PSR Financial Services: How to create Wealth

Wealth Creation

From the ages and generations there are two types of people, one who saves money and one who invests money. The person who saved money is better than who did not saved, but remained as a middle-class person with less wealth. A person who invested the money in any asset class became rich and created wealth worth several lakhs to crores of rupees.

For example, a person saved or kept a hundred rupee note in a locker and after few decades, the value of that hundred rupees is 25 rupees because of the inflation. That means the value of the saving is decreased.

If a person invested the same hundred rupees in any asset class, he would have created the wealth worth of several lakhs.

In the process of creating wealth there are so many factors to consider before going further. They are

#1. Financial Goals

#2. Investment Period / Horizon

#3. Risk Factor

Financial Goals

Financial Goal is the basic factor and also the most important while planning for investments. Investments should be linked to goals. There are different schemes/plans which suit different financial goals. Are you investing for retirement? For a child’s higher education? For child marriage? To buy a dream home? To buy a car? To go to world tour? One must keep their goals in mind before heading towards the available options.

Knowing the goals and the money needed helps you plan realistically and keeps you committed on your investment track.

Further, when you know your goals, then selecting investment options becomes easy. In a sense, you know the returns given by each option and the kind of investment you need to pick in order to reach the goals.

Investment Horizon

The next factor is for how long would you like to keep yourself invested- what is the investment horizon. There are schemes available according to this requirement classified under Long-Term, Short-Term and Medium-term investments.

Investment Risks

Returns or earning cannot happen overnight. You need to look for matching time period where the money can grow sufficiently to fulfill your desired goal. Even after knowing goals you should not invest hastily on the assets giving highest returns or assets with the lowest time period. Because of the risk factors and risk-taking abilities. Both factors differ from person to person.

For example, an individual fresh at a plush job would not mind losing Rs. 25,000 on equity. Whereas the same amount is sufficient for an old person to meet his monthly expenses and the amount needs to be preserved.

A salaried person may have different financial needs than that of the business person. Hence, they have different risk-taking abilities and they face different risk factors. Some investment instruments, majorly of the ones which are market-linked, are prone to some degree of risks such as Equity, Mutual Funds and NPS. Risk tolerance is something which differs in every individual. A young person will have the ability and time to take risk where as a person nearing to retirement will not have both. One must avoid investing hastily on the assets which give higher returns and pay good attention to what degree of risk is involved in the particular investment option. Also, analyse your risk tolerance before investing your assets in any scheme.

Growth

How much will your investments grow? Of course, there is no point in investing in a scheme which is not going to give you satisfactory returns. Before finalising an investment plan, review the historic returns, performance and other different factors to understand how and to what level your investments will grow in future.

In order to make smart investments, you must have in-depth knowledge of the different investment options available in the market. For most of the investors, the choice of a suitable scheme depends upon financial objective, time period, risk level, etc. Also, do not get confused between savings and investments. These are two broad terms the former refers to a passive way of saving your money whereas the latter one focuses on creating & growing wealth.

How do I go for an investment plan?

The first step in planning your investments is to figure out the right investment option that fits your profile and needs. Investment planning requires choosing investments carefully after doing adequate research and not falling for quick-buck schemes that promise high returns in a short time.

Here is a list of the top investment avenues people look at while saving or investing for their financial goals.

Direct equity
Equity mutual funds.
Debt mutual funds.
National Pension System (NPS)
Public Provident Fund (PPF)
Bank fixed deposit (FD)
Senior Citizens' Saving Scheme (SCSS)
Pradhan Mantri Vaya Vandana Yojana (PMVVY)
Real Estate.
Gold.
RBI Taxable Bonds
Tax Savings Fixed Deposit
Insurance
National Savings Certificate (NSC)
Bonds
Debentures
Monthly Income Scheme of the Post Office
Un-Listed Stocks
Sukanya Samriddhi Yojana

Always remember to diversify your investments

Most investors want to make investments in such a way that they get sky-high returns as quickly as possible without the risk of losing principal money. This is the reason why many are always on the lookout for top investment plans where they can double their money in few months or years with little or no risk.

But a high-return, low-risk combination in an investment product, unfortunately, does not exist. Maybe in an ideal world but not at present. In reality, risk and returns are directly related, they go hand-in-hand, i.e., the higher the returns, higher the risk and vice versa.

While selecting an investment avenue, you have to match your own risk profile with the associated risks of the product before investing. There are some investments that carry high risk but have the potential to generate higher inflation-adjusted returns than other asset class in the long term while some investments come with low-risk and therefore lower returns.

There are two buckets that investment products fall into and they are financial and non-financial assets. Financial assets can be divided into market-linked products (like stocks and mutual fund) and fixed income products (like Public Provident Fund, bank fixed deposits). Non-financial assets - many Indians invest via this mode - are the likes of physical gold and real estate.

