Investment Options in India

There are many different options to invest in India. You need to first decide how much you want to invest, how much you need (your goal), at what time and how to go about it.

Also if possible you should invest at least 30% of your total take home income in the different options written below. Lets suppose your after tax income is Rs. 100,000.00 per year, you should invest at least Rs. 30,000.00 per year in various investment vehicles.

As you know some of the investments are risky like the stock markets and some are less like a fixed deposit. Unfortunately investments that are risky give better returns than the non-riskier ones. How much percentage to invest in the risky investments compared to the less risky ones?

Lets first solve this question. Lets assume you do not want to take any risk with your money after retirement. Whats the retirement age in India? 60 years. Great. Now reduce the number of your age with 60 and you get the percent you should invest in riskier assets.

Example: You just got a job with a take home salary of Rs. 30,000.00 after paying taxes and your age is 25. 60-25 = 35. It means you should invest 35% of 30% of Rs. 30,000.00 in riskier investments like the stock markets. Lets do some math. 30% of 30,000.00 = 9000. 35% of 9000 = Rs. 3150. 3150 * 12 = Rs. 37,800.00. Your total investments in stock markets should not exceed Rs. 37,800.00 in the first year if you earn 30,000.00 per month and your age is 25. You must be thinking that this number will reduce every year. No, your salary will increase many folds in the next few years but the percentage will decrease by only one every year. After a few years you will see that you have saved enough in both the riskier and non-riskier assets. Roads to riches!!!

I offer a course on How To Invest Well And Retire Rich With Crores. It covers a lot more than what is written in this post like how to chose stocks for long term investments, how to chose mutual funds for long term investments and many other investment ideas not written in this article.

Note: Some financial advisers suggest 100-age rule of investing in stocks. In that case if you are 60. 100-60 = 40%. Do you think you will be comfortable investing 40% of your income in equities when you retire? If you do it right the above formula will make you enough cash to live a comfortable retired life. Even if the riskier investments doesn’t, the rest of the investments in debt will make you enough money. The idea is you should invest in equities with cash that you can take 100% risk with. If you cannot tolerate risk, its better you stay away from the stock markets.

Saving 30% of your income seems quite simple, unfortunately people just don’t save 30% of what they earn. And sometimes even if they save something – they get greedy and put the money in risky schemes only to lose it. Remember the Saradha Group chit fund scam and Citibank fraud?

Even before I start telling you about different investments schemes in India, you should promise yourself for the sake of your own benefit that you will never fall for any unjustified lucrative financial scheme that is not approved by any bank or the RBI (reserve bank of India). If you do so, do it at your own risk. The easiest way to know about these bogus schemes is when they give you a guaranteed return of 15% or more per year. Anything above 15 and you should get cautious.

Now lets come back to the topic of this article – Investment Options in India!!!

Once you decide how much to invest you have the following options to invest. I have also discussed the risk associated with these investments. Its also in increasing order of the risk involved.

1. Bank Fixed Deposits (FD) a.k.a. Term Deposit: The least risky investment of all. As of writing (May, 2013) most Indian banks are giving a return of 9% per year. Not bad considering average inflation of 6% over a long period of time. Right now its hovering around 5%. The returns from FD vary from 7%-11% per year. It depends on inflation and is directly proportional to it.

   Pros: Almost always beats inflation. Guaranteed return so you get peace of mind. Re-investment option for the magic of compounding.

   Cons: Even though it beats inflation, the returns are not good enough. Tax implications – the interest gained is your income and taxed accordingly. Cannot be withdrawn in between the term with the same interest. If you break you may not get the assured interest. Banks will lure you to get a credit card against it and you may be unknowingly paying them more than you make with your late payments and interests etc. (Therefore you must avoid taking a credit card against your FD even if the bank is offering it for free.)

   Where to invest: Walk to any bank recognized by the RBI. Here is a list of banks in India approved by the RBI: http://www.rbi.org.in/scripts/banklinks.aspx

   Tip: Talk to least 3 banks. One government bank and two private banks as rate of return and terms differ. Chose the best as per your convenience. You may need to submit some documents like address proof etc.

2. PPF (Public Provident Fund): PPF gives a return of around 8-9%. The government declares the rates at the start of every financial year. This is also at zero risk. Everyone should have a PPF account. PPF are better than Fixed deposits because they help you to save tax. Annual contributions qualify for tax rebate under Section 80C of Income tax Act. The minimum investment that one can make in PPF is Rs 500 and the maximum is Rs 100,000 in one year. The tenure is 15 years which can be extended in unlimited blocks of 5 years. You can withdraw some money at the end of 6^th financial year from the date the PPF account was opened. This money is limited to 50% of the balance outstanding in the account in the first 4 years.

