Safe Investments with Good Returns

 

Let me start by saying that whenever I say “Investment”, I mean long-term or at least mid-to-long-term investments. Not in this post, and not in any future posts will I talk about making money quickly. Because there is no such thing as quick money making. There is only quick money-losing. So, if you are looking for that head over to Instagram or YouTube where a lot of people talk about how they made Rs. 10 lakhs from just Rs. 10 thousand. And I also won’t talk about investing in Cryptocurrency.

Okay, let’s start. In my other post, I talked about investments for which Income Tax deduction is available. An investment is something you make in order to get some returns on your money. For most of us, it is more than savings, but less than our primary income. It goes without saying that with higher risk you will get higher returns. I remember the days when Savings accounts used to fetch 5% interest. Now, FDs are in that segment. Would we see days where Equity Mutual Funds fetch just a 5% return? Most probably not, but there is nothing certain in this world.

There is a reason why Income Tax deductions are only available to those investments. It’s because they are safe and encourage good investment practices. Does that mean investing in stocks is not a good investment practice? It’s just that returns from the stock market are not fixed. But they are the best investment option available if done rightly.

Please note that I do not consider Insurance as an investment. Insurance is kind of a necessity and hence you should get a policy as soon as possible. Do reach out to me if you need any help in getting a new LIC policy! On the same note, a ULIP is not a good option because mixing investment and insurance is not a good idea.

Ideal Portfolio

A portfolio, in general, is a collection of different things under one roof. In terms of investing, it means, your collection of different forms of investments. It goes without saying that a mixture of safe investments and moderate-to-high-risk investments is the way to go. But what should be the ratio of this mixture for a moderately conservative policy? This is called diversification of funds. The younger you are the more you can allocate to equity without much risk. So, for a middle-aged person, the following can be a good asset ratio

• Items already covered in the other post: Tax-saving options
• Gold and Silver (both physical and virtual)
• Fixed Deposits
• Government Bonds
• Large Cap
• Mid Cap
• Small Cap
• Mutual Funds
• Equity-Oriented Funds
• Debt-Oriented Funds
• Hybrid Funds
• Cash

Items already covered in the other post : tax-saving options

Investments like Provident Funds, National Pension Scheme, Sukanya Samriddhi Yojana, and others have been covered in the other post. You may refer to those. If you have any queries related to those then feel free to contact me.

Gold and Silver

These two are the most traditional form of investments, especially in India. The risk factor is also very less considering they are the most sought materials for jewellery. And hence, the annual average return, or in investment terms, known as the Compound Annual Growth Rate (CAGR) of Gold has been 5.7% as opposed to Nifty’s 15.5% [Source].

If you are only looking in terms of investment, it’s better to buy Gold online. That way you can save on a hundred charges imposed by gold-makers, and it’s also safer that way. You can also order physical gold from the ones you have bought online.

Buying Gold online is easy. You have many platforms like Google Pay, PhonePe, Upstox, etc. There is no need for a Demat account. You can also buy Gold Mutual Funds. In my experience, investing in Gold Funds is better in terms of other service charges compared to buying gold from Google Pay or PhonePe.

Tax implication: Profit from selling is taxed as Capital Gains.

Fixed Deposits

Everyone knows about Fixed Deposits. It’s about as safe as it gets. The annual return varies from 3% to 7%. I am not a big fan of FDs because, at this interest rate, it’s more of a saving than an investment.

Tax implication: Interest earned is taxed as Income from other sources.

Government Bonds

A Government bond is a debt instrument issued by the Central and State Governments of India. Issuance of such bonds occurs when the issuing body (Central or State governments) faces a liquidity crisis and requires funds for the purpose of infrastructure development. There are different kinds of bonds like floating rate bonds, sovereign gold bonds, GOI savings bonds, etc. These are very safe investment options and you can also get a return of 7.75% return p.a. on Savings Bonds.

Tax implication: Interest earned is taxed as Income from other sources on some bonds, and on other bonds, the interest is tax-free.

Equity Shares

An equity share is a claim of ownership on the company. For a company, it is a mode of financing. And for the buyer, it is an investment. It is true that when you buy an equity share it gives you ownership rights. But how much ownership does it give? For example, Tata Motors Limited has a total of 382,91,64,903 shares. Among those, only 16% (approx.) of the shares are held by the general public. The remaining shares are held by Promoters, Mutual Fund Houses (AMCs) like UTI, Nippon India Mutual Funds, SBI Mutual Funds, etc., Financial Institutions, and other institutions. So, practically, even if you buy all the shares in circulation you won’t have any real power in the company.

