Smart Investing Guide: 40 Lakh Strategies For Indians

If you're looking to invest 40 lakhs in India, there are a variety of options available to you. The best choice for you will depend on your financial goals, risk appetite, and current income and expenses. It's important to diversify your investments to mitigate risk and get optimum returns. Some options include pension plans, mutual funds, unit-linked insurance plans, fixed deposits, and guaranteed monthly income schemes. If you're looking for a fixed-income investment, real estate structured debt is a good option, offering an assured IRR of 17% with a minimum investment of 10 lakhs. If you're investing for retirement, equity mutual funds are a good option, but if you're already retired, consider investing in short-term debt funds.

Equity mutual funds

There are various types of equity mutual funds, categorized by investment strategy, market capitalization, tax treatment, and investment style.

Investment Strategy-Based Categorization:

• Thematic or Sectoral Funds: Follow a specific investment theme or invest in a particular sector of the market, such as BFSI, IT, or pharmaceuticals.
• Focused Equity Fund: Invests in a maximum of 30 stocks of companies with specified market capitalization at the time of the launch of the scheme.
• Contra Equity Fund: Follows a contrarian strategy by investing in under-performing stocks at low prices, assuming they will recover in the long term.

Market Capitalization-Based Categorization:

• Large-Cap Funds: Invest a minimum of 80% of their total assets in equity shares of large-cap companies (the top 100).
• Mid-Cap Funds: Invest around 65% of their total assets in equity shares of mid-cap companies (101st to 250th-placed companies by market capitalization).
• Small-Cap Funds: Invest around 65% of their total assets in equity shares of small-cap companies (251st and below by market capitalization).
• Multi-Cap Funds: Invest around 65% of their total assets in equity shares of large-cap, mid-cap, and small-cap companies in varying proportions.
• Large and Mid-Cap Funds: Invest around 35% of their total assets in equity shares of mid-cap companies and 35% in large-cap companies.

Tax Treatment-Based Categorization:

• Equity Linked Savings Scheme (ELSS): The only equity scheme offering tax benefits of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. ELSS has a minimum of 80% of its total assets invested in equity and equity-related instruments, with a 3-year lock-in period.
• Non-Tax Saving Equity Funds: All other equity funds that are not ELSS, where returns are subject to capital gains tax.

Investment Style-Based Categorization:

• Active Funds: Actively managed by fund managers who handpick the stocks they want to invest in.
• Passive Funds: Track a market index or segment to determine the stocks to invest in, without the fund manager's active role in stock selection.

When investing in equity mutual funds, it is important to assess your financial goals, risk tolerance, and investment horizon. These funds can be volatile in the short term, so investors should be prepared to stay invested for at least 5 years to generate handsome returns.

Real estate

Traditional Investment Model

The simplest way to invest in real estate is to buy or lease a property for the long term and rent it out to tenants. This process requires significant upfront capital and ongoing maintenance costs. Ensure the property is free from legal issues and can be easily accessed by road, as these properties generally appreciate in value over time.

Renting a Portion of Your Existing Property

If you want to avoid the burden of significant investment costs, you can start small by renting out a room or a floor in your current house to commercial or residential tenants. This option requires dealing with extra traffic and ensuring that the rental terms and conditions are clearly outlined in the rental agreement.

Fix-and-Flip

This strategy involves investing in a commercial or residential property that needs maintenance, renovating it, and then selling it at a higher price. This method requires familiarity with the real estate market's demand and supply and the cost of renovation work. It offers fewer constraints regarding regular maintenance and registration, and if market research is done well, it can generate good returns.

Exchange-traded funds (ETFs) and mutual funds can be used to invest indirectly in real estate by buying funds that are themselves invested in real estate stocks, such as publicly traded home builders, or in REITs (Real Estate Investment Trusts). REITs function like mutual funds, pooling investor capital to purchase income-producing real estate assets. They offer benefits such as liquidity, affordability, regulatory protection, and tax advantages. While they may not provide monthly dividends, they offer low investment costs.

Fractional Ownership

Fractional ownership is a growing trend in India, allowing multiple investors to pool funds to purchase a single commercial property, reducing individual investment costs and risk exposure while sharing rental income. This approach provides access to the lucrative commercial real estate sector, typically requiring high capital investment. It offers potential annual rental yields of 8-12% and an Internal Rate of Return (IRR) of 13-17%.

When investing in real estate, it is essential to consider your available capital, liquidity preferences, desired cash flow regularity, and risk tolerance. Real estate investments often require substantial capital and experience in the market. Diversifying your portfolio and investing for the long term are also key considerations.

Pension plans

HDFC Life Pension Plans

HDFC Life offers a range of pension plans with different features and benefits. Here are some of the notable ones:

• HDFC Life Click 2 Retire: This plan offers financial independence with a regular income during retirement. It has a low minimum investment requirement of ₹2,000 per month and provides guaranteed maturity benefits.
• HDFC Life Smart Pension Plus: This plan provides a guaranteed annuity income for life by paying premiums for a single or limited payment term. It offers flexible payout options and covers life insurance.
• HDFC Life Guaranteed Pension Plan: A traditional pension plan that offers guaranteed returns as post-retirement income. It provides a choice of premium-paying terms and guaranteed death benefits.

