It's common for working professional in the early stages of their career to go overboard with spending. Suddenly thrust into a world of enticing things to buy with an ungoverned purchasing power, salaried professionals often have a difficult time hanging on to their earnings. Even with fat salary packages, many end up living paycheck to paycheck comprising of the ever-growing urban poor.
While managing a strong control over your personal finances and siphoning a bit of each month's salary into a savings account is a good plan, investing the same money is a better one. That way, the money in your savings account keeps growing instead of sitting idle. To follow this path to financial security requires you to select an investment plan that best suits your unique situation.
Since the options can be quite overwhelming at first glance, we've shortlisted the five best investment options for working professionals in India:
A type of term deposit offered by nearly every major bank in India, a recurring deposit (RD) helps people with regular incomes deposit a fixed monthly amount and earn interest at a rate that, on average, ranges from five to eight percent. An RD is a stable, low-risk investment option with variable minimum deposit amounts (dependant on the bank) and lock-in periods that range from six months to 10 years. One cannot withdraw the deposit amount before the maturation period without incurring a penalty.
A similar investment option, especially suitable for low-earning professionals, is offered by the Post Office Recurring Deposit scheme. A PORD account can be opened by Indian citizens at any post office and has a fixed lock-in period of five years. The scheme typically offers an interest rate above seven percent per annum. and has a minimum deposit amount of only Rs 10 per month (there is no maximum limit) payable through cash, cheque or bank transfer. This type of investment is completely risk-free and, since it is backed by the government, the capital completely secure. Withdrawals prior to the maturation date can be made subject to certain conditions and penalties.
An Equity Linked Savings Scheme (ELSS) is a tax saving mutual fund which allows investors to claim deductions from their taxable income under Section 80C of the Income Tax Act. This is a diversified equity mutual fund with a fixed lock-in period of three years — which is the least among other tax saving instruments. Investors cannot withdraw their money before the maturation date unless they opt for a dividend scheme which grants them a regular income whenever dividend is declared by the fund.
Investments in an ELSS can be made either in lump-sums or through systematic investment plans (SIPs) — the minimum investment amount is Rs500 and there is no maximum limit — and are subject to market risk since they involve the stock market. ELSS funds generate an interest rate higher than bank fixed deposits but lower than diversified equity funds.
Investing directly in the stock market, i.e., purchasing stocks of publicly-listed companies, offers the highest returns but comes with an equally high risk. Direct equity purchases are made through a Demat account opened at a depository participant (DP) which includes private stock brokerage firms and public and private banks. This type of investment is purely speculative and hence requires a thorough understanding, and constant tracking, of the stock market. It is profitable only for long-term investments and typically recommended only for seasoned investors with disposable income. If you don't fit this bill but are still yearning for high returns, this investment option is what you should look at.
Mutual fund investments provide the best balance of return and risk. They're ideal for people who want higher returns than those offered by recurring deposits but can't be bothered to regularly follow the stock market. MF investments come with several options for lock-in periods ranging from ultra-short-term (up to one year) to long term (five years or more); naturally, longer investment periods offer higher returns. Deposits can be made either in lump sums or through SIPs. Also, investing in liquid funds allow investors to make withdraws before the maturation date. One can invest in mutual funds through banks or private firms like Scripbox that take total care of their investment portfolio.
If you have a family that is dependent on you, whether it’s your parents or your spouse and child, buying a life insurance plan is not only a good investment option, but a crucial one. Keep in mind that there are three kinds of life insurance — 'term', 'whole', and 'universal' — each with their own advantages and disadvantages. All types require you to pay premiums, either monthly or yearly, which can be increased as your income increases. Life insurance as a pure investment option is not a good idea because it offers the lowest rate of return compared to all the aforementioned options. But if you're in a situation where being safe is better than sorry, getting a life insurance can save your family from financial troubles in case you aren't around to help them any longer.
In conclusion, remember that it's better to choose safer options if you have short-term responsibilities whereas you can take the high-risk path if you're only looking at long-term returns. Either way, spend some time understanding the nuances of investing and do what suits your purpose the best.