There are lots of small investment schemes available in India that helps tax savings too. Many of them provides you guaranteed returns, high interest rates, tax savings under various sections of Indian Income Tax Act and much more benefits.
These small investment not only provide growth to your money but also provide you with financial security at various stages of your life. It depends on your needs what product suits you best. You must go through the scheme documents before starting any investment scheme. Each financial plan has its own advantages and shortfalls, only a good research will save your hard earn money.
Initial points before starting a small investment
- When you need returns?
i.e. you need money in short term or long term
- How much risk you can take?
i.e. you prefer safe investments or some risky (e.g. bonds or equity)
- What will be your investment pattern?
i.e. you want to invest a big amount one time, or small portion regularly
- How much do you know about the product?
i.e. are you aware of good and bads of a scheme in which you are investing
Investment Options of Middle Class – Worth for investment?
Fix Deposit –
• Making fixed deposit investment means riding the bicycle (fixed deposit) although you have a motor car (stock market).
• Fixed deposit investment means placing peacock feathers between the pages of the book in the hope that they would magically yield another feather soon.
• Fixed deposit investment will give you almost same amount back due to inflation and taxes. Perhaps that is why it is named as fixed deposit.
• Of course, you stand to get a decent return if your fixed deposit is worked out at compounded rate of interest. But do you think you can become wealthy by the fixed return of the fixed deposit?
• Whatever money we give to banker they lend same money to other people by loan and earn higher return so by making fixed deposit you are doing social service also
Post Office Schemes –
• Post office schemes are basically launched to run the post office. If you are making an investment in post office scheme. Congrats along with investment you are doing social service of paying a salary of thousand of post office employees.
• If you love to invite trouble like standing in the long queue at a post office, getting unreasonable and unfriendly customer support you can invest in post office schemes.
Provident Fund –
• Provident fund scheme is the best example of collective living. The beauty of this scheme is you contribute X amount from your salary and your employer contribute Y amount. The government collects this amount and does a good amount of social services, like paying salary to PF employees who are unemployable otherwise.
• For withdrawing PF money, you will be shown a number of rules. You required written permission from your employer to withdraw PF amount and…blah..blah. The government is strict in this matter for a practical purpose they don’t want you to waste this money.
• You will get money from PF at retirement age, but that money will not be enough to live retirement life happily.
Insurance Plans –
• If you are dreaming of earning a high return through insurance policy forget it. Insurance plans are plans where you agree to pay fixed amount monthly/quarterly/half-yearly and wait till maturity. At the maturity, you curse Insurance agent for making false promises.
• A true Insurance policy is term plan which provides risk coverage. So once you are covered fully with term plan you should not purchase the insurance plan for investment.
As you can see, the popular investment options available to the middle class people don’t allow you to get rich. In the event, stock markets continue to offer the best hope. To be sure, you may not become rich overnight on the bourses. But by the notch of your patience and perseverance, stock markets can help you realize the ultimate middle-class dream, that of seeing a few billionaires become middle-class overnight.
So forget all these play it safe in life investment option and stay invested in stock market
Apart from above, There are various options where you can invest money in India and get good returns. These options include Savings accounts, Fixed Deposits, Debt Funds & FMPs. Further, let’s see how each of these options work for you to get good returns.
Savings Account is the Best Basic Option
If liquidity is your prime concern then this will be the initial option you should go for. Today the interest rates are free from regulation & there is an increase in the interest income to Rs 10,000 which is exempted from tax. Hence, it is a good idea to invest in a savings account. Also, banks calculate interest on your money into the savings account on a daily basis. This is a plus point to investors.
However, only a few banks offer high interest rates like 5% to 6% and above this limit. The rate of return on funds that contain small amounts is just 3% to 4%. Hence, you should also consider other options also and then decide. Now let’s see the next option that will through more light on where to invest in India for good returns at a different level.
If Security is your Concern, Go for Fixed Deposits
Fixed deposits in banks are measured to be safe & are investments which are highly liquid as compared to others. Today, a one to two year fixed deposit (FD) can fetch you around 8% to 9% yearly interest. This would sound much rewarding for basic investors. However, here comes the role of tax. You must be aware that the interest you get is added to your income & tax will be charged on the whole.
Let’s consider an individual in the highest tax slab. Interest of around 9% will fetch him around 6% to 7% post tax. This means that actually he will get a benefit of 2% to 3%. However, for investors who fall in lower tax slabs, they can benefit from good returns.
The money that you invest in a fixed deposit will get locked in at high rates as decided at the time you invest. Also this will not affect your returns if in case the interest rate goes down in future. This is the biggest beneficial factor of investing in a fixed deposit.
Try the Sweep-in/Sweep-out
Banks offer a sweep-in/sweep-out option. Let’s see what does this has to offer. Funds which are listed in savings account can exceed above certain threshold limit. If you invest in such facilities then the amount which exceeds the threshold limit will be invested automatically in fixed deposits. This will give you higher returns. Also, it does not affect on your liquidity of your savings account.
Hence, one can remove funds at any period of time. However, the underline investment is in a Fixed Deposit. Therefore, one is liable to consider all the taxation factors & then analyze the real benefits.
Ultra Short Term Debt Funds is another Good Option
These kinds of funds invest in securities which have short term maturities. In the past one year, they have generated around 8.5% to 9.5% returns. The biggest plus point in Ultra Short term funds is their tax implication factors. Ultra Short Term Debt Funds are liable to a Dividend Distribution tax of 12.5% for each individual investor (effective rate can be up to 13.52%). The short-term capital gains tax for growth units will be according to your income-tax slab in which you fall. However, the long-term capital gains tax is around 20% with indexation. A high interest rate factor & efficient taxation factor enables it as a good investment option.
However, one should not expect similar performance when interest rates decrease. Also verify on the credit quality of the portfolios before you select any fund.
Fixed Maturity Plans (FMPs) if you’re Looking for Fixed Returns
Fixed Maturity Plans are debt mutual fund schemes. These types of plans can fetch you nearly fixed returns. Also the fluctuations in interest rates will not affect your returns. FMPs are available with different maturity plans & scores on efficient taxation factors unlike fixed deposits.
However, they are not highly liquid as is the case with fixed deposits. Your invested money can only be withdrawn through stock exchange. In stock exchange, these instruments are not traded on a high basis. Hence, you should be clear of your requirement while you invest in this instrument.
In the current interest rate scenario, FMPs do offer high post tax yield to investors. Also like fixed deposits, you can lock-in your investment at higher returns for a certain period of time.
Short Term Debt Mutual Funds for Higher Risk Appetite
These types of schemes will invest your money in debt securities with maturity period of a year or two. Fluctuations in interest rates have an impact on Short Term Debt Funds. However, in the current phase, these funds have delivered 8% to 9% to returns to the investors. You also can benefit from a lower dividend distribution tax (13.52%) & efficient long term capital gains taxation (20% with indexation).
All these factors make this one a good choice for investors with a higher risk appetite. There are categories of floating rate funds which investors can opt for. This is for those who don’t want to take risk of interest rate fluctuations.
All the above options have their own risk & return characteristics. However, you need to identify what are your requirements. You should consider factors like time horizon, liquidity & taxation factors & then decide which option to go for. So the above options will help to know where to invest in India for good returns.
Share market investment is also a good option for investing in the Indian market. You can check this info on how to make investment in share market in India.