Asset Investment Guide For Indians: A Beginner's Overview

India offers a wide range of investment options to cater to various risk appetites and financial goals. These include traditional investments like fixed deposits and gold, as well as market-linked options like stocks, mutual funds, and unit-linked insurance plans (ULIPs). When investing, it is essential to assess your individual objectives, risk tolerance, and market conditions. With careful planning and diligence, you can harness the potential of India's dynamic economy to achieve long-term financial growth.

Direct equity stocks

Direct equity investing involves investing in listed equity stocks of companies on the stock exchange. To get started, you will need a bank account and a Demat account. You must also have a high-risk appetite and understand how equity stocks and markets function.

To reduce risk, you can diversify across sectors and market capitalisations. It is also important to understand the underlying business and industry in which the business operates before investing in equity.

Mutual funds

There are several benefits to investing in mutual funds. Firstly, your money is managed by experienced professionals, making it easier for you to enter and exit investments with superior liquidity. Historically, mutual fund returns have been higher than other traditional investment options like bank FDs, RDs, and PPF. You can start investing with as little as ₹500, allowing you to create a diversified portfolio even with a small investment amount, thus reducing risk. Mutual fund schemes are also regulated by the SEBI, ensuring transparent processes and protecting investors' interests.

• Mutual Fund Distributor: Engage an AMFI-registered distributor for financial advice and transactions. Distributors can aid in risk assessment and selection but may offer regular plans with higher costs.
• Direct Investment with an Asset Management Company (AMC): Invest directly with an AMC by visiting their office or using their online portal. Submitting KYC documents is necessary for new investors. Direct plans have lower expense ratios but are more suitable for experienced investors with a good understanding of risk and market knowledge.
• Registered Investment Advisors (RIA): Opt for SEBI-registered advisors to access direct plans without AMC commissions. RIAs may charge fees and are required to provide unbiased advice as mandated by the AMFI's Code of Conduct.
• Registrars and Transfer Agents (RTAs): RTAs handle transactions for multiple fund houses, allowing investors to streamline multiple investments across different AMCs serviced by the same RTA.
• Online Investment:
• AMC portals: Invest through online banking on mutual fund websites, ensuring a clear distinction between regular and direct plans.
• RTA portals: Access online investment options on RTA websites using online banking to get a consolidated view of your mutual fund portfolio.
• Distributor websites: Several distributors provide online investing through their websites, allowing an overview of your mutual fund schemes.
• Stockbrokers: Leverage stockbrokers offering online trading and demat services as AMFI-registered distributors, mainly providing regular plans.
• Banks: Explore wealth management services offered by banks, which typically act as distributors, facilitating regular plans through their branches or online platforms.
• Mobile Apps: Access mutual fund transactions through mobile apps provided by AMCs or RTAs. Perform transactions like SIPs and redemptions with ease.

Additionally, you can invest in mutual funds by submitting a completed application form with a cheque or bank draft at a branch office, Investor Service Centre (ISC), or Registrar and Transfer Agent.

Before investing, it is important to consider factors such as your financial goals, risk tolerance, investment horizon, and current financial situation. Mutual funds also have associated costs like management fees, exit loads, broker commissions, transaction charges, selling costs, and taxes.

Remember to complete the KYC (Know Your Customer) process by providing proof of identity and address before investing in mutual funds in India.

National Pension Scheme (NPS)

The National Pension Scheme (NPS) is a government-backed, voluntary, long-term investment plan for retirement. It is regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and is open to all Indian citizens between the ages of 18 and 70, including non-resident Indians (NRIs). The NPS is a good scheme for those who want to plan for their retirement early on and have a low-risk appetite. The scheme is portable across jobs and locations, with tax benefits under Section 80C and Section 80CCD.

There are two types of NPS accounts: Tier I and Tier II. The former is the default account, which is a pension account with restrictions on withdrawals and utilization of the accumulated corpus. The latter is a voluntary addition that provides some liquidity to the scheme. NPS Tier II is similar to a mutual fund in characteristics but offers no exit load, no commissions, and good returns.

The NPS invests in different schemes, and the Scheme E of the NPS invests in equity. There are two options to invest in: auto choice or active choice. The auto choice decides the risk profile of your investments based on your age. The active choice allows you to decide on the scheme and split your investments.

The NPS subscription is flexible. NPS subscribers can contribute to the NPS fund at any time in a financial year and change the number of subscriptions. They can choose their own investment options and operate their account online from anywhere, even when they change their city and employment.

The NPS interest rate depends on the performance of the assets. Thus, the amount of return received upon retirement cannot be determined beforehand. NPS is a market-linked product where you can invest in a mix of equity, government debt, corporate debt, and alternative assets.

The NPS offers tax benefits on contributions under Section 80C, Section 80CCC, and Section 80CCD(1) of the Income Tax Act. Starting from 2016, an additional tax benefit of Rs 50,000 under Section 80CCD(1b) is provided, which is over the ₹1.5 lakh exemption of Section 80C.

Upon retirement, a person can withdraw up to 60% of the total corpus as a lump sum, with the remaining 40% going into an annuity plan. Subscribers can withdraw the entire corpus if it is less than or equal to Rs 5 lakh without purchasing an annuity plan under the new NPS guidelines. These withdrawals are also tax-free.

