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October 11, 2020

10 Instruments Millennials should Invest

by CA Shivam Jaiswal in Stock Market

10 Instruments Millennials should Invest

It is generally noticed that people pay a lot of attention at earning money. They will study hard and work harder so that their income is according to their desires. However, not many people have the skills to make their money work for them. Not a lot of people are aware of how to invest their income so that their future is adequately secured. Investing is how you take charge of your financial security. It allows you to grow your wealth but also generate an additional income stream if needed ahead of retirement. Not investing, or not doing it properly, can mean a longer working life.

Investing your money in the right thing can allow it to grow. With the help of the best investment options, you can make a difference in your wealth. Most youngsters have developed a larger risk appetite and are not satisfied with fixed-income schemes. Higher income levels, more access to banking and equity markets have played an important role in this crucial transformation. Here are 10 instruments millennials can start investing in in order to make their wealth grow:

1. Mutual Funds

A mutual fund is a company that pools money from many investors and invests the money in securities such as stocks, bonds, and short-term debt. Mutual funds are a popular choice among investors because they generally offer professional management, diversification, affordability and liquidity.

Mutual funds generally offer money in the following 3 ways:

  • Dividend Payments – A mutual fund may earn income from dividends on stock or interest on bonds. A mutual fund pays out nearly all of the net income it receives over the year (in the form of a distribution).
  • Capital Gains Distributions – The price of the securities in a fund may increase. When a fund sells a security that has increased in price, the fund has a capital gain. Most funds also pass these gains on to their investors.
  • Increased NAV – If the market value of a fund’s portfolio increases, after deducting expenses, then the value of the fund and its shares increases. The higher NAV reflects the higher value of your investment.

Mutual funds can be generally covered under the following types:

  • Equity or growth schemes – These are one of the most popular mutual fund schemes. They allow investors to participate in stock markets. Though categorised as high risk, these schemes also have a high return potential in the long run. They are ideal for investors in their prime earning stage, looking to build a portfolio that gives them superior returns over the long-term.
  • Money market funds or liquid funds – These funds invest in short-term debt instruments, looking to give a reasonable return to investors over a short period of time. These funds are suitable for investors with a low risk appetite who are looking at parking their surplus funds over a short-term. 
  • Fixed income or debt mutual funds – These funds invest a majority of the money in debt – fixed income i.e. fixed coupon bearing instruments like government securities, bonds, debentures, etc. They have a low-risk-low-return outlook and are ideal for investors with a low risk appetite looking at generating a steady income. However, they are subject to credit risk.
  • Balanced funds – These mutual fund schemes divide their investments between equity and debt. The allocation may keep changing based on market risks. They are more suitable for investors who are looking at a combination of moderate returns with comparatively low risk.
  • Hybrid / Monthly Income Plans (MIP) – These funds are similar to balanced funds but the proportion of equity assets is lesser compared to balanced funds. Hence, they are also called marginal equity funds. They are especially suitable for investors who are retired and want a regular income with comparatively low risk.
  • Gilt funds – These funds invest only in government securities. They are preferred by investors who are risk averse and want no credit risk associated with their investment. However, they are subject to high interest rate risk.

2. Public Provident Fund (PPF)

  • Public provident fund is a popular investment scheme among investors courtesy its multiple investor-friendly features and associated benefits.
  • It is a long-term investment scheme popular among individuals with low risk appetite who want to earn high but stable returns, with a lock-in period of 15 years.
  • Individuals can start investing in PPF with a minimum amount of Rs. 500 p.a. A maximum investment of Rs. 1.5 lakh can be made in one year in PPF account.
  • PPF comes under the Exempt-Exempt-Exempt (EEE) category of tax policy which implies that the principal amount, the maturity amount, as well as the interest earned is exempt from taxes.
  • One can fully withdraw the PPF account balance only upon maturity i.e. after the completion of 15 years. Upon completion of 15 years, the entire amount standing to the credit of an account holder in the PPF account along with the accrued interest can be withdrawn freely and the account can be closed.
  • However, if account holders are in need of funds, and wish to withdraw before 15 years, the scheme permits partial withdrawals from year 7 i.e. on completing 6 years.
  • An account holder can withdraw prematurely, up to a maximum of 50% of the amount that is in the account at the end of the 4th year (preceding the year in which the amount is withdrawn or at the end of the preceding year, whichever is lower). Withdrawals can be made only once in a financial year.
  • One can also take a loan against your PPF account between the 3rd and 5th year. The loan amount can be a maximum of 25% of the 2nd year immediately preceding the loan application year. A second loan can be taken before the 6th year if the first loan is repaid fully.

