Investment Plans
The purpose of our life could
be summed up into one right word — Happiness. Finding and unlocking the secret
to lasting happiness is a duty we all owe ourselves. One way to
bring happiness into our lives is fulfilling our ‘Life Goals’.
We all have different goals –
buying a house, giving the best education to the kids, see them building
family, retirement and a lot more. Many of us also hope to achieve a level of
wealth while providing for other goals. But the ultimate goal for anyone would
be achieve the freedom from financial worries. This freedom is possible with
smart goal-based investments.
Just as people have different
goals, there are investments to help achieve these objectives. Smartly
investing your hard-earned money ensures that the right amount of funds are
available in the right time.
What is Investment
- What does it comprise of?
When you invest, you commit
your money or resource in the expectation of future benefits. For instance,
when you want to accumulate some Rs. 20 lakh for higher-education of your
child, you may need to save about Rs. 10,000 per month for next 10 years to
achieve the goal.
This Rs. 10,000 that you forgo
now towards a goal in the future is your investment in that goal. Also,
investing implies that you have committed the money to a financial product with
the hopes of getting significantly more money in the future.
Why Should You Invest?
Majority of us have a single source of income, but we have several needs that are immediate, medium term and long term. And if we start to fulfil one goal after other with our accumulated savings, we would be hardly left with anything for our long-term goals.
Savings
= Income - Consumption
This equation shows savings as
the remaining amount after the deduction of total expenditure from total
income. Mathematically, the equation gives higher importance to consumption
first. However in real life, experts recommend to invest/save for future first
and then manage your spends with the remaining amount. Thus, if you plan to
save more money to fulfil your goals, there are only two possible options –
reduce spending and increase your income. Often the former is easier than the
latter.
So, coming back to this
question- “Why should you invest?” The answer is pretty simple - ‘You should invest to create
wealth, so that your savings are safe’. And why do you need to build
wealth?
·
To beat inflation, that keeps eating into the value
of your savings, unless you invest smartly
·
To fund your different life goals like planning for
retirement, children’s education, buying a car, going on an international
holiday, and so on
·
To keep a financial buffer for unplanned expenses and
emergencies
·
To deal with higher life-expectancy, which means
people are living longer and therefore need more money to maintain their
lifestyle.
Hence, it is critical not just
to have money in the savings account, but rather utilise it to make investments
that enable you to create wealth over a long period.
What is the
Difference Between Saving and Investing?
What
is Saving?
In simple terms, saving means
putting aside money, bit by bit. The primary goal of saving is to preserve
capital. People usually save up their hard-earned money to pay for something
specific, like a vacation or a wedding, deposit on a car or house, or to cover
for any unexpected emergencies. Typically, it includes the act of putting the
money into cash products, such as a savings bank account.
What
is Investing?
Investing involves committing
your money into an investment product with hopes of making a profit. Investing
is different from saving as it involves some level of risk. Investors assume
this risk with the hope that they will make more money and increase the value
of their investments.
The potential of receiving more
money is the motivation behind why you should invest in the first place.
However, just putting your money in any financial instrument may not be a smart
way to invest.
A smart investment for you
would be one that works towards fulfillment of your financial goals and should:
·
Consider the amount that you will need to fulfill
your goal
·
Allocate your money to help you beat inflation
·
Understand the time frame you have in hand
Simply following on someone’s
recommendations may not be a smart investment.
What
is Inflation & How does it affect wealth?
In simple language, inflation
is the rate at which the overall market prices increase over time. For example,
if the inflation rate was 5% last year, any commodity which was priced at Rs.
100 could cost about Rs. 105 now (Source: TheSWO Financial Calculator)
While looking at your wealth,
the effect is simply reverse of the commodity price. Just imagine that if you
had Rs. 100 on year ago, you could’ve bought that commodity. But if you kept
this money in your pocket for a year, you would find that you are short by Rs.
5.
This is why, you need to invest
smartly to overcome this wealth eating monster, and it’s not difficult.
What Are the Different
Types of Investments?
Equity
Investments
Most investments can be
categorised as either equity investments or debt investments. In an equity
investment, a person buys a share of the ownership in a company, which entitles
the investor to the profits and losses of the business.
For example, if you buy a ‘Food
Truck’, your profit will be based upon the net profit that the food truck
generates. Similarly, if you buy shares of a company, your profit is based upon
the rise (or fall) of the value of the company’s shares and the dividend which
Reliance pays (if any).
