The year is about to come to a close, and that means you’re probably going to be getting your annual bonus. If you get a big lumpsum at one go, don’t be tempted to blow it all up in consumption needs. Keep a part for investment, the size depending upon your spending profile.
Here are a few tips for investing for the Indian office-goer.
Identify your investment objectives
The first thing to do is to determine what you expect to achieve with your investment, whether it is for meeting a specific need (buying a bike, car or flat, foreign travel or child’s wedding, etc.) or retirement planning. This will influence how much you would need to invest. While most investment is for immediate predictable goals (like a new car after three years), a certain corpus should be built for funding your retirement, particularly where the employer does not provide pension benefits.
How much to invest and where
Based on your objectives, determine how much you need to invest. While determining the amount, check whether you have planned for availing the admissible tax rebate allowed under Section 80C to the extent of Rs 150,000. In case you have not planned, this is the right opportunity to put the required amount in any of the admissible categories of investment which qualify for this rebate.
- Provident Funds
Your contribution to your employer’s provident fund (EPF) also qualifies for this rebate. So check how much you would be contributing through your EPF deductions. If there is a deficit, for most tax payers, investment in PPF (Public Provident Fund) would be ideal under this category as it offers unmatched tax-free returns. For the last three years, the interest rate under the scheme has been 8.7%. But remember that PPF investments are long term, the account running for 15 years since its opening. The upside is that not only is the investment eligible for tax rebate, the interest as well as proceeds at maturity are also exempt from income tax. The maximum annual investment in PPF is Rs 150,000.
- Fixed Deposits
Most office goers keep certain sums in bank FDs or fixed deposits. It would be advisable to choose a reputed bank for keeping your deposits. Note that deposits in banks only up to Rs 100,000 are guaranteed by the Deposit Insurance and Credit Guarantee Corporation (DICGC) in case of bank failure. While you can spread your deposits across different banks, remember that interest earned on fixed deposits is taxable. Banks have a system of deducting 10% of the interest income received and transferring it to the Income Tax Department (under TDS). So, the actual interest received on fixed deposits would be reduced to that extent. Further, you have to account for the interest income while filing your income tax returns and pay further tax on it in case you come under higher tax brackets of 20% or 30%.
If you can take some risk, invest a portion of the amount in equity. Over the long term, equity has given the highest returns. Between 2000 and 2014, the BSE Sensex has rallied by 680 per cent. Choose good, profitable companies and be prepared for the long haul. Investments in equity held for more than one year are not taxed. If new to stock market, you can invest in mutual funds. Choose a large mutual fund which has a good track record (although past returns are no guarantee of future performance). There are various types of mutual funds to choose from, investments in pure equity funds get the same tax treatment as equity.
Want to invest in gold? Be cautious at this juncture for gold prices have been steadily declining. Gold price data for November 15 for the years 2012 to 2015 shows the price falling from Rs 3,145 per gram in 2012 to Rs 3,035 in 2013 and further to Rs 2,645 in 2014 and Rs 2,537 in 2015. If you cannot resist the urge, a new option introduced this November is the Sovereign Gold Bond, subscription for which is open up to November 20, 2015. The issue price has been fixed at Rs 2,684 per gram of gold. These bonds obviate the need to buy physical gold and carry an annual interest of 2.75%. Minimum investment is 2 grams of gold and maximum investment permitted is 500 grams. The holding period is eight years, with an exit option from the fifth year. May be considered by die-hard gold enthusiasts.
Whatever you choose, here’s to your wealthy and secure future.