A share is measured on its face value and not on its market value. Face value is the value decided by the company before issuing the shares. Normally face value of the company varies between Rs. 1 to Rs. 10. It is fixed and can only be changed after following the set rules and regulations. On the other hand, market value changes every second based on many factors like company performance; larger economic, political, and other conditions; market sentiments, etc. It is important to note that market sentiment plays a significant part in deciding short-term price variations.

People buy shares for either of two reasons:

1. To buy and sell for a higher price to get a profit. The profits are taxed as “Capital Gains”.
2. To hold the shares and get regular dividends.

How to start investing?

First and foremost, you’ll need to open a Demat account, short for Dematerialised account. Think of it as a storage unit but online. In India, Demat accounts are maintained by two depository organizations. NSDL and CDSL. You open your Demat account through one of the many available brokers like Upstox, Zerodha, Groww, etc. You can open an Upstox account from here.

What should be my investment strategy?

Profit-making through selling shares should be our main goal. It’s because relying on just dividends needs a lot more capital, and most of us don’t have that. But we should hold at least a small part of our portfolio for the distant future.

Allocation between different “Caps”

Equity shares are generally divided into 3 groups based on their market capitalization, i.e., the market value of the total outstanding shares of the company. SEBI ranks companies based on their market capitalization:

1. Large Cap:

The top 100 companies are termed as Large Cap companies and generally have a market capitalization of over Rs. 20,000 crores. These stocks are considered to be of very low risk. Stocks like Reliance Industries, Tata Motors, HDFC Bank, etc. come under Large Cap. These stocks are very liquid, meaning you will find many buyers and sellers. Allocation – 20% of total portfolio.

2. Mid Cap:

The companies from rankings 101 to 250 in terms of market capitalization are known as mid-cap companies. Their market cap generally tends to range from Rs. 5,000 to Rs. 20,000 crores. Companies like BEL, Union Bank, Polycab, etc. come under Mid Cap. These stocks are also quite liquid most of the time, so you won’t find any difficulty finding a buyer/seller. Allocation – 10% of total portfolio.

3. Small Cap:

All the companies that rank below 250 are termed Small Cap companies. They generally have a market capitalization of less than Rs. 5,000 crores. Some of the stocks here are less liquid. It is important that you verify the buyers and sellers volume before investing in these stocks. Otherwise, you might find yourself in a situation where even if you want to sell the shares there are no buyers, and you eventually have to settle for a loss. Allocation – 5% of total portfolio.

Tax implication: Profit from selling is taxed as Capital Gains. Dividends earned are taxed as Income from other sources.

Mutual Funds

A mutual fund is a pool of money managed by a professional Fund Manager. There are funds managed by organizations called Mutual Fund Houses or Asset Management Companies. These houses hire top-level professionals to manage the funds. These professionals, after thorough research, come up with asset allocation ratios. They decide how much to invest in which stock, debt, bond, etc. And when you invest in a Mutual Fund, you are indirectly investing in all these different assets. Mutual Funds are essentially like diversifying your portfolio.

One of the most popular ways to invest in MF is through Systematic Investment Planning (SIP). SIP is where you invest a fixed amount of money every month. It is beneficial because:

• You beat the market by constantly investing during both rise and fall.
• You develop a good habit of investing without feeling overwhelmed by the investment options. For most of us, investing a fixed amount of money every month is easier than a one-time investment.

There are also different types of Mutual Funds. They are:

1. Equity-Oriented Funds:

These are the funds where at least 65% of the funds are invested in equities. The risk factor is moderate to high depending on the fund type. The fund NAV varies depending on the market variations. Allocation – 10% of total portfolio.

2. Debt-Oriented Funds:

These are the funds where a large portion is invested in fixed-income instruments like bonds, debt securities, etc. These are generally low-risk options and hence, their NAV doesn’t vary a lot. Allocation – 5% of total portfolio.

3. Hybrid Funds:

These are the funds where fund managers allocate between equity and debt in a balanced way. It is generally less to moderately risky. Allocation – 5% of total portfolio.

Tax implication: Profit from selling is taxed as Capital Gains. Dividends and interest earned are taxed as Income from other sources.

Cash

Having cash is not an investment, but at least 10% of your total assets should be cash and bank balance. Technically, you will be losing money due to inflation, but you never know when an emergency situation occurs and you need money immediately. So, it’s worth losing some interest/dividend.

That’s it, folks! Hope you had a blast reading this. Please do share for maximum reach, I’m sure this will help many people. Waiting for your valuable feedback! Thank you!