Fixed
Income or Debt Investments
In a debt investment, you lend
money to a business or a government institution. However, in this case, your’s
business. If you buy a bond you are eligible to receive a fixed interest
irrespective of the profits earned by the firm or the government.
Besides above stated kinds of
income (dividends in case of equities and interest in case of debt), one can
also earn capital gains by sale of the investment. Due market factors the price
of the equity and debt changes almost daily and the difference in the price of
sale and purchase is investors’ capital gain.
Direct
Investment Instruments
You can invest directly into
the stocks of companies or buy the bonds issued by them and the government.
Stocks
or Shares
Stocks are simple- they are
shares of ownership in a specific company. For example, when you own a share of
you own a tiny piece of that company. In general prices of stocks fluctuate
with the company's fortunes, and with the changing conditions of the economy at
large.
Bonds
Bonds are certificate of your
lending money to the issuer at the said interest rate. The interest on each
bond could be paid to you regularly and at the end the face value is returned.
Alternatively, you can also sell the bond before expiry if you need.
Investors are attracted by this
investment type because of its relative safety. However, you should always
check the rating of the corporate bonds, to ascertain the risk involved.
Highest rated bonds and
government securities often carry lower risk, but they will also offer lower
rate of interest.
Indirect
Investment instruments
Indirect instruments refer to
the funds and instruments which invest in a variety of stocks or bonds or both
on behalf of investors.
These investments are
professionally managed and highly regulated. Following are some of the most
popular indirect investments:
·
Mutual Funds
·
Unit Linked Insurance Plans
·
Other Debt Investments
Although, there are various
divisions within these investments, but the most useful is the risk-return
possibility in the three catogories.
Understanding the risk-return
profile of the three investments will help you decide when to invest in which
category of instrument. We discuss this in the later part of this page.
However, you should know that
smart investors are always diversified into all three categories in various
proportions, based on their own risk tolerance and financial needs. This too we
shall discuss in detail later, but first let’s have a look at the instruments
where you can invest under each category.
Mutual
Funds
A mutual fund is formed when money is
collected from different investors and invested in a company’s stocks or bonds.
Typically, a mutual fund is shared by thousands of investors and is managed
collectively to earn the highest possible returns. The person driving the mutual
fund is a professional fund manager.
Mutual funds offer diversified
investment with lower investment corpus, in any or multiple asset classes.For
example, you can invest in a pure equity fund, a debt fund or a hybrid fund
investing in both stocks and bonds.
Mutual funds may offer various
risk category funds based on the type of stocks or bonds they are investing
into. Index funds are considered the safest fund category among equity funds.
Whereas, Gilt funds are the safest bet among the debt categories.
Unit
Linked Insurance Plans (ULIPs)
ULIPs are life insurance plans
with an additional feature of investing your money in multiple assets based on
your investment goals. However, there are two big differences: -
1) You can invest in multiple
funds under a single ULIP investment – Equity or Debt or a mix of both.
2) Your family gets the
assurance of life insurance that ensures that your financial goals are met
Thus, ULIPs are another route
to invest in a professionally managed portfolio of equities or bonds. The
benefit of investing in a bond fund through ULIP is that as per the prevailing
tax laws, you may enjoy tax deduction under section 80C subject to fulfilling
conditions therein.
ULIPs offer clear
classification of risk categories, where you can pick up the higher risk fund
for the long-term goals. You can gradually shift to lower risk investments as
your investment nears maturity.
Other
Debt Investments
Public Provident Fund (PPF)
& Similar Investments
PPF is a saving scheme offered
by the Indian Government, allowing investors to deposit funds for a fixed
period and earn returns on their savings.
PFF investments are safe,
easily accessible, simple to understand and tax-free, making them a popular
investment avenue for most individuals.The interest rate offered by the Public
Provident Fund is 8 percent, as applicable from 1st October 2018
(Source: Ministry of Finance).
Sukanya Sammriddhi Scheme is
another debt investment, which is very similar to PPF, however can be only
operated by parents of a girl child.
How Equity and Debt
Investments Help Realize Your Goals?