View : 5 Changes in Public Provident Fund PPF from April 2020

3. Bank Fixed Deposits (FD’s)

  • A fixed deposit (FD) is a financial instrument provided by banks or NBFCs which provides investors a higher rate of interest than a regular savings account, until the given maturity date.
  • Investors may be exposed to risks when they invest in market-linked instruments to earn higher returns. Hence, to ensure balanced financial growth, investors need to seek safer investment options as well.
  • Fixed deposits are safe and lead to guaranteed returns, as opposed to riskier instruments. Therefore, even when an investor loses money on other investment instruments, they can recover a portion of their losses from the FD investments.
  • FD plans also offer flexibility when it comes to the tenure of the plan. Depending on investor goals, they can either open short-term FD accounts or long-term FD accounts
  • Fixed deposits are perfect investment instruments for inexperienced investors. Further, risk-averse individuals can benefit greatly from such schemes

4. Recurring Deposits

  • A recurring deposit is a special kind of term deposit offered by banks which help people with regular incomes to deposit a fixed amount every month into their recurring deposit account and earn interest at the rate applicable to fixed deposits.
  • Unlike FD’s, where one must invest a lump sum amount, Recurring Deposits do not require a huge amount of money at one go. One can opt for monthly payments.
  • According to an RD scheme, one must deposit a fixed amount of money every month over a period of time. This will instil the habit of regular savings in a person.
  • People of low income can also invest in this scheme as the minimum amount to be invested every month is as low as Rs. 1000. Therefore, it is highly beneficial to people, particularly the set who can partake with little amount from their monthly budget.
  • Unlike Mutual Funds and Stocks, in which one can lose money if the market value goes down, the amount invested in RDs is safe and secure, and will be returned along with the interest at the end of the tenure.
  • Recurring Deposit is the best and safe option to invest, especially, if someone is planning for short term investments.

5. Gold (Physical or Paper Form)

Gold prices soared to new record highs as investors sought safe haven due to health of the global economy ravaged by the COVID-19 pandemic. Gold is a unique asset – highly liquid, yet scarce. It is a luxury good as well as an investment. There are many ways to buy gold. Different products can be used to achieve a variety of investment objectives.

Some investment options in gold are:

  • Buying physical gold 
  • Buying gold-backed ETFs
  • Buying into allocated gold accounts
  • Internet Investment Gold 
  • Buying gold derivatives
  • Buying gold mining stocks

Investment in gold funds is nowadays being preferred over investment in physical gold due to a variety of advantages. Some of the advantages of investing in gold funds include: 

  • No Storage Issues
  • Gold mutual funds are an excellent investment option to diversify one’s investment portfolio and reduce overall market risk.
  • Another major advantage of a gold fund is that it can be liquidated in short notice and without much hassle.
  • Historically, when stocks have gone down, the prices of gold have moved up. Hence, investing in gold through funds is likely to balance out any volatility in equity investments. 
  • Gold funds are a safety net and hedge against the currency fluctuation and market inflation

Investing in gold funds is an intelligent way to take exposure in gold. But at the same time, one needs to understand that fund value may fluctuate and there are no guaranteed returns on investment.

6. Government Securities

A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments. It acknowledges the Government’s debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than one year) or long term (usually called Government bonds or dated securities with original maturity of one year or more). G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments. Investing in G-Secs has the following advantages:

  • Besides providing a return in the form of coupons (interest), G-Secs offer the maximum safety as they carry the Sovereign’s commitment for payment of interest and repayment of principal.
  • They can be held in book entry, i.e., dematerialized/ scripless form, thus, obviating the need for safekeeping. They can also be held in physical form.
  • G-Secs are available in a wide range of maturities from 91 days to as long as 40 years to suit the duration of varied liability structure of various institutions.
  • G-Secs can be sold easily in the secondary market to meet cash requirements.
  • G-Secs can also be used as collateral to borrow funds in the repo market.
  • The settlement system for trading in G-Secs, which is based on Delivery versus Payment (DvP), is a very simple, safe and efficient system of settlement. The DvP mechanism ensures transfer of securities by the seller of securities simultaneously with transfer of funds from the buyer of the securities, thereby mitigating the settlement risk.
  • G-Sec prices are readily available due to a liquid and active secondary market and a transparent price dissemination mechanism.

7. Life Insurance Schemes

While planning for personal finance, insurance plays a critical role as it helps cover the risk. Life insurance is a contract between a policyholder and an insurance company to provide the policy holder with coverage based upon timely payment of premiums. Life insurance provides a death benefit to the named beneficiary/dependent (usually a spouse) upon policyholder’s death. Various benefits are attached to the life insurance policy, and tax benefit is one such key benefit.

Exemption under section 10(10D) on Maturity amount received

  • Exemption under section 10(10D) is available on any amount received under a life insurance policy. Such amount includes death benefits, maturity benefits and, accrued bonus.
  • When the premium paid on the policy does not exceed 10% of the sum assured for policies issued after 1st April, 2012 and 20% of sum assured for policies issued before 1st April, 2012– any amount received on maturity of a life insurance policy or amount received as bonus is fully exempt from Income Tax under Section 10(10D).
  • Also, policies taken after 1 April 2013, on the life of a person with a disability or a disease specified under Sections 80U and 80DDB respectively, where the amount received on maturity is tax free provided the premium paid does not exceed 15% of the sum assured.
  • Any money received from a life insurance policy, where the premium is more than 10%, 15% or 20% of the sum assured as the case may be, is fully taxable.

