Correlation between savings and investment
Savings is more important than investment
because the large corpus we normally create from savings, form the bedrock of
investment.
Investment is necessary because some things in
life like land, house, personal car etc. comes at a high cost. Savings or
normal income alone cannot cover the premium you pay for these. These costs can
be countered by investments, which, if invested properly, double your wealth in
3-5 years.
Stock markets, land are some of the fastest
money growers. If you are in a hurry, invest in stocks or better in mutual
funds. Mutual funds have the advantage of expert fund managers, managing your
money. Land value increases rapidly, but also carry a lot of litigation which
may be impossible to untangle.
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Why save?
Importance of savings:
If properly selected, more the investment,
greater are the returns. To have a sizeable amount on maturity, you need to
invest a large amount. This large amount is possible via regular savings
instruments like EPF. NSC. Etc. As we delve further on this matter in this
article, we will go through the merits of common savings instruments.
The primary mantra is to save in a smart way so that
the amount compounds. Once it reaches a sizeable corpus, go for investing
safely so that now the amount increases at a faster rate.
Another reason for savings in a smart way is so
that your returns beat the low-interest rate regime or is not less than
inflation-adjusted returns at any time.
Let us now go through the common savings
schemes, which provide good returns.
Different common savings scheme with good return
One of the best returns is provided by EPF. Its
beauty lies in the fact that its annual interest under 9.5% is tax-free. Also,
the amount your employer pays for your EPF is tax-free annually till 12% of
employee’s own contribution.NSC gives interest at a predetermined rate and does
not come down in low-interest regime. Another positive fact about NSC is that
its interest is added to the principal amount of that year. The sum becomes the
principal amount for next year on which you obtain interest next. Therefore,
the money grows in a compound fashion. Indian Government guarantees the return.
All these facts make NSC a good savings option with close to investment grade
output.
However, the amount on maturity is taxable.
NPS (National Pension Scheme) is one of the
savings avenue by which you lessen your tax outgo. It falls under EET scheme
where the amount invested and its interest is relieved under extra 50,000
special deductions available through 80CCD tax deduction route.
However, one con of NPS is the high lock-in
period and very low amount of taxes you have to pay on the 60% amount that you
can take out on maturity at retirement or 60 years. Rest 40% amount has to be
put into Annuity i.e pension schemes.
Investment with Insurance is needed
You can concentrate on wealth build up when you
are secured from medical or insurance costs.
So is there any investment instrument, which
combines insurance with a rapid increase in corpus? ULIP fills that purpose.
Buy units of ULIP that would be enough for your insurance needs. However,
invest in ULIP only when the markets are low.
ULIP is unit linked policy where the number of
units you buy at NAV is invested in debt funds or market and provides insurance
too proportionate to that amount. Not only does the NAV increase with an
increase in market price of stocks, but you get relief under 80C too for
investment in that fiscal. It has a lock-in period of 5 years. However, for
proper growth, it's better that you remain invested for a longer period. Do not
forget there's insurance connected with it.
Investment so that your wealth increase rapidly.
If you are in a hurry to increase your wealth
quickly, (you are in the approaching 40s) try ELSS. This is the best
combination of wealth increase along with tax savings.
Importance of tax savings
Tax savings mean more disposable money in your
hand, through which you can invest or save more. More investment or more
savings, both are mandatory for your happy future. Once your cash flow from
work (salary) stops, these investment created from savings, will provide you
with steady returns.
Back to ELSS
ELSS has a lock-in period of 3 years. After this
mandatory lock-in period, the matured amount is tax-free in the hands of the
investor.
Investing your Windfall Amount
Savings accounts fetch you a meagre 3.5-7%. When
you receive a “windfall amount” (a comparatively large amount that was not
anticipated), you will not like it to fetch only 4% in a normal savings
account. That is not the way to increase your money rapidly. For the ultra
short term period, put this money in liquid funds.
Liquid funds lag behind savings deposit only in
one respect i.e. tax. These funds are taxable either as short term capital
gains or as other income in your tax slab.
Apart from this, liquid funds are the best
avenue for ultra-short term investment.
Until you have a high return investment
opportunity to use the Windfall Amount, invest it in liquid MFs.
The liquid fund houses employ a mix of AAA+
rated commercial papers and lower-rated bonds, company certificates to give you
a constant return of 7-9%, which is way above normal savings deposit interest.
It has no lock-in period (until now). These are
withdraw able at any time without any charge and the final amount is credited
the very next day.
Save and Invest
Savings may seem as low output financial products. However, savings with
combine the tax deduction and you will be pleasantly satisfied by output. When
possible, go for schemes like EPF, PPF in active service life and when you
approach the 40s, invest 40% of total savings actively in ULIPs and ELSS. You
will be amazed by the speed of personal finance improvement.
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