Investment options for salaried employees
It is important to start planning for a better financial future early on, especially for those who have just got employed or have been recently married. One way to do this is by investing a portion of your salary in various investment options that align with your financial goals and risk tolerance. Here, we will explore some investment options for salaried employees, especially those who are just starting out in their careers.
Firstly, you should understand and plan the different times of your life when you would need the money. So, start by setting some goals.
Three types of goals for salaried employees
- Short-term goals: Saving for a short term goal may include down payment on a house or car, your child’s early medical expenses, celebrating his birthdays and various functions that happen in an Indian families, major house repairs, special vacation, meeting unexpected expenses. So, you should set a 3-5 yrs goal and make use of Recurring deposits (RD) as an investment instruments. RD’s carry very low risk and can be liquidated by paying only a nominal Bank charge if the money is required earlier than planned. After you receive the RD amount in your Bank account after 3-5 yrs, you may convert the balance amount left after meeting your short term goals into a Fixed deposit or again make a new RD. FDs are low-risk investments that offer a fixed return over a specific period of time. You can choose the tenure of the FD and the amount you want to invest. The interest rate on FDs is usually higher than a savings account but lower than other investment options.
- Mid-term goals: For mid-term goals, such as saving for children’s higher education, buying a house or trip to an expensive foreign destination, you could consider investing in a public provident fund (PPF) or an employee provident fund (EPF). PPF is a long-term investment option offered by the government of India, with a tenure of 15 years. It offers tax benefits and a fixed return of around 7% per year. EPF is a retirement savings scheme for salaried employees, where a portion of your salary is contributed by your employer and you towards a retirement fund. You can also withdraw the money from your EPF account for specific purposes, such as buying a house or paying for children’s education.
- Long-term goals: For long-term goals, such as retirement planning, you could consider investing in mutual funds, stocks, and real estate, in addition to PPF. Mutual funds are investment vehicles that pool together money from multiple investors and invest in a diversified portfolio of stocks, bonds, and other securities. Stocks represent ownership in a company and can be a good long-term investment option if you have a high risk tolerance and are able to bear market fluctuations. Real estate can also be a good long-term investment, as the value of property tends to appreciate over time. However, it is important to do thorough research and seek professional advice before investing in any of these options.
Building assets
Over your life for a better retirement, you should consider building assets such as land, house/flats, gold, a large portfolio of safe stocks and mutual funds. You can save money to buy these assets outright or take out a loan. Another option is to build digital assets, such as a blog, YouTube channel or presence or following in various social media or digital communities, which can generate passive income over time. Even newer forms of digital assets would be available as the technology and world grows.
Learning about investments
It is important to educate yourself about the various investment options available and understand their risks and returns before making any decisions. You can read books, attend seminars, or seek professional advice from a financial advisor to learn about different investment options and how to create a diversified portfolio. Learning and changing your investment approach is a life long process. Just try to keep it as simple and practical as possible.
Investments to be made by the salaried employees :
- Public Provident Fund (PPF): Start by investing in PPF. The amount would vary for every person as it would depend upon various factors like 80C deduction tax benefits, the corpus required to meet various goals etc.
- Mutual funds: Consider exchange-traded funds (ETFs) for long-term growth to begin with and avoid hybrid funds completely due to high charges. As you slowly start understanding about various types of mutual funds, slowly, you can start investing in large cap mutual funds and slowly progress towards mid-cap, small caps or multi-cap funds.
- Stocks or bonds: Direct investments in individual stocks or bonds can be considered for a portion of your portfolio, depending on your risk tolerance and investment goals. Around 15-20% of the savings can be invested initially. Begin with investing in profitable, low debt and reputable large cap companies in different sectors like IT, Banks, Consumer products etc. As you understand more, start investing in mid-cap and small-cap companies too.
- Recurring deposits and fixed deposits: As you gain more experience and your financial situation changes, you may want to re-evaluate your investment mix and allocate more of your funds to shorter-term investments like recurring deposits and fixed deposits to meet your near-term goals.
What is PPF ?
A Public Provident Fund (PPF) is a long-term savings scheme made available by the Government of India. It is a tax-free savings instrument. The PPF account can be opened at designated banks and post offices in India.
Some of the key features of PPF account are:
- Eligibility: Any resident individual in India can open a PPF account. Minors, through their guardians can also open and operate a PPF account. One person can have only one PPF account.
- Contribution: The minimum contribution to a PPF account is Rs. 500 per year, and the maximum is Rs. 1,50,000 per year. Contributions can be made in lump sum or in instalments.
- Tenure: The tenure of a PPF account is 15 years, which can be extended in blocks of 5 years after the initial 15-year period.
- Interest rate: The interest rate on a PPF account is set by the Government of India and is reviewed on a quarterly basis. The interest rate is “currently 7.1%” per annum.
- Tax benefits: Contributions to a PPF account are eligible for tax deductions under Section 80C of the Income Tax Act, 1961, up to a maximum of Rs. 1.5 lakh per financial year. The interest earned on a PPF account and the final maturity amount are tax-free.
- Loan facility: PPF account holders can avail of a loan against their PPF balance after the completion of 3 years from the date of opening the account. The loan can be availed up to 25% of the balance at the end of the 2nd year preceding the year in which the loan is applied for.
- Partial withdrawal: Partial withdrawal from a PPF account is allowed after the completion of 5 years from the date of opening the account. The maximum amount that can be withdrawn is 50% of the balance at the end of the preceding financial year.
- Full amount withdrawal : The final maturity amount can be withdrawn at the end of the 15-year period or at the time of extension, if any.
Investment options for salaried employees
Also read : Tips for beginners to invest in stock market
Also read : Strategies for saving for your retirement