Equity investments area great
choice if you want to create long-term wealth and fulfil your goals. This is
simply because equities are known to perform well over a sufficiently longer
investment horizon. The following historical data supports this statement:
The BSE index, which was at ‘3055’ in the year 1998, (20 years
ago), is at ‘36,324’today (September 2018).
Meaning, it has risen at a compound annual growth rate of 13.16 percent over
the last 20 years (source: Online Financial Calculator).
CAGR is the compounded annual
growth rate of an investment over a specific period. Imagine yourself
being invested for such longer time frame in equity investments.With returns as
high as 13 percent, the corpus accumulated would be enough to take care of your
goals. However, due to the high volatility (risk) of equity investments, it is
always good to keep some money in a debt investment.
So, to meet the long-term
goals, such as children’s higher education or marriage and even retirement, you
can invest in a proportion of equity and debt funds. You can manage the
proportionate allocation to manage the risk over time.
For instance, at the beginning
when you have a lot of time you can allocate 80% to equity and just 20% to debt
funds. But going forward you can keep reducing your equity investment until all
the money is lying in the debt funds by the time the goal arrives.
Inflation vs.
Equity Investments
Investing in equity might be a
‘need’ if you wish to beat the inflation. As the historical returns in the
equity market suggest, this is the only place where you can beat inflation by a
huge margin over long-term.
See the ‘Inflation Index’
chart, which shows the increase in the value of a commodity in 2018
The CAGR on the growth comes to be slightly more than 6.5%(Source: Online
Financial Calculator). Compare that to the equity market CAGR of 13%. While you
must allocate some money to equity to beat the inflation, you should take care
of a few factors to maximize your returns and minimize risk.
When Should I Start
Investing?
Today, When it comes to
investing, your most powerful tool is time.You will be in for a pleasant
surprise if you start investing early. This is possible because time and
compounding interests play a vital role in building wealth over time. Time and
compounding interest form a magic combination that can help you grow your
wealth exponentially over a longer horizon.
How
Does Compounding Grow Your Wealth?
Consider two friends Rohan and
Vivek, both 30 years of age.
·
Rohan invests Rs. 3,000 monthly towards his retirement.
His investments provide him with a 10% annual return on investment and he
succeeds in accumulating little over Rs. 68 lakhs at the end of 30 years.
·
Vivek, however, sits idle for 20 years and then
suddenly wakes up 10 years before his retirement. He starts investing Rs.
15,000 every month for the next 10
·
Vivek too manages to pocket an annual return of 10%
on his investment. However, at the end of 10 years, he manages to accumulate
only around Rs. 31 lakhs for his retirement.
How is it possible? Rohan was investing
merely Rs. 3,000 every month whereas Vivek was investing Rs. 15,000.Well, it is
possible dueto the compounding interest and time, which has the power to
multiply your money over a long period.
Thus, if you invest in a
disciplined manner and giveyourinvestments plenty of time to grow, you can
achieve most of your goals without much pain.All thanks to ‘Power of
Compounding.’
Starting Small is
Okay
Sometimes people delay
investing until they have a significant amount of money. But this also means
they give up years of compound growth. No matter how small the amount is, get
your money working for you as soon as possible.This question, “How do I start investing
with little money?”, shouldn’t bother if you want to secure your future.
Consider the previous example
of Rs. 3,000 invested by Rohan when he was30 yearsold. Pretend for a moment, he
didn’t have Rs. 3,000 to invest at age 25. But he did have Rs. 1,800. If he
invested Rs. 1,800 starting from the age 25, he would have almost Rs. 68 lakhs
at retirement age. Almost the same amount that he accumulated by investing Rs.
3000 per month starting from the age 30.
Unit Linked
Insurance Plans (ULIPs) for All Investment Needs
ULIPs are life insurance plans
which are more vested towards investment objectives. With the help of ULIP
investments, you can not only invest in the goal but also ensure that your
family can achieve the goal even if anything happens to you.
More than that, ULIP
investments can help you a lot of tax over time. As ULIP investments qualify
for deduction under section 80C, investments up to Rs. 150,000 (as per tax laws
for A.Y. 2019-20) subject to fulfilling conditions therein can reduce your tax
liability for the financial year.
Also, as per the prevailing tax
laws (lat. A.Y. 2019-20) any returns on the invested money are not taxable in
ULIPs. You can withdraw partially after five years of investment without
incurring any tax liability subject to fulfilling conditions therein. However,
if you want to adjust the investment risk of your ULIP investment, you can do
so without withdrawing money.
