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Investing money is just as important as saving money. But not everyone is aware of how to invest money. This is because apart from there being several investment options, there are also different risk profiles for various investments which match the needs of some investors.
Though investing money can be simple for those who know the basics of investment, there are some steps involved in understanding which investment options are best suited for one’s needs. For example, investing in a market linked~ investment may incur market volatility. In contrast, investment options such as guaranteed return plans can be more flexible and suitable for a larger proportion of investors, especially for those who are looking beyond having a simple life insurance product.
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Table of Content
The terms savings and investments are often used together or assumed to carry the same meaning, which is not true. When you save money, you set aside some money in a bank account, fixed deposit or even a savings insurance plan or savings scheme where you continue saving your funds for a certain time period for future use.
In the case of investing money, the funds you set aside will grow over the years, depending on the investment option you select. While savings is associated with building a monetary fund, investments are better known for creating or growing your money. The importance of investment is that, with time, the rate of inflation also increases. The price of goods and commodities will increase which means the funds you currently have will not be sufficient to fulfil your goals 10 years later. Hence, suitable investments can help your money grow periodically to combat inflation and the rising prices of goods and commodities.
There is no hard and fast rule on how much money you need to invest as long as you are aware of the real rate of return on your investments; however, it is important to know how you can invest a suitable amount that does not take a toll on your other expenses.
In the case of investments, your risk profile is always important. If you are making a moderate to high-risk investment where the returns may not be guaranteed, be sure only to invest the money you can afford to lose. Therefore, after setting aside money for your essential needs, household expenses and bills, and emergency savings funds, you can spare a small amount for your investments. On a regular basis, for instance, every month, small investments over the years can affect the rate of return on money.
On the other hand, if you are investing in low-risk options such as a savings insurance plan, where the returns are guaranteed, you can afford to invest more money in the form of premiums. This will not only help increase your savings corpus but also enable you to choose a greater life cover option which can secure your family’s financial future.
Depending on what goals you need to fulfil over a certain period of time, you can fix a certain percentage of your salary or monthly income that will be dedicated to investments only.
Non-Linked, Non-Participating, Individual Life Insurance Savings Plan (UIN:110N158V09)
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How Much Time Do You Want to Put into Investing Your Money?
Each investor’s investment goals are different, and hence, the investment tenure or investment horizon also needs to be different. If a person wants to save for a new business start-up, they will require adequate capital, for which they need to have an investment tenure of at least 3-5 years, if not more. And since the risk involved in short-term investments may be more, the investor should seek out options as per their own risk profile.
It is also necessary for the investor to understand the type of returns their investment can generate over a given time period. Some investment goals can be achieved in a matter of 5 years, while other goals need more financial support, and hence, the investment tenure needs to be greater.
If an individual decides to invest a large amount of money as a lump sum in a single investment and use it for their short-term goals, it means their investment tenure will be shorter. Accordingly, such an investor will have to select investment options that can generate the desired returns within this time period. Likewise, for long-term goals, an investor can invest a small amount of funds regularly in investment instruments and generate long-term returns.
During financial planning and while planning your investments, the bottom line is to align your investment goals with the investment tenure so that when it is time to fulfil these goals, you can have the desired funds at your disposal.
Many investors invest their hard-earned money on the basis of some tried and tested principles or fundamentals. Some of the most important among them all are:
Knowing the returns your choice of investment can generate is important. When you start investing, make use of an investment calculator online that can help you calculate your returns. Though the final numbers will only be an estimate, you will be able to factor in the interest rates and the inflation rate to get a reasonable result. Without adequate precaution, miscalculating your returns can lead to a shortage of financial resources when it is time to meet your financial goals.
An early investment will always yield better results than investments made at the last minute. This is true, especially if you want to invest for the long term. Starting your investments early also gives you enough time to make changes to your portfolio over the years or increase the investment amount as and when needed. Even in the case of short-term investments, it is advisable not to wait for too long. You can always start the investment first and then track its performance along the way.
Sticking to a single investment option may work for some investors; however, if you are expecting better returns and also want to reduce your portfolio risk, adding more investment instruments is necessary. You can ensure that the choice of investments you add is as per your risk profile and your investment goals to maintain the balance in your portfolio. Moderate to high-risk investors add some high-risk investments and hedge the risk with some safer investment options.
