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Investment Knowledge Chapter 3

Investment Knowledge Chapter 3

Why is knowing investment important?

Investing ensures present and future financial security. It allows you to grow your wealth and at the same time generate inflation-beating returns.

Why is Investing Important and Where Should One Invest

Gone are the days when people use to only rely on their savings for future security. In today’s world, savings may not be adequate to ensure financial safety. Idle money kept in your savings bank account or locker may also not serve the purpose. That is because of two reasons – one, the idle cash in your bank account is an opportunity loss as it is not capable of earning more money, and second, it does not have the potential to beat inflation.

It is clear from the fact mentioned above that just earning money and keeping it idle is not enough. It would help if you made your money work hard for you. And how do you do that? By
INVESTING.

Investing allocates money in different asset classes with the intention of capital appreciation and earning better returns in the long run.

Why Should You Invest?

Investing ensures present and future financial security. It allows you to grow your wealth and at the same time generate inflation-beating returns. You also benefit from the power of compounding.

Furthermore, investments have the potential to meet your financial goals, such as purchasing a house, accumulating retirement corpus, and building an emergency fund, among others.

Investing instils a sense of financial discipline as you develop a habit of setting aside a particular amount every month or every year towards your investments.

Some investment vehicles like Equity Linked Savings Scheme (ELSS), Public Provident Fund (PPF), National Pension System (NPS), etc., help to minimise your tax liability.

Popular Investment Options in India

In India, you have several investment options. You need to select based on their financial goals, risk tolerance and investment horizon. Some of the popular investment options available in India are:

Direct Equity

It is commonly referred to as a stock investment. It is one of the most preferred investment options among investors. When you buy shares of a company, you indirectly acquire an ownership stake in the company. Long-term stock investment aids in capital appreciation. Stock investment has enormous potential to earn attractive returns, but there are associated risks in this type of investment.

Mutual Funds

A mutual fund comprises a pool of money collected from many investors who share a common investment objective. The money so collected is invested in various instruments such as stocks, bonds, money market, etc. Mutual fund investment is considered to be flexible as you can start or stop investing as per your wish. They offer moderate returns, but the risk is lower than equity investment.

Public Provident Fund (PPF)

PPF is a government-backed savings scheme that aims to mobilise small savings and provide a secure post-retirement life to individuals. It is a long-term savings scheme with a lock-in period of 15 years. PPF investments are eligible for tax deductions under section 80C of the Income Tax Act, 1961 and are also considered relatively safe.

Employee Provident Fund (EPF)

Just like PPF, EPF is also a retirement-oriented investment scheme that is specifically designed for salaried employees. Under this scheme, a certain percentage is deducted from the employee’s monthly salary with an equal contribution from the employer. EPF contribution is eligible for a tax deduction, and the final amount received upon maturity is also entirely tax-free.

National Pension System (NPS)

NPS is a retirement pension scheme introduced by the government to build a corpus that can provide a monthly pension to people post-retirement. It has a mandatory lock-in period till retirement; however, you can make partial withdrawals after retirement. Investments made towards NPS are also eligible for a tax deduction.

Fixed Deposits

Fixed deposits are regarded as an ideal investment option for conservative investors. They provide a fixed rate of return for a specific period of investment, thus offering guaranteed returns.

Which Investment Option Should You Choose?

There is no one-size-fits-all investment plan. The investment choice depends on several factors like your risk-bearing capacity, age, investment horizon and financial goals. So, make a wise choice for yourself. It is good to invest after conducting proper research and adequately understanding your investment options. You may also want to consider the tax implications on your investments and returns.