ULIPs are quite flexible in the
way investors belonging to any risk category can invest in them for a very long
period.
Multiple Asset
Classes
Asset classes you can through
ULIPs include the following broad categories:
·
Equity Stocks
·
Debt or Fixed Income Securities
·
Balanced Funds – A flexible mix of Equity & Debt
securities
·
Liquid Funds
You can invest in ULIPs
considering your current risk capacity and keep adjusting the portfolio as your
risk profile changes.
1.
Equity Funds
Equity funds in the ULIPs are
aimed at the investors who have a high-risk appetite and want better growth
over long investment term.
These funds primarily invest in
the blue-chip and mid-cap stocks. Considered the safest bet among the stock
market, these stocks provide a relatively smooth growth to your investment.
However, it is often
recommended that you expect your investment horizon to stretch between 5 to 10
years for this asset class. Also, the best way to benefit from the volatility
is to invest a fixed sum of money regularly, instead of large lumpsum
investments.
To summarize Equity Fund
Investments in ULIPs:
2.
Debt or Fixed Income Funds
Debt funds invest predominantly
in government bonds and top-rated corporate bonds. Debt funds carry lower
investment risk than equity funds since they invest in safest bond securities.
However, lower risk means lower
returns as well. One plus side is that your investment horizon can be shorter,
and you can invest lump sum money.
Also, if you have a large sum
you want to invest in equity funds, it is better to put the whole amount in a
debt fund and then transfer slowly to the equity fund.
3.
Balanced Funds
Balanced funds fall between the
safer debt funds and riskier equity funds. Unlike equity and debt funds,
balanced funds invest in both equity stocks and fixed income securities in
varying proportions. For example, 60:40 or 70:30.
The unique quality of balanced
funds is that fund managers can adjust the ratio based on the market trend.
Thus, balanced funds have a dynamic asset allocation and can deliver better
returns over longer periods than both equity and debt funds.
However, considering that these
funds carry lower risk than equity funds, you should expect lower returns than
pure equity funds.
4. Liquid Funds
Liquid funds are the safest out
of all the fund options ULIPs present to the investors. Liquid funds invest in
very short-term debt securities and thus carry very little risk. In fact,
experts term liquid funds as a saving account, where you can park your money
for a short period of time without the worry of losing it.
For ULIP investors too, liquid
funds can act as the safe fund to transfer their accumulated money as the
investment reaches maturity. This is a very useful tactic, especially when you
have been investing primarily in an equity fund.
Multiple Investment
Modes
You can invest in ULIPs as per
your income frequency (monthly, quarterly, etc.) and convenience. Consider any
one of the following methods to invest in the ULIP:
·
Lumpsum
·
Regular – Monthly, Quarterly, Annually
·
Top-up
Lumpsum investment simply means
putting in a large sum of money at one go and then manage the investment.
However, for most investors, our recommendation would be to invest regularly.
Here are a few reasons how this helps:
·
Your overall investment expense will be lower
·
You can reduce your risk while investing in equity
funds
Top-up investments can be made
any time before the maturity of the plan. However, you should check the tax
status of the additional investments. Whichever way, top-up investment option allows
you to benefit from market opportunities and park your windfall gains without
hassles.
Switch between Funds without Withdrawing
While you can start investing in any fund at the beginning, you may want to switch funds in the future due to multiple reasons. Usually, investors need to change the funds under the following scenarios:
· Their Risk Profile has changed
·
Income changed
·
A Financial Goal is close
·
The Market Conditions have changed
You can switch between two
funds or multiple funds in a ULIP multiple times a year. Also, it is not
necessary to switch in one go or transfer lumpsum. You can use systematic
transfer instructions to transfer a fixed sum every month.
Smart Investment
& Withdrawl with ULIP
Systematic transfer (STP) features allow you to invest smartly towards your goal, especially if you want to benefit from equity investments.
For
example, assuming you have chosen to invest Rs. 100,000 once every year
in a ULIP plan. Invest the whole amount in a debt fund and submit an STP
request for transfer of Rs. 8,300 every month to the equity fund. This way, you
can keep investing lumpsum in the ULIP, and benefit from the rupee cost
averaging in equity funds.
Similarly, when you are nearing
your financial goal, you can start switching from equity funds to debt funds.