Here is a look at the top investment avenues people look at while saving for their financial goals.

1. Direct equity

Investing in stocks might not be everyone's cup of tea as it's a volatile asset class and there is no guarantee of returns. Further, not only it is difficult to pick the right stock, timing your entry and exit is also not easy. The only silver lining is that over long periods, equity has been able to deliver higher than inflation-adjusted returns compared to all other asset classes.

At the same time, the risk of losing a considerable portion or even all of your capital is high unless one opts for stop-loss method to curtail losses. In stop-loss, one places an advance order to sell a stock at a specific price. To reduce the risk to certain extent, you could diversify across sectors and market capitalisations.

2. Equity Mutual Funds

Equity mutual fund schemes predominantly invest in equity stocks. As per current rules, the Securities and Exchange Board of India (SEBI) Mutual Fund Regulations, an equity mutual fund scheme must invest at least 65 percent of its assets in equity and equity-related instruments. An equity fund can be actively managed or passively managed.

In an actively traded fund, the returns are largely dependent on a fund manager's ability to generate returns. Index funds and exchange-traded funds (ETFs) are passively managed, and these funds track the underlying index. Equity schemes are categorised according to market-capitalisation or the sectors in which they invest. They are also categorised by whether they are domestic (investing in stocks of only Indian companies) or international (investing in stocks of overseas companies).

3. Debt Mutual Funds

Debt mutual fund schemes are suitable for investors who want steady returns. They are less volatile and, hence, considered less risky compared to equity funds. Debt mutual funds primarily invest in fixed-interest generating securities like corporate bonds, government securities, treasury bills, commercial papers and other money market instruments.

However, these mutual funds are not risk free. They carry risks such as interest rate risk and credit risk. Therefore, investors should study the related risks before investing.

4. National Pension System (NPS)

The National Pension System (NPS) is a long-term retirement - focused investment product managed by the Pension Fund Regulatory and Development Authority (PFRDA). The minimum annual (April-March) contribution for an NPS Tier-1 account to remain active has been reduced from Rs 6,000 to Rs 1,000. It is a mix of equity, fixed deposits, corporate bonds, liquid funds and government funds, among others. Based on your risk appetite, you can decide how much of your money can be invested in equities through NPS.

5. Public Provident Fund (PPF)

The Public Provident Fund (PPF) is one product a lot of people turn to. Since the PPF has a long tenure of 15 years, the impact of compounding of tax-free interest is huge, especially in the later years. Further, since the interest earned and the principal invested is backed by sovereign guarantee, it makes it a safe investment. Remember, interest rate on PPF in reviewed every quarter by the government.

6. Bank Fixed Deposit (FD)

A bank fixed deposit (FD) is considered a comparatively safer (than equity or mutual funds) choice for investing in India. Under the deposit insurance and credit guarantee corporation (DICGC) rules, each deposit in a bank is insured up to a maximum of Rs 5 lakh with effect from February 4, 2020 for both principal and interest amount.

Earlier, the coverage was maximum of Rs 1 lakh for both principal and interest amount. As per the need, one may opt for monthly, quarterly, half-yearly, yearly or cumulative interest option in them. The interest rate earned is added to one's income and is taxed as per one's income slab.

A recurring deposit is a special kind of term deposit offered by banks which help people with regular incomes to deposit a fixed amount every month into their recurring deposit account and earn interest at the rate applicable to fixed deposits.

7. Senior Citizens' Saving Scheme (SCSS)

Probably the first choice of most retirees, the Senior Citizens' Saving Scheme (SCSS) is a must-have in their investment portfolios. As the name suggests, only senior citizens or early retirees can invest in this scheme. SCSS can be availed from a post office or a bank by anyone above 60.

SCSS has a five-year tenure, which can be further extended by three years once the scheme matures. The upper investment limit is Rs 15 lakh, and one may open more than one account. The interest rate on SCSS is payable quarterly and is fully taxable. Remember, the interest rate on the scheme is subject to review and revision every quarter.

However, once the investment is made in the scheme, then the interest rate will remain the same till the maturity of the scheme. Senior citizens can claim deduction of up to Rs 50,000 in a financial year under section 80TTB on the interest earned from SCSS.

8. Pradhan Mantri Vaya Vandana Yojana (PMVVY)

PMVVY is for senior citizens aged 60 years and above to provide them an assured return of 7.4 per cent per anum. The scheme offers pension income payable monthly, quarterly, half-yearly or yearly as opted. The minimum pension amount is Rs 1,000 per month and maximum Rs 9,250 per month. The maximum amount that can be invested in the scheme Rs 15 lakh. The tenure of the scheme is 10 years. The scheme is available till March 31, 2023. At maturity, the investment amount is repaid to the senior citizen. In the event of death of senior citizen, the money will be paid to the nominee.