   Pros: Very safe investment. Magic of compounding if you do not withdraw. For example if someone deposits the maximum Rs. 100,000.00 every year for 15 years and does not withdraw will get Rs. 3,063,201.00 (30 lakhs, 63 thousand, 201) at end of 15 years at 8.5% compounded annually. Loan is possible against PPF. Saves taxes.

   Cons: Cannot withdraw cash before 7 years. Cash withdrawal limited. Long maturity period of 15 years.

   Where to invest: You can open a PPF account in any post office or nationalized banks like SBI. ICICI bank also allow PPF accounts.

3. Debt Mutual Funds: Some people are confused and think all mutual funds invest in the stock market. Well this is not the case. 100% debt mutual funds do not invest anything in the stock market. They invest in bank CDs (certificate of deposits), buy debentures, loan to the governments, and offer commercial papers etc. Most of them are not risky, but still debt mutual funds are slightly riskier than bank fixed deposits. However their returns are also more.

   There are various type of debt funds like income funds, short-term debt funds, long term debt funds, government securities fund, dynamic bond funds etc. Debt funds return anywhere from 3-15% annually. Since the returns are not fixed the average returns may be around 10% over a long period of time.

   I have experienced best returns from dynamic bond funds because of their ability to change the investment style depending on the returns of the debt market.

   Therefore you must have a dynamic bond in your portfolio and count them in the non-riskier investments.

   Pros: Easy to invest. You can invest online. Very liquid – you can withdraw anytime you wish. However some debt funds do have withdrawal charges up to 3 years. But you can always withdraw partial amount and the fee will not have a great effect. Creates a balance in your portfolio if you also have invested in equity mutual funds. If you keep it for 3 years, the withdrawals have very limited tax liability. Since tax laws keep changing every year, please refer your taxman for recent developments.

   Cons: No guarantee of returns. Some year the fund may make 15% returns and in some it may make only 5%. Sometimes the returns may be less than bank fixed deposits.

   Still you should have at least 20% of your saved money in debt funds.

   Where to invest: If you have a demat account, you can invest directly through your account. You can also go to the mutual fund broking houses and invest. Your financial adviser may also help you. You may need to fill the KYC forms. You can download it here: http://www.cvlindia.com/downloads01.html

4. Gold: Frankly gold should be used as gold, that is to wear. Gold should not be used as an investment. However if you think gold is important as it’s a hedge against inflation then you should keep it to 5% of your portfolio, not more. Gold may not be very risky, but over a long period of time gold may not be able to beat the returns you get from a good equity mutual fund. So why its getting a mention here if the writer thinks its not worth an investment?

   Well gold has other values in our society. You may be married, or you may get married soon. Then you will have kids, and the there will be time when you will have to get them married. On an average this will take about 25-30 years from your marriage. We all know how important role gold plays in an Indian marriage. Can you tell with precision what rate gold will be 25 years from now? Nobody can. So how do you save money for buying gold at that time? Why not buy that gold right now and preserve it for next 25 years? Sounds good?

   Ok, here is the gold saving plan for you. Lets suppose you have 2 kids. Both around 3 years and you plan to marry them off 25 years from now. For the time being just forget they are 3 and think that within 3-4 months they are getting married. Ask yourself this question, how much worth of gold do you wish to give them as gift? Is it 2 lakhs, 3 lakhs? Lets suppose you decide its going to be Rs. 4 lakhs – 2 lakh worth of gold to each one of them.

   Now start a SIP in any Gold mutual fund (Gold ETF presently do not allow SIPs) with an amount you are comfortable with. Make sure its not more than 5-10% of what you can afford to save. Lets suppose you have decided to invest Rs. 3000.00 per month in a gold fund. Continue this SIP until Rs. 4 lakh is invested in the gold fund. It will be about 134 months or 11.1 years. Stop your gold SIP after Rs. 4 lakh is invested. Now you do not have to worry about the price of gold when your kids will get married. Also since you have done a SIP, you will probably buy more units when the price of gold will fall, and less when it increases. Remember do not redeem the funds until the time of their marriage, as gold prices may increase in this period.

   Do not buy physical gold ever for investment purpose.

   Security will be a huge issue. You may not find time to buy gold every month unlike SIP which does this automatically. Therefore you may be tempted to buy when the price is on the rise. Some hidden charges like making charges etc are also involved when you buy physical gold. When you sell you may not get back making charges.

   Pros: Just like mutual funds, investing in a Gold fund is easy. Fills you with pride that you have invested in Gold – emotional satisfaction. There is less risk, but returns may also be less.

   Cons: Gold value cannot be predicted. Sometimes gold value does not increase at a good rate for years, so people get frustrated and sell it at a loss. Gold has zero value in industries. Gold like shares can drop huge in one day creating panic selling. Recently it dropped almost 9% in one day. You can read more about it here and here.

