Inflation vs Investing
Inflation is a sharp rise in prices due to a fall in the buying power of money. Inflation decreases the purchasing power of money resulting in a decrease in your worth. Inflation is a national wide concept and no change can be bought by an individual. Since you have no control over Inflation investing is a prominent option to make sure you earn enough money and stay ahead of inflation trends. Investing is a prominent way of tackling inflation.
Types of Investments
There are various investing methods available. Assessing the amount of risk you can assume would be a good place to start. Investors that actively participate in trading mostly deal with Active Investments. These are high-risk and the rewards are similarly substantial. But if you are uncomfortable assuming that much risk, Passive sources of income are a good place to dive into. These are low-risk and reap low-yielding rewards. Passive income sources take time to realize and are popularly referred to as bought-and-hold. Let’s look at some passive ways of investing that are available.
Fixed deposits are the investment instruments that are provided by banks and other financial institutions. In this financial instrument, a lump sum amount is deposited/ invested for a period of time and in turn, one gets a fixed interest rate.
There are various benefits attached to FD, some of them are-
- Assured rate of interest
- One can get a loan from the FD amount in case of financial emergencies
- The money growth is faster as interest is compounded and senior citizens are provided with higher interest rates without any penalties.
- Premature withdrawal is allowed
- Re-investment option is also given to the users
- The investment is safe as it’s under the eyes of the Reserve Bank of India (RBI)
Non-Banking Financial Companies (NBFC), Housing Finance Companies (HFC), and Scheduled Commercial Banks (SCB) provide taxpayers to open fixed deposit accounts under their vigilance. But before investing, one should make sure financial institute has high ratings from authentic rating agencies.
One of the alternative fixed deposits is with the Post office which is called Post Office Fixed Deposit (POFD). Although, it has been observed that POFD is more commonly used by people who are living in rural areas. One can choose the tenure of deposit from 1 to 5 years (with a high tenure one gets a higher interest rate). The interest rates range between Companies’ FD rate and Bank FD.
Any Indian citizen is eligible to open a fixed deposit under this except NRIs. Individuals who are risk-averse or keep a low-risk appetite who wants a steady income are most suited to avail of this investment plan.
Some of the benefits which one gets in making investment under this scheme are:
- One gets high flexibility in investing amount. A minimum of Rs. 1000 is required to open an account with no maximum limit fixed.
- One gets an attractive interest rate.
- There is an option to make a nomination (even in a case nominee has already accounted in POFD).
- One can make a premature withdrawal
- Tax deduction (on the 5 years fixed deposit) can be claimed by an individual under Section 80C of the Income Tax Act
As per the Union Budget of 2021, senior citizens whose income is based entirely on pension and interest income are exempted from filing income tax returns. Section 194P has been newly inserted to enforce that banks deduct tax on senior citizens of more than 75 years of age who have a pension and interest income from the bank.
There are various types of FD which are available such as Regular FD, Senior Citizen FD, Corporate FD, Tax-Saving FD, NRO FD, NRE FD, FCNR FD, and FD (with monthly payout& Maturity payout)
Apart from these two, there is another investing option called a Liquid Fund. Liquid funds are short-term money market instruments such as commercial papers, high-rated corporate bonds, government bonds, and treasury bills. They are a safer investment options form of capital preservation. Because of this nature, these funds invest in high-rated money market instruments.
Compared to mutual funds, this is a safer option. Investors who are risk-averse and at the same time want to put up their extra money to avail a higher rate of interest can plan to choose this investing instrument. These liquid funds as compared to the fixed deposit give a slightly higher rate of interest, both long-term & short-term investors are available, and require low investment.
For all these to open an account Identity Proof (Passport, PAN Card, Voter ID, Driver’s license, Aadhaar Card), Address Proof (Passport, Aadhaar Card, Bank Statement with as cheque), and Date of Birth proof (Service Discharge certificate, PAN card, Aadhaar Card, Voter ID)
This article is just a brief overview of fixed and liquid deposits. To more in detail about each of them contact HA for the same.
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As the name indicates, this is the deposit scheme that provides investors to make a regular monthly investment. Investors as per their convenience plan for monthly deposit. This investing scheme is simpler to use and start than a fixed deposit as it’s more flexible.
There are various types of recurring deposits, such as-
- For Minors
- To Senior Citizens
- NRE/ NRO
Some of the basic features such as Interest rate (ranges from 2.5% – 7%), Minimum monthly deposit (Rs. 100), Investment tenure (6 months- 10 years), Interest Compounding frequency (quarterly), and withdrawal (partial is not allowed and if, then its subject to penalty).
