Investment options, often because of media hype, are usually centered on equity investments alone. “Where can I invest Y amount of money to generate Z amount of returns?” seems to be most popular question. Besides the capital market which usually appears risky to most people, especially the first-time investors, there are many other options where you can park your money. Many working professionals make the mistake of investing purely from the tax-saving angle and that too at the last moment. Those are not the best investment options for a working professional.
There are a huge number of young professionals working in the corporate sector and earning good money. They are just starting off their professional careers but they tend to develop a habit to live from paycheck to paycheck, indulging in all of life’s luxuries. Usually, they end up not having enough savings to meet life’s emergencies. And of course, no investments. They fall prey to easy credit with conveniences like plastic money and personal loans. A debt trap soon builds around them, courtesy limited inflow and unmanageable outflow. They land themselves in a financial mess.
We, at Capitalworx Advisers, in an effort to restore some sanity, bring to you the best investment options for a working professional. These are both effective and offer decent returns to meet your financial and investment goals.
1. Diversified Equity Mutual funds
These are undeniably the best option for retail investors to generate wealth over the long term. The reasons are simple. Mutual funds are managed by professionals. The portfolio of a diversified equity mutual fund is invested in stocks across industries to reduce the risk quotient. Currently, profit (capital gain) arising from the sale of mutual fund units is tax-free after a year of holding. Systematic investment plans (SIP), where you can invest a fixed sum of money, monthly or quarterly, over a long period of time is a great tool to slowly build exposure to the equity market and accumulate wealth. Besides, there are several variations of this type of mutual fund, where you can invest, depending upon your risk appetite.
2. Balanced Mutual Funds
For those who do not want to risk their entire investment to equity, balanced mutual funds are a good option. These funds typically invest 65% of their portfolio into equity and the remaining 35% in debt. This works very well for the risk averse investor because of the automatic asset allocation in equity and debt through a single fund. Also, typically equity and debt markets move contrary to each other and due to this the balanced fund cushions the risk averse investor against large fluctuations.
3. Debt Mutual Funds
Then there are debt mutual funds which invest in various government securities, corporate bonds and similar instruments. These are not exactly risk-free but they hold much lesser risk compared to equity funds. If you are able to match the holding period of your investment with the average duration of the bonds held by the fund, you would typically get returns close to the prevailing interest rates on your investments. Currently, profits arising out of sale of debt mutual funds are taxed as short term capital gain (for holding period less than 3 years), which means you might be paying higher tax on them, depending on your tax slab. However, debt mutual funds should play a very important part in your overall asset allocation strategy.
Public Provident Fund has been and will continue to remain one of the most preferred investment products where you can safely invest your money without undue risks. It’s under the exempt-exempt-exempt (EEE) regime where the contribution, accumulation, and withdrawal amounts are entirely exempt from tax. Though the interest rate changes every year, it usually hovers around 8%. You can deposit a minimum amount of INR 500 and a maximum of INR 1.5 lakh in your PPF account. There’s a lock-in period of 15 years and partial withdrawal is possible from the seventh year. Again considering tax benefits and retirement planning, PPF is a great tool to have in your investment arsenal.
5. National Pension Scheme (NPS)
The NPS has become more attractive than it was earlier and has emerged as one of the best investment options for a working professional. Any individual aged between 18 to 60 years can join the NPS. You are eligible for tax benefits for investments up to INR 50,000 under section 80CCD(1B) apart from the INR 1.5 lakh under section 80C. All investments to the NPS are regulated by Pension Fund Regulatory and Development Authority (PFRDA). You can also choose your percentage of exposure to equities. The minimum investment in NPS is INR 500 each month and the fund management charges are very low.
However, the NPS comes under the EET category which means exempt-exempt-taxable. In simple terms, your investment and returns are tax free but the withdrawal will be taxed which is not the case with PPF (at least as of now). Recently the government announced that the investor can withdraw 60% of the maturity corpus at the age of 60 and it will be tax-exempt. However, with the remaining 40%, the investor has to compulsorily buy annuity which will be taxed in the year of receipt.
However, as discussed earlier, tax angle is only one of the considerations in your investment decision and it should never be the sole consideration.
Annuities typically are bought with a lumpsum and then the annuity company pays out a regular amount every month / quarter as per your choice for a fixed number of years.
Personally, I’d like to have more control over my retirement funds than what annuities provide. So I would anytime opt for SWP (Systematic Withdrawal Plan) offered by mutual funds over annuities. Simply put, SWP is the opposite of SIP. You get to withdraw a fixed amount regularly from your investment in mutual funds. The major difference being, you decide the amount of withdrawal and not the company.
6. Senior Citizens Savings Scheme (SCSS)
This one is often overlooked by most investors. As the name implies, the scheme is meant for senior citizens. But you can of course invest the money in the name of a senior citizen in your family, like your father or mother. The rate of interest for SCSS is 8.6% and it’s usually 1% above the 10-year government security yield.