9. Real Estate

This option requires huge money as compared to other investment options.The house that you live in is for self-consumption and should never be considered as an investment. If you do not intend to live in it, the second property you buy can be your investment.

The location of the property is the single most important factor that will determine the value of your property and also the rental that it can earn. Investments in real estate deliver returns in two ways - capital appreciation and rentals. However, unlike other asset classes, real estate is having highly liquidation problem. The other big risk is with getting the necessary regulatory approvals, which has largely been addressed after coming of the real estate regulator.

10. Gold

Possessing gold in the form of jewelry has its own concerns such as safety and high cost. Then there's the 'making charges', which typically range between 6-14 per cent of the cost of gold (and may go as high as 25 percent in case of special designs). For those who would want to buy gold coins, there's still an option.

Many banks sell gold coins now-a-days. An alternate way of owning gold is via paper gold. Investment in paper gold is more cost-effective and can be done through gold ETFs. Such investment (buying and selling) happens on a stock exchanges (NSE or BSE) with gold as the underlying asset. Investing in Sovereign Gold Bonds is another option to own paper-gold. An investor can also invest via gold mutual funds.

11. RBI Taxable Bonds

On the other hand, RBI taxable bonds were offering 7.75 per cent per annum. However, the bonds have a long tenure and have a seven year lock-in period. ... The minimum investment in the bonds starts at Rs 1,000. An investor of these bonds can opt to receive interest payment either in cumulative or non-cumulative forms.

Earlier, RBI used to issue 7.75% Savings (Taxable) Bonds as an investment option. However, the central bank has stopped issuing these bonds with effect from May 29, 2020. These bonds were launched by replacing the erstwhile 8 percent Savings (Taxable) Bonds 2003 with the 7.75 per cent Savings (Taxable) Bonds with effect from January 10, 2018. These bonds had tenure of 7 years.

The Central Bank with effect from July 1, 2020 has launched Floating Rate Savings Bond, 2020 (Taxable). The biggest difference between earlier 7.75% savings bonds and the newly launched floating rate bond is that the interest rate on the newly launched savings bond is subject to reset in every six months. In the 7.75% bonds, the interest rate was fixed for the entire duration of the investment. Currently, the bonds are offering interest rate of 7.15 per cent. The first reset on the interest rate is due on January 1, 2021.

12. Tax Savings FD

Tax saver fixed deposit (FD) is a type of fixed deposit, by investing in which, you can get tax deduction under section 80C of the Indian Income Tax Act, 1961. Any investor can claim a deduction of a maximum of Rs. 1. 5 lakhs by investing in tax saver fixed deposits.

13. Insurance

It is the first and most considered savings. Even though it is meant for risk cover we consider it as safe and secure investment tool. Insurance is one thing which every earning person should have to safe guard his family when unexpected death happened to the bread winner of the family, which will take care of his dependents for certain period.

14. National Savings Certificate (NSC)

We have plenty of options when it comes to investments. You can choose any as per your financial goals. National Savings Certificate or NSC, a post office savings product, is one such option. As a low-risk investment, it comes with a host of benefits.

The National Savings Certificate is a fixed income investment scheme that you can open with any post office.

15. Bonds

A government bond is a debt instrument issued by the Central and State Governments. Issuance of such bonds occur when the issuing body (Central or State governments) faces a liquidity crisis and requires funds for the purpose of infrastructure development.

Government bond in India is essentially a contract between the issuer and the investor, wherein the issuer guarantees interest earnings on the face value of bonds held by investors along with repayment of the principal value on a stipulated date.

16. Debentures

The definition of a debenture is a long-term bond issued by a company, or an unsecured loan that a company issues without a pledge of assets. An interest-bearing bond issued by a power company is an example of a debenture.

17. Post office Monthly Income Scheme (MIS)

Post Office MIS is seen to offer higher interest as compared to other fixed-income investments including some bank FDs but the returns from the MIS investments do not beat inflation.

The Post Office Monthly Income Scheme (MIS) is a low-risk investment scheme offering steady income and, hence, is suited for conservative investors and senior citizens. It is one of the small savings investment schemes wherein you can start investing with a minimal amount of Rs 1000.

This scheme is one of the popular investment options in India, as it is a government-backed scheme and the invested amount is protected by the government until maturity. The MIS is a fixed income scheme and is a low-risk investment. The money deposited is not subject to market risks and stays safe.

18. Un-listed Stocks

Stocks which are yet to list in stock exchanges are also can be pursed. For this investment time frame should be 3 to 5 years.

19. Sukanya Samriddhi Yojana

Sukanya Samriddhi Yojana is a small deposit scheme of the Government of India meant exclusively for a girl child and is launched as a part of “Beti Bachao Beti Padhao” Campaign. The scheme is meant to meet the education and marriage expenses of a girl child.