ICICI Pru Signature Pension Plan

The ICICI Pru Signature Pension Plan is a market-linked pension plan that helps build your retirement corpus through market-linked returns. It offers tax-free commutation of up to 60% of the vesting benefit, flexibility in partial withdrawals, and a choice of portfolio strategies and funds.

Tata AIA Fortune Maxima

Tata AIA Fortune Maxima is a participating unit-linked pension plan (ULPP) that offers life insurance cover and market-linked returns. It provides investment options in debt, equity, or balanced funds and offers extra units to boost your investment. It also has optional riders for greater protection.

Max Life Online Savings Plan

The Max Life Online Savings Plan is a unit-linked, non-participating traditional investment plan that combines life cover with wealth creation benefits. It offers guaranteed returns, predictable income after retirement, tax benefits, and no market risks. The plan has no premium allocation or policy administration charges.

Bajaj Allianz Life LongLife Goal

Bajaj Allianz Life LongLife Goal is a non-participating unit-linked pension plan (ULPP) with guaranteed life cover and annuity payout. It offers loyalty additions, flexible payout options, and life insurance coverage until age 99. The plan also has a "Retired Life Income and Return Enhancer" feature.

ICICI Prudential Signature

ICICI Prudential Signature is a participating unit-linked pension plan (ULPP) with guaranteed life cover and loyalty additions. It offers potential for higher returns, guaranteed benefits, life insurance cover, and flexibility in premium payment and policy terms. The plan returns mortality and policy administration charges at maturity.

National Pension Scheme (NPS)

The National Pension Scheme is a long-term pension scheme introduced by the Government of India to secure the financial future of government and private employees after retirement. It offers better returns than other savings plans and allows partial withdrawals during the contribution stage.

Lump sum mutual funds

Lump-sum mutual funds are a great investment option in India, but they come with certain risks. Before investing, it's important to understand how mutual funds work and what factors to consider.

Mutual funds are a way to pool money from multiple investors and invest it in various securities, such as stocks, bonds, and other financial instruments. The funds are managed by professional fund managers who aim to generate profits for the investors. One of the key advantages of mutual funds is diversification, which reduces risk because not all stocks move in the same direction at the same time.

When investing a lump sum of 40 lakhs in mutual funds, it's crucial to assess your risk tolerance, investment goals, and time horizon. You can choose between open-ended and close-ended mutual fund schemes. Open-ended funds offer more liquidity and allow investors to buy and sell units at Net Asset Value (NAV)-related prices daily. On the other hand, close-ended funds have a stipulated maturity period, typically 5-7 years, and provide an exit option through periodic repurchase or listing on stock exchanges.

Additionally, mutual funds can be classified into growth, income, or balanced schemes based on their investment objectives. Growth or equity-oriented schemes focus on capital appreciation over the medium to long term and carry higher risks. Income or debt-oriented schemes aim to provide regular and steady income by investing in fixed-income securities, while balanced funds offer both growth and regular income by investing in a mix of equities and fixed-income securities.

When investing a lump sum, it's recommended to seek advice from experts, compare different mutual fund schemes, and consider factors such as the fund's track record, service standards, and professional management. Diversifying your investment across different schemes and fund houses can also help manage risk.

It's important to remember that mutual funds are subject to market risks, and past performance does not guarantee future results. Investors should carefully consider their financial goals, risk appetite, and investment horizon before investing in mutual funds.

Unit-linked insurance plans

Here's how ULIPs work: a portion of your premium payment goes towards providing life insurance coverage, while the remaining portion is invested in market-linked funds of your choice. These funds are professionally managed and can be invested in different asset classes such as equity, debt, or a combination of both. The growth of your investment depends on the performance of these funds. ULIPs offer flexibility in terms of premium payments and fund allocation, and you can switch between different funds as per market conditions and performance.

ULIPs have a lock-in period of 5 years, after which you can make partial withdrawals to meet financial needs. They also offer tax benefits under Section 80C of the Income Tax Act, and the maturity proceeds are tax-free under Section 10(10D).

When choosing a ULIP, it's important to consider your investment goals, risk tolerance, and the insurance company's solvency ratio. Additionally, compare the features and benefits of different ULIP plans, including charges such as premium allocation, fund management, policy administration, and mortality fees.

ULIPs are suitable for individuals with dependents who seek a long-term insurance plan with the combined benefit of wealth creation and life insurance. They are a good option for retirement planning, wealth creation, and securing your child's future.

Some popular ULIP plans in India include:

• Bajaj Allianz Invest Protect Goal
• TATA AIA Smart Sampoorna Raksha
• HDFC Life Sampoorn Nivesh
• ICICI Pru LifeTime Classic
• SBI Life eWealth Insurance

Frequently asked questions