Savings alone may not guarantee wealth. Your hard-earned money needs to be deployed prudently in productive asset classes and investment avenues. This way money grows and can help you accomplish your financial goals.
You need to take into account your risk profile, broader investment objective, financial goals, time horizon to achieve the goals, cost of investing, among a host of other aspects and align your investment activity accordingly. Plus, complement investment
with tax planning. Money that’s legitimately saved from tax is also extra income.
Here are a few investment avenues that can help you generate extra income and help in fulfilling your financial goals:
Bank Fixed Deposits – Bank fixed deposits (FDs) offer an assured rate of return and address liquidity needs and contingency requirements. Those who are not comfortable
taking risks could look at this option for building wealth steadily. Senior citizens who would like to draw a regular income could consider between monthly or quarterly interest pay-outs directly to their bank accounts.
Investing in a tax saver bank FD entitles you for a deduction under Section 80C of the Income Tax Act, 1961 up to a sum of Rs 1.50 lakh per annum.
Also, from asset allocation and diversification standpoint, it is sensible to hold some money in fixed deposits. To maximise returns on a bank FD, you could consider the following measures:
Lock-in when interest rates are high
Select your tenure in line with your goals, ideally invest for the long-term
Avoid prematurely withdrawing the bank FD as it can get in the way of compounding. Instead, when you need the money, consider availing a loan against your bank fixed deposit
If the total projected interest in a financial year crosses the threshold limit, make sure to furnish the declaration in Form 15G (for non-senior citizens) or 15H (for senior citizens), as the case may be, to prevent tax deduction at source
(TDS) and by complying the provisions of the Income Tax Act, 1961.
Mutual funds – Mutual funds earn you market-linked returns. Some broad categories of mutual funds as categorised by the capital market regulator:
- Equity Schemes (The objective is to generate capital appreciation over the long term);
- Debt Schemes (The objective is steady and regular income for investors, but this varies as per the sub-category of the scheme).
- Hybrid Schemes (The objective is to provide capital appreciation of equity assets and the regular income of debt securities)
- Solution-Oriented Schemes (The objective is income generation and capital appreciation in line with the goal the fund is addressing)
Choose a mutual fund scheme/s based on its distinctive investment objective and evaluate if it is matching with your financial goals for a meaningful approach.
If you are young, can afford to take the risk, are seeking capital appreciation, have sufficient time horizon (5 years or more) to accomplish your financial goals, then equity mutual funds would be an appropriate choice. Some options are large-cap
funds, dividend yield funds, multi-cap funds and value style funds.
Conversely, if you are planning for short-term financial goals (time horizon of 2 to 3 years), want a steady and regular income, can’t afford to take high risk as in equity mutual funds, and/or are a retiree, then liquid and overnight funds
in the debt fund category could be a sensible choice.
For tax planning through mutual funds, consider Equity Linked Savings Scheme or ELSS (also known as tax saving funds). ELSS is a diversified equity mutual fund providing tax-saving benefit up to a sum of Rs 1.50 lakh per annum under Section 80C of
the Income Tax Act, 1961. Remember that you can’t redeem your investments before three years from the date of your investment, in case of ELSS.
You could invest through Systematic Investment Plans (SIPs) to address your long-term financial
goals. SIPs offer rupee-cost averaging as the investment is done regularly and periodically. This helps to reduce the volatility in mutual fund returns.
Public Provident Fund (PPF)) – The PPF scheme is a government-backed long-term saving scheme. It is one of the safest investment instruments and it can also be linked with your savings account.
PPF enjoys an ‘Exempt-Exempt-Exempt (E-E-E)’ status. This means, contributions are eligible for tax deduction under Section 80C, the interest earned is tax-free and maturity proceeds are exempt from tax.
PPF has a lock-in period of 15 years, during which you earn interest. Currently, the interest rate on PPF is 7.90% compounded annually. Your interest will be calculated on the minimum balance in your PPF account between the 5th and the last day of every month. So, as a strategy, if you were planning to invest monthly, make sure you invest on or before the 5th of every month (i.e. your PPF account is credited with the
investment amount on or before the 5th of every month) to earn the interest for the month.
Over the long-term, PPF is also one of the effective avenues for your retirement.
Sukanya Samriddhi Yojana – If you are planning for your daughter’s future needs - education and/or wedding - the Sukanya Samriddhi Yojana (SSY), a Government of India scheme, is a worthwhile proposition. Like PPF, the SSY account too enjoys an Exempt-Exempt-Exempt (E-E-E) tax status.
SSY Account can be opened after the birth of the girl child until she is 10 years of age. Deposits have to be made into the account at least once a year till completion of 15 years from date of account opening. The account matures on completion of
21 years from the date of opening the account. On completion of 18 years of age, partial withdrawals of upto 50% of the outstanding balance is permitted for the purpose of meeting education or marriage expenses. However, if the account holder
gets married prior the maturity date of the account, then the account will be closed.
Currently, SSY Account earns interest @ 8.4% p.a. compounded annually. Strategically, in addition to investing in mutual funds, bank FDs, stocks, etc, parents could contribute to the SSY account to address their daughter’s future financial needs.
One should diversify across asset classes, investment avenues and choose your investment time horizon sensibly. This helps to reduce the risk to the investment portfolio and maximise its return potential.
Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.