Savings and investments are the basic steps in an individual's financial planning process. There are various options available in the market, and it is very important to plan and select the right investment instruments in order to get the best returns. It is advisable to start saving and investing as early as possible. It is also very important to allocate some of your time to planning and tracking your existing and planned investments. You cannot have all you plan for in your investment portfolio on day one - you need to build the portfolio slowly over time, and focus on diversification of instruments too.
The first step is to identify your objectives. The objectives can be simply classified as short-term needs such as tax saving, insurance, buying some asset etc, and long-term needs such as a property, marriage, children's education, retirement etc. The next step is to identify your risk appetite, which is basically your capacity to bear loss on investments. Risk appetite is unique to each investor as it depends on various personal factors such as age, stability in earnings, financial background of the family etc.
These are some of the broad categories of investment instruments that are available in the markets:
Tax-saving instruments
It is important to plan to reduce your tax liability. The Income Tax Act specifies certain investment instruments that attract a rebate in income tax. For example, provident fund, NSC, infrastructure funds etc. However, most of these tax-saving instruments come with a long lock-in period. You can choose some of these tax-saving instruments to invest in.
Investors with a low risk appetite can invest in debt based instruments like PPF, NSC etc, while investors with a high risk appetite can invest in a mix of tax saving mutual funds, PPF, NSC etc.
Insurance instruments
It is important for everyone to have an adequate insurance cover on life and health. Analysts suggest an investor should have an insurance cover that is at least 5-8 times his annual income. On the other hand, you should have adequate medical cover as well for yourself and your immediate family members.
Insurance schemes taken at a lower age come with lower premiums and therefore it is advisable to go in for adequate insurance cover during the early part of one's earning years. Unit linked insurance plans (ULIPs) are a good option to bundle one's investment and insurance needs.
Liquid and debt instruments
Debt-based investment instruments are 'low risk and low returns' options, and provide for capital protection. Debt instruments are good for short and medium-term investment plans where investors are looking for liquidity. You can look at investing in various debt based investment instruments based on your needs.
Some options are bank savings deposits, bank fixed deposits, debt based mutual funds etc.
Gold
Investing in gold has gained popularity in recent times due to the lucrative returns. Gold-based investments add another dimension to a portfolio. It acts as a debt instrument and usually provides good returns during uncertain economic conditions. You can look at investing in gold either through the metal itself or through units of gold exchange-traded funds (ETFs).
Equity-based instruments
You can invest in the equity markets either directly in stocks or through indirect options - equity-based mutual funds. You can identify investment opportunities with some basic analysis. Ideally, only investors who have the time and understanding of markets should look at the direct stock method. Others should look at investments through funds managed by various fund houses.