   Where to invest: Just like a mutual fund you can buy any fund that invests in gold. Since these funds NAV will correspond with gold prices, all funds will return similar returns over a time period. Its not recommended to buy physical gold as an investment.

5. Real Estate: Real estate had a great run till 2010. However after that the returns are not that stellar. Risk is very high and returns may be just about 10%. This may not sound true to some of you and I agree. You see most of us buy one home to live. And that is a good decision. But some buy a second home as an investment. Since this is a highly non-regularized sector there is no exact figure of the exact returns one makes. Some might get lucky and some might not. The question is – will you get lucky?

   If you have enough cash to buy a home as an investment – that still makes sense. But if you are taking a loan then you got to do a lot of maths before deciding do you really want to invest in real estate. Remember most of us will have to take a home loan to buy a home.

   Let me do some math for you. Home loan rate currently is around 10-12%. Lets assume you got a Rs. 20 lakh home loan at 11% interest rate. Your total expenditure of buying a home was Rs. 25 lakhs.

   Your aim is to sell your home after the loan tenure is over. For a 20 lakh loan at 11% interest you will have to pay almost Rs. 18,500.00 per month. (18,500.00 * 12) * 20 = Rs. 44,40,000 + 33,63,000 (this is the money you might have got had you kept the 5 lakh initial down-payment with a debt mutual fund at 10% compounded annually for 20 years) = Rs. 78,03,000.00. To make a decent profit you will have to sell this home at double this price 78,03,000 * 2 = Rs. 1,56,06,000 (one crore 56 lakhs and 6000). Do you think someone will buy your home at this price after 20 years. You got to take the decision as your investment will be huge.

   This is not the end. Now lets assume one of your friends decided that he wont buy a home but instead start a SIP in a decent equity mutual fund for 20 years. Lets assume his fund returns 12% per year. What does he get at the end of 20 years? Here is the math: Initial deposit: Rs. 500,000.00, Annual addition: 18,500.00 * 12 = Rs. 2,22,000.00. Compounded at 12% the returns after 20 years = 22,738,265.00 (2 crores, 27 lakhs, 38 thousand, 265). Compare this with your returns.

   You know what even if you get a buyer who is ready to buy your home at Rs. 1,56,06,000.00, you are still way short of the returns a good mutual fund has got for your friend. Add to this the hassles involved in investing in real estate and the maintenance cost. God forbid, but what if there is a earth-quake or major fire after you have paid your loan in full and the house gets destroyed? If you forgot to get an insurance against quake or fire your entire investment of a life time will go to drains. Even if there was an insurance you will be paid only the principal amount. The interests that you paid will go forever.

   But that said, this is also true that some people have made millions through real estate investments. However they may have been plain lucky or their timing was good, you don’t know. Mostly these people are businessmen involved in real estate. As in any other business they take care of their real estate business and that could be the reason they make lots of money. The point is real estate investment is a huge risk and for middle class people like us, its better that we stay away.

   Some people might argue that rental income is not included in the above math. Yes you may recover some money from renting, but no one is going to pay more or even equal to the EMI you pay for the loan. In our case it was Rs. 18,500.00 per month for a 25 lakh flat. In a good city that is a 2BHK flat. Who will pay that much as monthly rent for a 2BHK in any city in India? And on top of that you will have to get a good tenant who takes care of your home. Moreover you will not get good tenants for months once a tenant leaves. Add to this the cost of advertisements. You friend however is making money every month without any hassles by being invested in a mutual fund.

   Pros: Pride of ownership. Low risk. You get respected in society if you buy real estate.

   Cons: Though low risk, the investment is huge and if you count inflation, risk is involved. If you do not find a buyer you may even sell it in a loss if you need cash. Illiquid – no partial withdrawal facility. Repairs cost and maintenance cost is huge that can offset the returns. No guarantee of returns.

   Where to invest: Look for advertisement in newspapers for upcoming housing complexes in good areas in your city. Usually when builders need cash they will keep the rates low. Try to pay the maximum down-payment. If you are not taking a loan, one way to save money is to have an agreement with your builder and lock in the rates by paying him a good percentage of the home and do not register the home. When the building is complete you can find a buyer and sell him at a profit. He pays for the registration cost etc. You can take profits in a short span of time. However your terms with the builder should be clear. Its preferable that the terms are clearly written in legal paper. You should also take the receipt of payments made from the builder and lock your home. It is also important to invest in homes that are in or near to the city, else you may find hard to get a buyer who is willing to pay a good price.

6. Equity Mutual Funds: One of the best ways to invest and make good money over a long period of time. You should have 2-4 good equity mutual funds in your portfolio. And yes do not buy at one go. Many people have that habit of buying at one go, it is a mistake. You should invest via the SIP (systemic investment plan) method. A small amount invested every month will get huge in years and will generate good income when you retire. Remember to carry-on the SIPs even when the markets are down. This is very important as the whole idea of making money in the stock markets is buy low and sell high. If you don’t buy when the stock market is down, how will you make money?

