Market-linked returns, option to choose a fund as per your risk appetite, short to long-term
- Commodities and Bullions – High-risk, bullions for the long-term, other commodities for short-term
- Derivatives & Foreign Exchange – Very high-risk, usually short-term
- Real Estate – High-risk, long-term
Each of these investment instruments can help you fulfil specific financial goals. High-risk assets should be reserved for long-term goals and low-risk or fixed-income assets for short and medium-term goals.
Also Read - Goal-based investing
Best Ways to Invest Money
The best way to invest money depends on your goals and your financial circumstances. Given below are some of the best investment options where you can create a diversified portfolio to meet your different financial goals:
|Investment Option||Why Invest?||Maturity Period||Tax Benefits|
|Life Insurance Savings Plans||A perfect combination of insurance, investment and tax saving. These plans are perfect for wealth preservation and distribution goals.||10 years+||EEE Investment|
|Unit Linked Insurance Plan (ULIP)||These plans offer you insurance coverage with excellent investment options. ULIPs come with benefits like goal safety, multi-fund allocation, and automated portfolio management. These are good investment options for your long-term goals.||5 years+||EEE Investment|
|Pension plans||These are apt for your retirement goals. You invest a certain amount in pension plans to build a considerable sum over time. At retirement, the pension plan allows you to generate regular income in the form of a monthly pension.||Up to the age of 55/60||EET, the interest is not taxed, but the pension you receive is taxed as regular income|
|Fixed Deposits (FDs)||Perfect for short-term parking of funds, emergency funds and mid-term safe deposits. Allows superb liquidity for internet banking users||7 days to 10 years||Fully Taxable|
|Tax Saving Fixed deposits||The tax savings fixed deposits have a lock-in period of five years. The interest you earn is taxable as income in the year, and the bank will deduct a 10% TDS on your FD's interest rate every year.||5 years||ETE investment, the interest is taxed|
|Public Provident Fund (PPF)||If you plan to invest in safe options, PPF is right there at the top of the list. It is a long-term investment option that offers you an attractive interest rate and returns on your investment. The interest earned and the returns are not taxable under Income Tax.||15 years+||EEE Investment|
|National Savings Certificate (NSC)||Safe investment with a fixed rate of return. No limit on investment, and no TDS. Interest accruals do not attract tax until maturity.||5 Years||ETT Investment but accrued interest is considered reinvested|
|Equity Stocks||Direct market investment into equity stock. You should check the daily traded volume for stocks to ensure good liquidity. Blue chip stocks are considered the safest.||1 day to no limit||Fully-taxable|
|Mutual Funds||Enable you to minimise risk with diversified equity, debt or mixed portfolios. You can invest small sums regularly in SIP mode.||1 day to no limit||Fully-taxable|
|Equity Linked Savings Scheme (ELSS)||You may invest in ELSS mutual funds to get high returns on your investment. ELSS offers the advantage of investing in the stock market indirectly using the expertise of professional fund managers. It lowers your risk.||3 years+||EEE Investment|
|Commodities & Bullions||Bullions like Gold provide a good hedge against inflation. Other commodities can offer hedging opportunities for traders.||Less than 1 day to 6 months||Fully-taxable|
|Derivatives & Foreign Exchange||Derivatives allow you to hedge against temporary market trends. Invest only if you understand derivatives and how they work.||Less than 1 day to 6 months||Fully-taxable|
|Real Estate||One of the necessary lifetime investments. Builds legacy, can provide inflation-adjusted income. Can provide tax benefits for residential property purchased/constructed on loan.||3 years+||Fully-taxable|
Step-by-Step Guide to Invest your Money
Investing is a process, and you need to bring in discipline to start and continue your investing journey. Follow the below steps to start investment:
1. Save Money
The first step is to start saving money. When you receive a monthly salary or business income, you should first set aside an income in your savings bucket and spend the remaining. Spending first and then saving is not the right approach.
2. Assign Goals to your Savings
Savings will be more fun when you know you are going to achieve something good with them. You can list down all your short-term and long-term financial goals. Classify your goals as short, mid, and long-term goals. It will also help you tag your investments with a financial goal. For example:
- Mutual Fund A – home purchase 10 years later
- ULIP for the child’s higher education goal 15 years later
- NPS for self-retirement goal 30 years later
This way you can start with the essential investments first such as retirement and child’s goals.
3. Find Appropriate Investments
You should find an appropriate investment option based on your goals. You should select options from different categories for diversification. Time to goal is one thing which will limit or expand your investment choices. For example:
- If you want to invest for less than 3 years: Super savers, FDs, Liquid Funds, Savings account
- Investments you can use for 3 to 5-year allocation: Debt mutual funds, bank and post office FDs, equity mutual funds
- If you want to invest for longer terms: Equity and debt mutual funds, ULIPs, PPF, NSC, etc. Investing in the different instruments will help reduce the overall risk of your portfolio.
4. Seek Help if Needed
Selecting the best places to invest money is not easy. If you feel that you will save time and can focus on life and work more it’s better to hire an advisor. The best part is nowadays you don’t need to have someone coming to you for all paperwork.
You can use online advisors and build your portfolio through them. Advisors will help you select funds, and allocate your money regularly.
5. Always Invest within your Risk Appetite
The final step of the process is to start investing. Do not delay your investing. Start with whatever amount you are comfortable investing. Investments reward those who are patient and risk appetite is what defines your patience with investments.
Usually, high-risk high-reward investments take longer to materialise. So, make sure to choose your asset classes in a way that your short-term needs do not face compromise.
You should invest wisely, choosing the investment option that is in line with your short, mid, and long-term goals. Investing in the right financial instrument today will give your financial security in the future.
You will be able to beat inflation and also benefit from the power of compounding. For all-around protection, you should also invest in a term and health insurance plan. These plans will protect you and also your loved ones.Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.