Along with the systematic
switches you can give instructions for the systematic withdrawal of funds as
well. This feature is especially useful for those who want to create an income
stream while continuing to grow their investments over time.
For
example, once a retirement goal is fulfilled, you need to create the
income stream from the accumulated money. If you have accumulated the money in
a ULIP, you can simply start the systematic withdrawals whenever you want to
start the income. If you are investing in ULIP now, your income will start five
years from now.
Another benefit of systematic
withdrawal from ULIPs is that the withdrawn money is not taxable as per the
prevailing tax laws, subject to fulfilling conditions specified in section
10(10D).In case policy is non compliant in accordance to section 10(10D), it
would be subject to TDS
Dynamic Asset
Allocation
Many ULIP plans offer an
automatic adjustment feature called dynamic asset allocation. If you opt for
this feature in your ULIP investment, you may not need to care about manually
adjusting risk of your portfolio.
Dynamic asset allocation works
based on the investment period of your plan. For example, if you start a 20-year
plan, first five year will have the maximum equity allocation. In the later
years the equity proportion is gradually reduced, and when your plan is close
to maturity all the money is transferred to a debt or liquid fund.
Dynamic asset allocation feature
may eliminate the need of your intervention in the investment plan until the
maturity.
How ULIPs Cater to
Your Insurance Needs and Goal Orientation?
We all struggle to fulfill the
needs of having adequate Insurance and Investment. This is where ULIPs come to
rescue. Lips are perfect investment plans offering the combined benefits of
Investment and a Life Cover.
The premium that one invests in
ULIPs has a dual purpose:
·
Life Cover - which pays a Sum Assured to your family
after your demise.
·
Investment–Which allows your money to earn
market-linked returns and upon the completion of the policy period, you are
paid a lump sum maturity benefit.
This lump sum amount helps in achieving your life goals.
How to Choose the
Equity-Debt Allocation for Yourself?
Choosing an appropriate equity-debt allocation depends on two
things:
·
Your risk profile
·
How far is your financial goal?
For example, if you are in your
20s and do not have any responsibility, you can invest up to 80% of your
savings into equity funds. However, you should also consider the second factor,
i.e. ‘time to goal’ before allocating your savings.
The reason for two-way limit is
that, for short term goals, your money doesn’t have enough time to grow in
risky investments. Therefore, only the long-term goals will enjoy the maximum
equity allocation, that too limited by your own risk tolerance. Consider the
following table and the example afterwards to understand how to do it yourself:
As per the table, if you are 35
years of age, you are probably looking after a family, saving for the goals of
your kids, etc. At this stage if you are investing for a goal which is 15 years
away, you can allocate up to 80% of your saving for that goal into equity funds.
At the same time, any
investment for a goal which is just about 6 years away should only get a
maximum of 40% allocation to equity.
Revise Your
Portfolios
Another thing you need to be
careful about is the passing time. It is always good to keep a track of your
investments and financial goals. Use the switch and transfer options in your
investment plans to adjust your investment risk time to time.
While investments like ULIPs OR SIP help you secure your financial goals,
you need to ensure that the risk is within your tolerable limit. Best option is
to opt for a dynamic asset allocation, which will automatically adjust your
equity portfolio and ensure you have enough money.
Tax Disclaimer: In case policy
is non compliant in accordance to section 10(10D), it would be subject to TDS
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'Key organ for investing is the
stomach, not the brain.'
Investors are generally categorised into the following categories
according to their risk profiles:
·
Conservative
- Investors wanting stable,
reliable growth and only willing to accept minimal losses are known as
conservative investors.
·
Moderate
- Individuals looking for
diversified or balanced investments havingthe potential for growth and are
willing to accept a certain level of volatility are known as moderate investors.
·
Aggressive
- Aggressive investors generally
have long-term capital growth as their focus and are willing to accept
substantial fluctuations in order toaccess the highest possible returns in
long-term.
Things to Keep in Mind While Deciding Where to Invest
Investors are generally categorised into the following categories
according to their risk profiles:
·
Your
Investment Goals
·
Your
Current Financial Situation
·
Your
Investment Time
·
Your
Risk Tolerance
ULIPs for long-term goals:
·
Buying
a house in the next 10 to 15 years
·
Financing
your child’s education or marriage
·
Accumulatinga
sufficient retirement fund
·
Creating
a start-up in the future
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