One should fulfill the eligibility criteria to avail benefits of Recurring deposits. The criteria are-
- Indian Resident
- Senior Citizen
- Minors (who are under the supervision of parents/ guardians)
- Non-Resident Indians
Apart from the advantages, there are disadvantages attached too. They are like-
- When one withdraws within the lock-in period it does not provide any return
- Premature withdrawal is subject to a penalty
- The amount for the installment is fixed
- The rate of interest is comparatively lower
One other type of Recurring deposit scheme is Systemic Investment Plan (SIP). In this one has to put up a certain amount of money either monthly or quarterly instead of investing in a lump sum amount. An amount low as Rs. 500 can be invested in SIP which in turn will be invested in mutual funds. There is however no fixed period in terms of tenure but a minimum of 6 months is required. The SIP can be closed anytime without any penalty charges.
Based upon one’s investing need and appetite one should plan for investment and before taking any major step finer details should be looked at.
Another saving scheme which is launched by the Government of India is National Savings Recurring Deposit Scheme. It was launched on 12th December 2019 to encourage small investors to invest even a small amount regularly to meet their future needs. Saving accounts in this scheme can be opened even with a low amount of Rs. 100.
The account can be opened and maintained by individuals and jointly after filing Form-1. The various types of accounts which can be opened are, Minor with a minor (who is at least 10 years old), minor with a legal guardian, a joint account (maximum three adults), an individual account.
According to the economic condition, the rate of interest varies. The current rate is 5.8%. The interest rate is compounded on a quarterly basis.
Apart from all the features some of the salient features are-
- The account can be opened by depositing cash or cheque
- Accounts under this can be transferred across post office branches
- The account maturity period is 5 years and after that also one can take an extension
- Loan up to 50% of the accumulated amount can be taken
- Withdrawal before 5 years is allowed only in the 3rd year from the date of opening of the account
Systematic Investment Plan vs Recurring Deposit
|Factors||Recurring Deposits (RD)||Systematic Investment Plan (SIP)|
|Investment Scheme||The scheme gives you a fixed rate of returns. Flexible RD schemes are also available.||Freedom to choose between equity and debt funds based on the risk and return appetite.|
|Tenure||Choose a deposit tenure from six months to 10 years.||No fixed tenure for SIP as such. However, the minimum period is six months.|
|Interest Rates||Interest rates vary from 2.5% to 7%. Senior citizens may be offered higher rates.||Interest rates generated by SIP mutual funds have been 12% to 22% for the last 5 to 10 years.|
|Returns||Returns are fixed and will be known at the time of investment.||Returns depend on equity and debt markets, and the fund scheme was chosen; cannot be estimated for sure.|
|Installment Frequency||RDs include a monthly installments structure.||SIPs offer flexible instalment plans, i.e. daily, weekly, monthly, and quarterly.|
|Risk Factor||RDs are not prone to risks and are a safe form of investment.||Returns from SIP are variable as they depend on the stock market. There can be a risk of capital.|
|Liquidity||Though RDs are liquid, they will attract fines for premature withdrawal.||SIPs can be closed anytime without any penalty charges.|
|Taxation||RD amount and the interest earned on RDs are not exempt from income tax.||SIP investments and their returns are exempt from tax when invested in ELSS mutual funds.|
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Just like any other investment scheme, a saving account is one that encourages saving. Individuals who have a steady income and short-term goal planners can avail themselves of most of the benefits from it.
The benefits associated with a saving account is huge and some of the most prominent are-
- No or Less Risk
- Access to International debit card
- Insurance availability
- Discounts on the opening locker
- Discount on the purchase of gold
Furthermore, the account also attracts tax under the head ‘Income from other sources and one can also avail deduction as per Section 80TT suitably.
As per Government Savings Bank Act 1873, the Central Government has launched National Savings Time Deposit Scheme.
Some of the prime features of this scheme are-
- Various types of accounts can be opened up
- Minor is also eligible to open
- Deposits are accepted in the form of cash, demand draft and cheques
- An account holder can nominate a nominee for their account
- The minimum account which has to be deposited is Rs. 100 and a minimum of Rs. 1000 has to be maintained on the account
- Premature closure of account is acceptable
The rate of interest varies from one year to the other, that is from 1st year to 3rd year the rate is 5.5% but the interest rate for 5th year is 6.7%. As the saving scheme offers accounts for 4 different maturity periods the interest rate varies. The best aspect is the rate of interest provided is much higher than a regular savings bank account, so one should plan and invest accordingly.
