If you want to start investing your money and are worried about where to start off then fret not, you are not alone. But the good news is we are here to help you in understanding the various kinds of investment opportunities available in India. But before we begin, let’s just shed some light on the fact that many investors are out there looking for an investment opportunity that provides high returns, no risk and that too in no time. Remember this, no matter how luring the scheme may be… you need to burst your bubble and accept that such schemes do not exist. Now before you start investing, make sure that you are in this for the long haul. If your goal is to save taxes then you must look into opportunities like ELSS and PPF whereas if you want to save for your retirement then you must look at ULIP, which also has tax-benefits under EEE. However, the most important aspect is to find the right investment opportunity for you given your current income and your future goals. Let’s delve into the characteristics of various investments opportunities.
What is ELSS? – In simple terms, if you want to invest your money in mutual funds & also want to save taxes then ELSS should be your go-to avenue. The Equity Linked Saving Scheme or ELSS is a diversified, equity mutual fund that invests in the capital market and selects companies with different market capitalizations. In a financial year, an investor can claim a tax saving under section 80C of Income Tax Act &get deductions of up to Rs. 1,50,000 against investments made in ELSS.
Rate of return: When you invest your money in ELSS, you must know that ELSS funds come under the equity category (open-ended). This means that as much as 65% of the money is invested in equity. The rate of return in ELSS is dynamic, that means it purely depends on how well the stock market performs over a long time period. One point to keep in mind is that the money invested in ELSS has the least lock-in period, i.e. three years. Another thing to keep in mind is that the returns on ELSS schemes are taxed at 10%, without indexation benefit, if they exceed Rs1,00,000 in any FY. In comparison, PPF has a minimum lock-in period of 15 years. However, as per past trends and how well the market& the stocks have performed, an investor can expect an approximate return of 12-14%.
Risks: Yes, there are risks involved while investing in stocks. And it can be risky and volatile in the short term, hence as mentioned earlier, you need to know that. However, stocks have the potential to offer better returns in the long run.
What is ULIP? – When the purpose of your investment is wealth creation that covers your life then one of the best avenues to invest your money is Unit Linked Insurance Plan, or popularly known as ULIP. This is a specially designed investment plus insurance product where a part of your investment is used to insure you, while the remaining is invested in the products of your choice – this can be a healthy mix of equity, debt, hybrid funds. ULIP can help you save taxes as well, as the premium paid is eligible for a tax deduction under Section 80C. And guess what, when the policy matures, the returns are exempt from income tax under Section 10(10D) of the Income-tax Act. However, the best part about ULIP is that you can choose to switch from equity to debt or hybrid as per your investment objective during the lifecycle of the investment.
Related: All about ULIP’s
Rate of return: The rate of return can vary in ULIP. Why? It is because the investor chooses the combination of equity, debt, hybrid funds in his investment.
Risks: This may seem like the best investment opportunity, however, before you push all your hard-earned money here you must know that the biggest caveat with ULIP is the lock-in period. Investments made under ULIP have a lock-in of five years. One caveat is that ULIP as an investment is not as diversified as compared to ELSS, the risk factor is a bit high.
What is PPF?
With an aim to mobilize the small savings as investments, coupled with a decent return – PPF or Public Provident Fund was introduced in the country in 1968. Decades later, it still remains a favourite savings avenue for many investors. And one of the major reasons why this is still a hot investment option is because of its ‘saving+tax saving’ nature. You want to invest in a safe investment option with decent gradual guaranteed returns and also want to save taxes then you should open a PPF account. One thing to keep in mind is the lock-in period which is 15-years! However, there are many benefits to investing in PPF. It’s a tax-saving scheme. The 80-C section provides PPF with EEE benefit (Exempt, Exempt, Exempt) which means that investment up to Rs. 1.5 lakhs per year, the returns you earn and the corpus when the fund matures are all exempted from taxation.
How to get 1 Crore by investing in PPF.
Rate of return: Even though there’s a lock-in period of 15 years, there are provisions where you can withdraw some money of the money invested or take loans after 7 years. The current rate of return in PPF is 7.9%. In comparison to Fixed Deposits, the returns from a PPF are more attractive.
Risks: One of the biggest benefits of investing in a PPF account is that the risk factor in PPF investment is low. This is possible because it is backed by the government.
It is important to note that the new tax slab introduced in Union Budget 2020 does away with these tax deductions, if you opt for the updated regime. However, the tax benefits and freedom of these instruments remain extremely beneficial to those who choose to stay in the same tax regime. Moreover these investments prove to be a safer and more secure investment option apart from the tax benefits as well. Now that you know about the popular investment opportunity, you should choose what suits your needs and how you want to invest your savings. Pro tip: Always diversify your investments. But always remember, mutual fund investments are subject to market risks, please read the offer document carefully before investing.