Attractive interest rate of 7.6%, that is fully exempt from tax under section 80C.

Minimum 1,000 rupees can be invested in one financial year

Maximum investment of 1,50,000 rupees can be made in one financial year

Deposits in an account can be made till completion of 14 years, from the date of opening of the account

The account shall mature on completion of 21 years from the date of opening of the account, provided that where the marriage of the account holder takes place before completion of such period of 21 years, the operation of the account shall not be permitted beyond the date of her marriage

How you will go?

Some of the above investment options are fixed-income while the others are financial market-linked. Both fixed-income and market-linked investments have a role to play in the process of wealth creation. Market-linked investments offer the potential of high returns but also carry high risks. Fixed income investments help in preserving the accumulated wealth so as to meet the desired goal. For long-term goals, it is important to make the best use of both worlds. Have a judicious mix of investments keeping risk, taxation and time horizon in mind.

While selecting an investment avenue, you have to match your own risk profile with the risks associated with the investment product before investing in it.

As you are reading this article, so you want to know where to invest money for better returns.

We all have investment plans and we all are constantly in search of a better investment option. But has the fear of investing in the wrong investment plans.

You should invest only after understanding the pros and cons of the investment options. I am trying to keep things easy for you.

I have done in-depth research on all the available best investment options and listed the best legitimate investment plans in India. You can invest based on your needs and risk-taking abilities.

Let us understand a few investment fundamentals before jumping into investment selection.

How to Double your Investment

There is nothing as doubling money overnight. It can happen only in dreams, but let me tell you that there is an easy formula to estimate the amount of time taken for your money to get doubled.

The formula is Rule of 72.

The estimated time period to double = 72/ rate of interest.

For example, if you want to know quickly, in how much time Rs. 10,000 will become Rs. 20,000 provided that you invest at an interest rate of 8%.

Then the answer would be, 72/8= 9 years.

If you invest in something that gives 24% returns?

72/24 = 3 years only to double your investment

If someone promises you to give double money in 2 years then he is giving you 36% returns.

You must review your stock and mutual fund investments regularly and keep an eye on the tax implications on returns and capital gains that you make form specific investments

Tax Benefits

Majority of investors seek options which not only save their money but also give tax benefits. In that case, you should analyse different Tax-saving investments and select the one which gives you the best of both worlds.

Grow Wealth with Power of Compounding

We have heard the word compounding right from our school days. But very few have effectively used the power for long term wealth creation. You might be surprised if you let the magic work over a period of time.

Compounding is simply- earning interest on the principal, reinvesting all the earnings and then getting not only interest on principal but also interest on interest from next year on wards.

In a way, compounding, helps you build a large corpus over a period of time even with a small initial investment.

But for the magic to happen, you require two things. One is starting early and the other is to keep on reinvesting over a time period, say 10 years to 20 years. (Ex. SIP in Mutual Funds)

The more you let that happen the more you amass wealth.

Let us see how Power of Compounding

Suppose today you invest 1 Lac at a compound rate of 8% and kept reinvesting all the earnings. Then after 10 years, the money will become Rs. 2.15 Lakhs, then turn into Rs. 4.66 Lakhs after 20 years, and then Rs. 10.06 Lakhs in 30 years.

In the initial period, you see that the earnings are not as much but in the later years, the earnings increase exponentially. Which is due to the compounding effect.

Starting early allows more time for the magic, i.e. compounding to happen. Let us see three scenarios.

The goal is to accumulate a corpus of wealth by the age of 60 years. Investment amount Rs. 1 Lac every year and assuming that the compound interest rate is 8%.

Scenario 1

Investing Rs. 1 lakh every year from the age 20 to 40 & Rs. 2.13 Crores corpus created at the age 60 years.

Scenario 2

Investing Rs. 1 lakh every year from the age 30 to 50 & Rs. 0.99 Crores corpus created at the age 60 years.

Scenario 3

Investing Rs. 1 lakh every year from the age 40 to 60 & Rs. 0.46 Crores corpus created at the age 60 years.

Power of Compounding

You can see that the results are strikingly different even when the investment is for 20 year period in each scenario.

You build a corpus of Rs. 2.13 Crores just by starting early at the age of 20 years as compared to Rs. 46 Lakhs when starting late at the age of 40 years.

This is because you get an extra time period of 20 years for the money to get compounded.

In this way, compounding amplifies the growth and maximizes the earning potential of your money.

Final Words

I have explained the different types of investment options available in India. Analyse your investment goals and your risk capacity and then Choose your best investment plan.

There are several factors associated with investment planning which are indicative of how much returns you can earn, how secure your investments will be and what the benefits are. Firstly, you must consider your investment horizon and goals which will further help you select from the best investment plans.