In this policy, the investment risk in investment portfolio is borne by the policyholder. Unit Linked Individual Life Insurance Savings Plan (UIN:110L112V04)
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These are a few points with the help of which beginners can start investing money:
If you and your family are leading a certain quality of lifestyle, it is important to start investing money in avenues that will help you maintain the standard of living and even upgrade it. You can opt for money-back insurance plans that offer periodic survival benefits during the policy term. Alternatively, you can also seek ULIPs, which can help you with a financial corpus 5-10 years down the line.
Investment plans should be long-term in nature so that you do not disrupt the growth of your wealth in the middle of the investment tenure. Most investment plans grow through compound interest which can help your money grow over the tenure, provided your principal investment is large enough to garner better growth through the interest rates. You can then make plans for the future, where you can utilise the funds to fulfil various financial goals.
In one’s late 30s or early 40s, many people may be new to investment. However, since this is the right time to start investing for future goals and retirement, a range of investment plans and savings schemes can be availed to start with an investment to secure one’s future. These plans can also be retirement plans or regular income plans that offer a steady source of income in the future.
Investment plans with moderate risks, such as ULIPs, can be a good pick when it comes to financially securing your family. This is because apart from the investment portion of the ULIP, you can also secure your family with a life insurance cover, both of which are combined under a single policy.
Hence, the investment corpus can be useful for fulfilling your family’s dreams, while the death benefits, paid out in case of the insured’s death, also secure their financial future.
A Non-Linked, Non-Participating, Annuity Plan (UIN:110N161V04)
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There are many other investment options in India that investors can choose from; however, these few investment options are the most common among all. But most importantly, no matter how much risk an investment carries, investors should always learn more about the investment option they choose.
Out of the many investment options available to Indian citizens, there are a few options which are known to be popular among investors. Though some investments can surely offer good returns than others, it is mainly the risk profile of an investor that determines their choice of investment. Hence, some investors opt for low but stable and guaranteed returns, while others may opt for high-risk options that come with high but unguaranteed returns. Ranging from one end of the risk scale to the other, these investment avenues have been relied upon and can be useful for those who are well acquainted with the working of such investments:
Direct Equity Investment
Stock market investments offer high inflation-beating returns that can help you earn good profits, depending on your knowledge and understanding of the stock market. However, do note that high returns are always followed by high risks, and since the market can be volatile, these investments may not be for everyone.
Hence, do not use stock investments to build your emergency funds. Your go-to savings fund should be a low-risk investment with guaranteed returns. A stock market equity-linked investment can be useful if you want to grow your wealth over the long run but can handle minor losses associated with the market.
Mutual Funds
Though mutual funds are also market-linked instruments, these investments function differently. A mutual fund pools the capital collected from many investors and then purchases capital assets such as bonds, shares and so on. Moreover, mutual funds are managed by experienced fund managers who decide how and when to purchase these capital assets.
Mutual funds can comprise equity funds, debt funds and hybrid funds, as per the allocation and the objective of these schemes. Mutual funds can also help you with tax benefits under Section 80C of the Income Tax Act, 1961 if you opt for Equity-Linked Savings Scheme (ELSS).
Life Insurance Plans
RBI Savings Bonds
Bank Deposits
Fixed Deposits (FDs) in banks are yet another popular investment option in India. In most cases, when an investor wants to invest a lump sum amount in a low-risk avenue, a Fixed Deposit is generally their first preference.
Depending on which bank one may open their FD account at, a senior citizen can avail of higher interest rates than a non-senior citizen. A Recurring Deposit can be a good alternative to investing a lump sum amount like in the case of an FD, as one can invest a small amount each month in an RD. Recurring Deposits also offer a higher rate of interest as opposed to a savings bank account.
Real Estate
The real estate industry in India is booming due to several factors, of which an important one is the growth of employment opportunities. Since all the major cities in India have huge corporate setups, the youth are attracted to these locations for better opportunities. As a result of this, the price and the value of real estate are steadily increasing.
Buying a new property has become a lucrative way to invest money, especially for working professionals and middle-aged individuals. Whether one chooses to stay in a newly purchased property or plans to rent it out to potential tenants, either way, real estate can be one of the ways to invest a large sum of money.
When it is the question of how to invest money, one of the main concerns an investor may have before selecting an investment is whether their investments are in sync with their risk tolerance. This is because any investment should primarily be based on your risk tolerance and your risk profile. Risk tolerance, in simple words, means your investment portfolio’s ability to withstand market fluctuations that also affect your investments.
Hence, in case of losses due to market volatility, the investment portfolio should be able to balance these losses through other investment instruments. This essentially means that the resultant financial loss should not greatly impact the investment or the investor.
