Wealth creation is a time-consuming process. It requires effort, knowledge and discipline. You cannot build wealth without saving and investing. Investment needs sound planning and implementation. The first step in investment planning is to set financial goals. These can be of three types: short-term, medium-term and long-term. You then tap the available financial resources like salary or business income, savings and so on. After you are clear on your goals and know the resources at your disposal, go ahead and plan your investments.
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Investment planning not only involves setting investment strategies according to risk profile, financial goals and financial resources at your disposal, but also implementing and monitoring them. Today, you have a plethora of investment plans like shares, bonds, mutual funds, bank deposits, real estate, derivatives and so on.
Following are the investment options you can invest:
ULIP is a life insurance product that provides risk coverage along with the investment benefit. In a ULIP, you can choose to allocate your investment in different asset classes like equity, debt, and so on. You can invest based on your choice of asset class and risk tolerance in stocks, bonds or mutual funds. The payouts from these plans can be used for education, retirement and so on.
It is a voluntary retirement savings scheme launched by the Government of India. NPS promotes systematic savings during your working life to help save for retirement. Contributions to NPS can be made from a young age of 18. NPS offers investors two choices: active choice and auto choice. In active choice, 50% of contributions are invested in equity, while the rest is in government and corporate bonds. In auto choice, investments are made in a mix of equity, corporate and government bonds, depending on your age.
A mutual fund is a company that pools yours and other investor’s money and invests in various asset classes like debt, equity, and so on. There are different types of mutual funds like balanced funds, equity funds, debt funds and so on. The main advantage of investing in mutual funds is diversification which minimizes risk in investment.
Your returns from mutual funds are based on the type of mutual funds you invest and the risk involved. Equity mutual funds are highly risky but also give high returns in the long-term. Debt funds, on the other hand, are less risky and ensure the safety of your funds along with moderate returns. Balanced funds invest in both equity and debt. These funds give you moderate returns at moderate risk.
PPF is a popular long-term investment which offers capital preservation and attractive interest rates. PPF enjoys the EEE status. The money you invest enjoys Section 80C benefits up to Rs 1.5 Lakhs a year. The interest and amount withdrawn at maturity are tax free.
You can invest a minimum amount of Rs 500 a year in PPF up to a maximum of Rs 1.5 Lakhs a year. PPF currently offers interest rate of 7.6% from 1st April 2018.
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Sukanya Samriddhi Yojana (SSY) is a small savings scheme launched by the Government. It aims to create awareness on the importance of the girl child and seeks her welfare. The SSY account has to be opened in the name of a girl child only. It can be opened anywhere in India, through post offices or authorized commercial banks in India. The rate of interest on SSY is revised on a yearly basis. Currently, it is 8.1% per year.
Liquid funds are also called money market instruments. Liquid funds invest in money market instruments like treasury bills, commercial paper and certificates of deposit with a maturity term under a year. They give good returns in times of high inflation and in an high interest rate regime.
When a Company sells its shares to the general public for the first time, it’s called an IPO. These are mainly launched by new companies having a sound business model and a track record of profits. An Initial Public Offer could also be launched by a company which has been in business for a while, but wants to raise additional capital by selling part of its stake to the public.
Gold ETFs are commonly called paper gold or e-gold. These are basically open-ended mutual fund schemes, which invest in standard gold bullion of 99.5% purity. These units are listed on a stock exchange. These provide returns, in lieu of physical gold in the spot market. A minimum of 1 unit can be purchased by the investor.
Stocks are commonly known as shares and come under equities. These are units of ownership capital of companies and hence, give investors ownership rights and a share in profits. Shares are traded on the stock exchange. These are risky investments but give good returns in the long-run if carefully managed.
Bonds are debt instruments. These are issued by governments and companies. These are debt instruments through which issuers avail loans from investors. The issuer pays a fixed rate of interest over a period of time. Due to the fixed returns, these investment options offer fixed returns at low risk.
Certificate of deposits are issued by banks. These are like promissory notes. Investors cannot redeem these certificates before the maturity date. Certificate of deposits earn higher interest when compared to savings accounts.
Commodities are resources that affect the overall economy. The common commodities traded are wheat, gold, metals and so on. Commodities are listed on the commodity exchanges and can be traded like stocks.
Hedge funds are professionally managed private investment companies or partnerships. These invest in underlying assets like financial derivatives and publicly traded securities. These are characterized by high returns, high fees and low liquidity. These are usually invested by people with high net worth.
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