A comparison of different saving schemes is described below-
|Scheme||Interest Rate||Minimum Investment||Maximum Investment||Eligibility||Tax Implications|
|Post Office Savings Account||4% per annum (p.a.)||–Rs 20 –Non-cheque facility – Rs 50||No limit||Resident Indian, minor and majors||Tax-free interest up to Rs 50,000 from the financial year 2018-19|
|Post Office Time Deposit Account (TD)||First year – 5.5% p.a. Second year – 5.5% p.a. Third Year – 5.5% p.a. Fourth Year – 6.7% p.a.||Rs 200||No limit||Individual||Tax benefits up to 5 years under section 80C on deposits|
|Post Office Monthly Income Scheme Account (MIS)||6.6% per annum payable monthly||Rs 1,500||For one account holders – Rs 4.5 lakh Joint account holders – Rs 9 lakh||Individual||Interest earned is taxable and no deduction under Sec 80C for deposits made.|
|Senior Citizen Savings Scheme (SCSS)||7.4% p.a. (Compounded annually)||Rs 1,000||Maximum deposit over the lifetime allowed at Rs 15 lakh||Individuals of age> 60 years or age >55 years who have opted for VRS or superannuation||– Tax benefit under section 80C for deposits – TDS to be deducted on interest earned for more than Rs 50,000 p.a.|
|15-year Public Provident Fund Account (PPF)||7.1% p.a. (Compounded annually)||Rs 500 per financial year||Rs 1.5 lakh per financial year||Individual||Tax rebate under section 80C for deposits (maximum Rs 1.5 lakh p.a.)|
|National Savings Certificates (NSC)||6.8% p.a. (Compounded annually)||Rs 100||No limit||Individual||Tax rebate under section 80C for deposits (maximum Rs 1.5 lakh p.a.)|
|Kisan Vikas Patra (KVP)||6.9% p.a. (Compounded annually)||Rs 1,000||No limit||Individual (Adult)||Interest is taxable but no tax on the amount received on maturity|
|Sukanya Samriddhi Accounts||7.6% p.a. (Compounded annually)||Rs 1,000 per financial year||Rs 1.5 lakh per financial year||Girl Child – up to 10 years from birth and one additional year of grace||Investment (up to Rs 1.5 lakh exempt under Section 80C), interest, and the amount received on maturity is tax-free|
As to remove the difficulty in managing finances for Non-resident Indians, Foreign Exchange Management Act has set up guidelines for the same. NRIs are supposed to switch their saving account to Non-Resident External Account (NREA) or Non-Resident Ordinary (NRO) account. By opening these accounts one will save from the heavy penalty and can save & send earnings through this.
One is open to choosing between NREA and NRO accounts. NREA account is Indian –rupee dominated account which offers complete security. The foreign income that one deposit are converted into an Indian rupee. The account under this form can be in the form of savings, fixed deposits, current or recurring. The income deposited should be earned outside India and can also be easily accessible with an international debit card 24*7. The main usage of this account is for investing in India, personal banking, and carrying out business. Whereas, NRO is the account that is managed by NRI for the income which is earned by them in India. Via this account one can receive funds either in Indian currency or foreign currency. But the sad part is that the tax is levied on the amount which is deposited in this account, that is, it is subject to TDS.
The difference between NREA and NRO accounts is as follows:
|Parameter||NREA accounts||NRO accounts|
|Deposits and Withdrawals||Can deposit in foreign currency, and withdraw in Indian currency||Can deposit in foreign as well as Indian currency, and withdraw in Indian currency|
|Transfer of fund||An NRE account allows you to transfer funds to another NRE account as well as to an NRO account||You can transfer funds from an NRO to another NRO account, but you cannot transfer funds from an NRO account to an NRE account.|
|Effect of Exchange Rate Fluctuations:||NRE accounts are subject to conversion loss and fluctuation in the value of the rupee against a foreign currency||There are no risks involved in NRO accounts|
Yet another type of investing instrument is Liquid funds. These are debt funds that can be used for investing in the securities like commercial papers, treasury bills, certificates of deposit, and other similar debt securities. These investment instruments are easy as they are processed within 24 hours and get mature within 91 days. The risk levels of liquid funds are on the lower side. Liquid funds are considered to least risky among all classes of debt funds as they mostly invest in high-quality fixed-income securities that mature soon. The main objective of this type of fund is to preserve capital and offer liquidity.
As there is no exit load to the investors of liquid funds and various variants like Daily, Weekly, or Monthly Dividend and Growth options are available giving easiness.
As compared to saving bank accounts these are risky but not high risky. This is because the investment is predominantly in debt-free instruments.
To more in debt about all the financial investment instruments in details contact HA.
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