Deduction under Section 80C

  • Premium paid towards life insurance policies to insure the policyholder’s own life or the life of his/her spouse or child qualifies for deduction under Section 80C, up to a maximum of Rs 1.5 lakh a year. An individual and a HUF, both, can claim this deduction under Section 80C.
  • However, to claim deduction under section 80C the premium paid should not exceed 10% of the sum assured where the policy has been issued after 1st April 2012.
  • For policies issued prior to 1st April 2012, in order to claim this deduction, the premium paid should not exceed 20% of the sum assured.
  • Further, the premium should not exceed 15% of the sum assured on a policy issued after 1st April 2013, covering the life of an individual with a disability referred to under Section 80U or a disease referred to under Section 80DDB, to claim the deduction under Section 80C.

8. Medical Insurance or Health Coverage Schemes

The current COVID-19 pandemic has made the entire world realize that medical exigencies are unpredictable and can cause a financial upheaval that is tough to handle. In today’s time, the cost of healthcare in the country has risen significantly thanks to the ever-growing demand for medical services. Having a health insurance or Mediclaim comes handy in times of medical emergencies. Many individuals often have to use funds from their savings in case of a medical emergency, which not only impacts their financial health but also jeopardizes personal goals.

With the rising cost of medical expenses, access to good medical facility and hospitalization costs can be financially strenuous. Therefore, getting a health insurance cover for yourself and your family can provide the added protection you need in times like these. Apart from the obvious benefit of having the financial confidence to take care of your loved ones, a health insurance plan is extremely useful when it comes to beating medical treatment inflation.

The right health insurance, not only covers your hospital charges in case of variability but also tackles the pre-and-post-hospitalization costs. This basic cover, which includes your family as well, will ensure that bills are the last thing on your mind at the time of an emergency.

Every individual can claim a deduction under Section 80D for their medical insurance which is taken from their total income in any given year. Not only can an individual take benefit by purchasing a health plan for themselves but also one can take advantage of buying the policy to cover their spouse, dependent children or parent. An individual can claim a deduction of up to Rs 25,000 for the insurance of self, spouse, and dependent children. An additional deduction for the insurance of parents is available to the extent of Rs 25,000 if they are less than 60 years of age, or Rs 50,000 if parents are aged above 60.

9. Direct Equity (Investment in Stocks)

  • Direct equity investments are basically market linked investments. An equity investment is money that is invested in a company by purchasing shares of that company in the stock market. These shares are typically traded on a stock exchange.
  • When investing in equities, on has to consider a lot of factors such as industry, sector, size and structure of the company and management track record.
  • Compared to any other asset class, direct equity is riskier.
  • Best investing skills generates maximum profits here. Direct equity is risky but it also opens doors for higher returns.
  • Return of direct equity (in long term) can outperform any other asset class. But the only precondition is, one should know to value stocks and time the market.
  • Direct equity investing is all about long term growth. When one buy stocks, he/she becomes part-owners in that company.
  • This way one becomes eligible to share both profit & loss made by company. Investors prefer equity because no other investment option promises long term growth as high as equity. As a result, equity also beats inflation very conveniently in long term.

10. National Pension Scheme (NPS)

An initiative undertaken by the Government of India, the National Pension System or the NPS seeks to provide retirement benefits to all citizens of India. It is a defined, voluntary contribution scheme that is market-linked and managed by professional fund managers. Benefits of investing in NPS are as follows:

  • NPS is regulated by PFRDA, with transparent investment norms and regular monitoring and performance review of fund managers by NPS Trust.
  • A Subscriber can contribute at any point of time in a Financial Year and also change the amount he wants to set aside and save every year
  • Subscribers can choose their own investment options (Auto choice or Active choice) thus providing the flexibility of choice.
  • An individual can open an account with low initial contribution (minimum of Rs. 500 for Tier I and a minimum of Rs. 1000 for Tier II) at the time of registration. Subsequent minimum contributions as given below are also nominal under this scheme:
    1. Tier I: Minimum amount per contribution – Rs. 500 & Minimum contribution per FY – Rs. 1,000
    2. Tier II: Minimum amount per contribution – Rs. 250
  • The NPS fund gives individuals partial accessibility to their funds saved over the years, thus allowing them to meet financial needs before retirement during emergencies.
  • Own contribution of a subscriber towards Tier I investments tax deductible within the total ceiling of Rs.1.5 lakh u/s 80C. Under section 80CCD (1), subscribers are allowed deduction up to Rs.50,000 as deductions towards Tier I contributions. Contribution of an employer towards Tier I investments is eligible for deduction up to 14% for central government contributions and up to 10% for others. This deduction is over and above the deduction limit applicable u/s 80C.

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