Before you start investing your money, always consider various investment options instead of solely relying on recommendations since another investor’s risk profile may not be the same as yours. For example, high-risk and experienced investors can opt for volatile market stocks and manage their asset allocation to hedge the losses that they may incur. Low-risk investors often opt for low-risk and long-term stocks or debt investments that invest in fixed-income securities and so on.
To ensure that your investments match your risk tolerance, first find out what type of investor you are. If you are a conservative investor, your risk tolerance is likely to be low, and you will need to seek out investment options that offer fixed and guaranteed returns. Savings insurance plans such as endowment plans, and money-back plans are apt for such investors. However, even aggressive investors with a high-risk tolerance opt for savings insurance plans that help them balance their investment portfolio risk and also offer the added benefit of life cover.
Matching your risk tolerance and your investments can help you invest your money in a more secure and disciplined manner. It also helps avoid confusion regarding different investment options since you only invest in instruments, plans, assets and schemes that are within your scope of understanding.
Nearly every type of investment can be subject to some degree of risk; however, most government-backed schemes, fixed income schemes, savings insurance plans and other investments that offer guaranteed returns at the end of the investment tenure are considered to be the safest investments.
Though there are also low-risk investment options in the stock market, these options still carry the risk of being linked to market fluctuations. But if one knows how to invest money in the market, they can choose a SIP (Systematic Investment Plan) or stock SIP and invest small amounts of money regularly instead of an option for lumpsum investments.
Low-risk investors often opt for investment schemes supported by the government or go for savings insurance plans and pension schemes such as NPS, which offer guaranteed returns. Even high-risk investors make such options a part of their portfolio to balance out their investment risks.
Frequently Asked Questions
What is the difference between investments and savings?
Both the terms are used interchangeably; however, saving money is simply putting aside some funds for future use, while investment means growing your financial corpus through investments that suit your risk profile and investment goals.
Can investment help my money grow?
Yes, the aim of investing money in suitable avenues is to ensure that the returns on the investment should be greater than the initial investment. For this, you will have to research and pick the right investment option as per your needs, risk profile and investment goals.
To ensure that your investments are growing with time, review them periodically and choose other options in case the current investment options are not helping your wealth grow.
How much of my monthly income should I invest?
There is no rule on how much of your monthly income should be invested. After your essential expenses and emergency funds contribution has been set aside, you can allot some amount of investment. This will also depend on the type of investment option you choose its risk profile and the investment tenure.
ULIPs offer flexible premium payment options, depending on the policy, where you can invest the minimum amount each month to build an investment corpus and also get life insurance cover for yourself and your family.
Should there be long-term as well as short-term investments?
Yes, always divide your investments as per your goals. You should also be aware of the benefits of investing early. Hence, if you have some short-term financial goals, opt for an investment that offers returns between 1-3 years. For long-term goals, ensure that the investment continues for up to 5-10 years with the regular investment so that you can meet your goals after the investment tenure is complete.
Can I save on taxes by making investments?
Yes, most of the investment options available in India offer tax# benefits under Section 80C of the Income Tax Act. This is also applicable for life insurance plans whose premiums can be eligible for tax deductions, and their benefits can be eligible for tax exemptions under Section 10(10D) of the Income Tax Act, subject to policy terms and conditions.
Is it possible to invest money for retirement?
Yes, you can invest money regularly over the long term and build a financial retirement corpus. Investment options like Unit-Linked Insurance Plans offer the benefit of long-term investment as well as life insurance, which can be quite useful for securing your family’s finances during retirement.
Additionally, there are also annuity plans and retirement schemes, such as the National Pension Scheme and the Senior Citizens Savings Scheme, which allow the individual to invest a regular sum of money until the plan reaches maturity.
Why do investors prefer Unit-Linked Insurance Plans?
Investors prefer ULIPs because it offers multiple benefits under a single insurance policy and is one of the easiest ways to start investing. Along with investment and the fund options to choose from, such a policy also offers a life cover to the insured’s family, which protects them financially during emergencies.
ULIPs also allow investors to switch between the fund options available under the plan to ensure that they can monitor and revise their investment to align their investment with their financial goals. Moreover, the tax# benefits under Section 80C and Section 10(10D) of the Income Tax Act also help the insured save money through the premiums paid as well as on the death and maturity proceeds of the policy, subject to policy terms and conditions.
What are the investment options with the least risk?
Savings insurance plans, government savings schemes, retirement savings schemes and investments in fixed income securities are some low-risk investment options.
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