   Note: It is very important to choose good equity funds for investments. Do not invest your money in new fund offers (NFOs). Your financial adviser may pursue you to invest, but never do it. You don’t have any knowledge of the fund so why invest in the first place? There is a great way to chose the best funds to invest, you can read this article on How To Invest Well And Retire Rich With Crores for more information.

   Start investing with a good balanced fund. When you understand how these funds work you can start investing in more funds. Ideally you should invest in one balanced fund, one large cap fund, one mid and small cap fund and one dynamic bond fund with equal amounts in each of these funds. If you are young and willing to take risk you can invest slightly more in the large cap and mid and small cap fund.

   You should also keep tracking your funds performance. If anyone of them is not performing well, you can stop your sip in that fund and start investing in another good fund in the same category. If you want to redeem your money from the fund that was not performing then you can redeem in full, park that cash in a liquid fund and do a systematic withdrawal every month into the new fund. That way you will not buy lump sum and the cash withdrawn will get invested in the new fund over a 6-month or 1-year period. And the best part is the liquid fund will also give a good return over this period and you make some extra cash to invest.

   If you do not need cash, do not withdraw money from your funds. Think like they are your piggy-bank and you will break it only when you need cash. You must also withdraw what you need and no more. If you can do this, rest assured you will have a lot of money when you retire. Don’t believe? Ok its time for some math:

   Lets assume you decide to invest Rs. 20,000.00 every month in mutual funds for 20 years. For simplicity we are fixing the amount to 20k and 20 years. After 20 years at 12% your kitty will grow to a whopping Rs. 19,367,696.53 (1 crore, 93 lakhs, 67 thousand and 696) and at 15% your returns will be: Rs. 28,274,428.80 (2 crore, 82 lakhs, 74 thousand and 428). How is that as an investment?

   Average starting salary now-a-days is almost 30k per month and if one is determined investing 20k per month is possible.

   Pros: Returns are great. You sleep while your fund manager does all the hard work for you. Partial withdrawal possible. Withdrawal may come with tax implications. Please refer your taxman. If you do it right you will be a very rich man long before you retire.

   Cons: Its hard to find a fund that will give consistent return over a period of 10 years. You have to monitor your returns every six months. One bad fund can destroy the returns.

   Where to invest: If you have a demat account you can invest directly through your account. Your financial adviser may help. You can walk directly to the fund houses and invest. KYC needs to be filled.

7. Stock Markets: Interestingly everyone is lured to the stock markets for its stellar returns forgetting the risks. They invest huge sums thinking they will make a lot of money, only to lose and and they never ever return. This is mostly with the retail investors. Why don’t they understand that anything that gives abnormal returns comes with huge risk. The problem is everyone thinks they are different – but that’s not the case.

   Yes its true that stocks can give great returns, but the risk is also huge. A stock can move more than 10% in a day and can also fall 20% in a day. Today itself Opto Circuits plunged 38%.

   If someone would have invested in this stock yesterday, they would be down by 38% in one day and I am damn sure there will be many people.

   So how do you make money in the stock markets? First of all never depend on any tips. Even I did and lost. Pay them to lose money – how bad is that?

   One of the best ways is to pin-point two three companies with good business model. Like ITC, RIL, Yes Bank etc. and buy one or two shares every week without looking at the markets. Just like mutual funds keep a certain amount fixed and buy. For example if you fix Rs. 1000.00 for Yes Bank and if its below 500, buy 2 shares else buy 1 share. You should also book your profits every time you make 10-15% and start again from there. Do not buy at one go and only invest with the money that you don’t require for years.

   Derivatives like options and futures can give even more returns but they are riskier than buying a stock. If you have knowledge only then start playing with derivatives but hedge your position properly. Anything more is out of scope of this article.

   Pros: Amazing returns possible – more than 30% per year. Easy to invest. Partial withdrawal possible.

   Cons: Very risky. If you are not careful, you may lose it all in one year.

   Where to invest: You need a demat account. Banks and many financial institutions offer. Look at the lowest brokerage house before opening an account.

   Note: There are a lot of options to invest in India other than what is written above. However these are sufficient for most people. The best way to invest is to buy a term insurance for the head of the family and invest the rest in mutual funds.

   I offer a course on How To Invest Well And Retire Rich With Crores. It covers a lot more than what is written in this post like how to chose stocks for long term investments, how to chose mutual funds for long term investments and many other investment ideas not written in this article.

   Disclaimer: Thorough research was done before writing this article. However you must do your own research before investing. Investment decisions should not be taken in a hurry. This article is meant to help you to understand different investment options in India. The actual investment decision will be ultimately be yours.

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