Public Provident Fund (PPF)

The Public Provident Fund (PPF) is a long-term investment option in India, introduced in 1968, that offers tax-free interest and returns. It is a government-backed scheme that provides guaranteed returns, making it a safe investment option for those who are uncomfortable with taking risks. The interest rate for 2024 is 7.1% per annum, which is compounded annually.

Features of a PPF Account:

• Tenure: PPF has a minimum tenure of 15 years, which can be extended in blocks of 5 years.
• Investment Limits: The minimum investment amount is Rs. 500, while the maximum is Rs. 1.5 lakh per financial year. Investments can be made in a lump sum or in a maximum of 12 instalments.
• Opening Balance: The account can be opened with just Rs. 100 per month. Annual investments above Rs. 1.5 lakh will not earn interest and will not be eligible for tax savings.
• Deposit Frequency: Deposits must be made at least once every year for 15 years.
• Mode of Deposit: Deposits can be made in cash, cheque, demand draft, or through an online fund transfer.
• Nomination: A nominee can be designated for the account at the time of opening or subsequently.
• Joint Accounts: PPF accounts cannot be held jointly.
• Risk Factor: PPF offers guaranteed, risk-free returns and complete capital protection as it is backed by the Indian government.
• Tax Benefit: The interest and maturity amount are tax-free under Section 80C of the Income Tax Act, 1961.
• Partial Withdrawal: Partial withdrawals are allowed from the 5th financial year onwards.

Eligibility Criteria:

PPF accounts can be opened by Indian citizens residing in the country, and minors are also eligible provided the account is operated by their parents or guardians. Non-resident Indians (NRIs) cannot open new PPF accounts, but they can continue contributing to existing accounts.

Loan Against Investment:

Loans can be availed against the PPF investment, but only between the third and sixth years from the date of activation of the account. The maximum loan amount is limited to 25% of the total available amount, and the tenure of such loans is 36 months.

Procedure for Withdrawal:

Partial or complete withdrawals from a PPF account can be made after completing 5 years. The procedure involves obtaining Form C from the bank or post office, filling it out, and submitting it to the concerned branch.

Limitations of PPF:

PPF accounts have a long lock-in period of 15 years, and the interest rate offered is moderate. Additionally, there are restrictions on NRIs opening new accounts, and the investment limit is capped at Rs. 1.5 lakh per year.

Real estate

Buying Physical Property

This is the most traditional and direct way of investing in real estate. It involves buying a property outright or through a loan and owning it for the long term. You can buy residential properties such as apartments, villas, and plots, or commercial properties such as offices, shops, and warehouses, depending on your objectives, budget, and preferences.

Advantages:

• Full control and ownership of the property
• Regular income through rentals
• Capital appreciation through price appreciation
• Tax benefits through deductions and exemptions
• Inflation hedge through rental escalation and value appreciation

Disadvantages:

• High investment outlay and transaction costs
• Lack of liquidity and diversification
• Legal hassles and maintenance costs
• Market risks and uncertainties

Fix and Flip

This strategy involves buying a property that needs maintenance, fixing it up, and then selling it at a higher price. It is a more active and short-term way of investing in real estate.

Advantages:

• Quick returns and high profits
• Low investment outlay and transaction costs
• Flexibility and creativity

Disadvantages:

• High risk and uncertainty
• High skill and effort required
• Dependence on market demand and supply

REITs (Real Estate Investment Trusts)

REITs are a more indirect and passive way of investing in real estate. Investors buy units of a REIT, similar to units of a mutual fund. A REIT owns and operates income-generating real estate assets, such as offices, malls, and hotels, and distributes at least 90% of its income to its unitholders as dividends.

Advantages:

• Low investment outlay and transaction costs
• High liquidity and diversification
• Regular income through dividends
• Professional management and transparency

Disadvantages:

• Low capital appreciation and tax efficiency
• Regulatory restrictions and compliance costs
• Market risks and performance risks

InvITs (Infrastructure Investment Trusts)

InvITs are another form of indirect and passive investment in real estate. Investors buy units of an InvIT, which owns and operates income-generating infrastructure assets such as roads, bridges, and power plants. Like REITs, InvITs distribute at least 90% of their income as dividends.

Advantages:

• Low investment outlay and transaction costs
• High liquidity and diversification
• Regular income through dividends
• Professional management and transparency

Disadvantages:

• Low capital appreciation and tax efficiency
• Regulatory restrictions and compliance costs
• Market risks and performance risks

Advantages:

• Low investment outlay and transaction costs
• High liquidity and diversification
• Professional management and transparency

Disadvantages:

• No direct exposure to physical property
• High expense ratio and exit load
• Market risks and performance risks

ETFs (Exchange-Traded Funds)

ETFs are another indirect and passive way to invest in real estate. Investors buy units of an ETF that tracks the performance of an index comprising stocks of companies in the real estate sector.

Advantages:

• Low investment outlay and transaction costs
• High liquidity and diversification
• Passive management and transparency

Disadvantages:

• No direct exposure to physical property
• Tracking error and tracking difference
• Market risks and performance risks

Fractional Ownership

Fractional ownership allows investors to buy a fraction or share of a property instead of the whole thing. This option provides more direct ownership but is still shared with other investors.

Advantages:

• Low investment outlay and transaction costs
• Partial control and ownership of the property
• Regular income through rentals
• Capital appreciation through price appreciation

Disadvantages:

• Lack of liquidity and diversification
• Legal hassles and maintenance costs
• Market risks and uncertainties

Frequently asked questions