Smart Investments for beginners
So, let’s get into some very basic, yet smart investments you can start without pouring your entire salary or pocket money into it, a little chunk of savings with something as little as Rs. 100
1. Recurring Deposits:
A recurring deposit is a special kind of monthly deposit offered by banks to their customers that helps them save a fixed amount of money every month. The money from their savings account is transferred into their RD account at regular intervals (usually monthly) which then earns interest as set by their bank.
The interest varies from bank to bank. It has a range of 4.5%-6.5%. All banks these days have the option of creating an RD in their mobile app. It is an automated service unless chosen otherwise. It could be a large amount or even a tiny amount, so you wouldn’t miss it and it can lead to big savings in the long run!
How to open an RD online:
- It is mandatory that you have a savings account in the bank that you wish to open an RD in.
- Look for the option under the savings tab in your savings account on the web portal. This is when you have to enter the amount and the regularity of the deposits
- Make the first deposit.
Pros of RD:
- Good for short term goals, like travel, purchase of a luxury product, etc
- Convenient for beginners, no investment knowledge necessary
- Flexibility of deposits
Cons of RD:
- Taking the money out before the term might get you a small fine.
- The interest rate is lesser than that of other investment options offered by the bank.
- If you have less money in your account, the RD might still go through, sometimes leaving you with zero balance.
- If your risk appetite is high, this is not the place to park your money.
2. Public Provident Fund or PPF:
A Public Provident Fund is a savings instrument introduced by the Ministry of Finance in 1968, it is aimed at the general public to encourage the habit of saving. These smart investments offer income tax exemption, so you are saving on your savings! The PPF is safe as it is backed by the government. The interest rate of 7.9% is also pretty good as it is relatively more than any bank deposit interest rate. You can invest on a long term basis with as little as Rs. 500 and up to 1.5 Lakhs. You can also use this investment to avail all sorts of loans after three years in the future!
How to invest in a PPF:
- Deposit your money into the PPF account yearly (max 12 installments allowed) right from Rs. 500 up to Rs. 1.5 lakh
- Remember to deposit before the 5th of the month to get the interest for the full month, as the interest is calculated on the lowest balance that you’ve deposited into the account from the close of the 5th day and the end of the month.
- You can make investments for yourself or for a minor. Although a single person is allowed to have only one account at a time.
- The tenure for a PPF account is fixed at 15 years but you can extend it indefinitely in blocks of 5 years.
Open a PPF Account
You can opt for a PPF account at your bank or you can open one at your nearest post office.
- Visit your nearest bank branch or post office and submit a PPF account opening form.
- Submit self-attested copies of supporting documents such as Aadhaar, PAN, Voter ID, etc. along with photographs.
- Fill up a PPF deposit challan or Form B that is available at the Post Office or bank. The deposit slip will have the main section and two counterfoils – one for an agent (ignore it if you are doing it yourself) and one for you to retain as a receipt
- You then deposit the amount by cash, cheque or demand draft
- Enter your name, address, your PPF account number, amount you are investing and the details of how you are making the investment.
- For an in-depth reading: Check this out
3. National Savings Certificate or an NSC:
The National Saving Certificate or NSC is a small-saving government scheme offered by the Department of Postal services. This is yet another secure, government-backed investment option that’s well-suited for beginners. The interest rate is the same as is for a PPF. It is designed by the government of India to encourage the habit of saving money in its citizens.
NSC is income tax exempted for up to 1.5 lakhs. It has an investment time of 5 years. So for example, if you are looking to invest Rs.100 then after 5 years your returns would be Rs. 146.93! An NSC is easily available at your nearest Post Office.
Know your basics:
- The minimum amount that a certificate can be purchased for is Rs. 100. The different denominations that the certificate can be purchased for are Rs.10,000, Rs.5,000, Rs.1,000, Rs.500, and Rs.100. You can start with small investments and then increase the denomination as you go.
- It has two maturity tenures of 5 years and 10 years
- The rate of interest is 8% and it is added to your investment annually. However, the interest is payable only at the end of the tenure date or maturity.
- You can add your family members including minors as nominees. Then after you, they will be eligible to inherit the scheme.
- The National Savings Certificate can be used as a security or collateral at banks to avail loans. However, the postmaster must authorize the transfer of the certificate to the bank
- You can transfer an NSC from one post office to another. Transfer of certificate from one individual to another is also possible. However, the certificate will remain the same and the name of the new owner shall be written on it
These are the various ways you can own a National Savings Certificate :
Single Holder Type Certificate:
This type of certificate, as the name suggests, can be held by only a single person. Such certificates are only issued to individuals and joint holders are not allowed. You can appoint nominees but only you, the owner to whom it was issued can make any decisions regarding it.
Joint ‘A’ Type Certificate:
Joint A type of certificate is issued to 2 adults. On maturity, the amount is payable to both of the investors. The signature of both the holders is required in case the certificate needs to be transferred or canceled, or a nominee needs to be changed.
Joint ‘B’ Type Certificate:
The difference between Joint A and Joint B type certificate is that Joint B type pays the end maturity value to any one of the 2 joint certificate holders. This is opposed to maturity payment to both the certificate holders in case of Joint A type holding. All the other features are the same for both A and B type joint certificates.
How to invest in an NSC:
You can opt for an NSC at your nearest Post Office.
- The NSC application form must be filled and submitted at the post office.
- Bring an original identification proof such as Passport, Permanent Account Number (PAN) Card, Voter ID, Driving license, Senior Citizen ID, or Government ID for verification along with a photograph.
- Address proof such as Passport, telephone bill, electricity bill, bank statement along with a cheque as well as a Certificate or an ID card that has been issued by the Post Office would do
4.) Index Funds:
Index Funds are smart investments not only for beginners but for regular investors as well. An Index fund is a type of mutual fund that tracks the performance of a particular index like the NIFTY 50 or SENSEX. These Index funds ensure a performance/returns that are identical to that of the Index(Nifty 50 or SENSEX). The main advantage of these funds is their “Low expense ratio.”
“Expense ratio” is the amount that mutual funds charge for managing investors’ money. A scheme with a lower expense ratio is considered cost-effective. Moreover, They don’t aim to outperform other funds but try to replicate the market. They help the investor in managing the balance of risk in their investment portfolio.
Why are Index Funds a great bet?
The legendary Warren Buffet is a believer despite his out of the world stock-picking skills. He wants 90% of his wealth invested in Index funds after his death. He says that index funds are the best kind of passive investing.
Passive investing broadly refers to a buy-and-hold portfolio strategy for long-term investment horizons, with minimal trading in the market. That is to say, They hold every stock in an index, even big wigs like Reliance, Maruti, and Infosys, and due to their low turnover rates, the fees and taxes are small as well. More on why Warren Buffet thinks that Index funds are the best way to grow money for everyday investors.
- Low cost
- Less effort to manage
- Does not underperform the market
- Low risk
Here is all you need to know: Index Funds: Benefits, Differences and More.
Happy investing folks!