A Guide To Investing In India's Booming Economy

India's market size and growth potential make it an appealing place to invest. The country boasts impressive numbers in terms of the number of investors, economic expansion, and the value of leading publicly traded companies. The International Monetary Fund projected that India's real gross domestic product growth in 2024 will be 6.8%, making it the fastest-growing nation in the G20. With such promising stats, the Indian stock market attracts global investors. This article will explore the different ways to invest in India, including exchange-traded funds (ETFs), direct stock purchases, and various investment plans available in the country.

Exchange-traded funds (ETFs)

ETFs are a basket of stocks that reflect the composition of an index, such as the Sensex or the Nifty in India. The price of an ETF is based on the net asset value of the underlying stocks it represents. They are passively managed funds, aiming to replicate the performance of the index they track rather than aiming to outperform it. This means they have lower fees than actively managed funds.

There are several types of ETFs available in India:

• Index ETFs: These are the most common type of ETF and aim to track a specific market index, such as the Sensex, Nifty, BSE 100, or Nifty 100.
• Sector ETFs: These ETFs focus on specific sectors or industries, such as healthcare, technology, or energy.
• Bond ETFs: These provide access to various bonds, including government, corporate, and municipal bonds.
• Commodity ETFs: These track the performance of commodities such as gold, silver, oil, or natural gas.
• Foreign Market ETFs: These monitor non-Indian markets, such as the Nikkei Index in Japan or the Hang Seng Index in Hong Kong.

When investing in ETFs, there are a few key considerations:

• Investment Goals: Define your short-term and long-term investment goals and choose ETFs that align with them.
• Risk Tolerance: Assess your risk tolerance level and select ETFs that match your comfort with risk.
• Expense Ratio: Consider the total annual operating expenses of the ETF as a percentage of its assets.
• Diversification: Choose ETFs from different asset classes, such as stocks, bonds, real estate, and commodities, to diversify your portfolio.
• Research: Analyse the ETF's strategies, past performance, and associated risks before investing.
• Franklin FTSE India ETF (FLIN): This ETF has the lowest expense ratio among India ETFs and tracks large- and mid-cap Indian stocks.
• Columbia India Consumer ETF (INCO): With a focus on the consumer industry in India, INCO has the best 1-year performance among India ETFs.
• IShares MSCI India ETF (INDA): Offering the best liquidity, INDA tracks large- and mid-cap companies trading on the NSE and BSE.

Direct stock purchases

If you're looking to invest directly in Indian stocks, there are a few options available to you. However, it's important to note that the majority of stocks are only available domestically or to foreign institutional investors.

• Dr. Reddy's Laboratories Ltd. (RDY), a $12 billion healthcare stock.
• GAIL (India) Ltd. (ITC: GAILF), a $14.5 billion utility stock.
• HDFC Bank (HDB), a $144 billion financial stock.
• ICICI Bank, a $93 billion financial stock.
• Infosys, a $70 billion tech stock.
• MakeMyTrip Ltd. (MMYT), an $8 billion consumer discretionary stock.
• State Bank of India (OTC: SBKFF), an $80 billion financial stock.
• Wipro Ltd. (WIT), a $27 billion tech stock.

If you're interested in investing in other companies, including smaller players or major companies that are solely listed on domestic exchanges, you'll need to go through an ETF provider.

Government-backed fixed-income schemes

India's government has introduced several investment schemes to meet the diverse financial needs of its citizens. These schemes are designed to help individuals achieve their financial goals, such as retirement planning and child education. One category of government-backed investment schemes in India is fixed-income schemes, which offer guaranteed returns and security for investors. Here are some of the top government-backed fixed-income schemes in India:

Atal Pension Yojana (APY)

The APY is a government-backed pension scheme targeted towards individuals working in the unorganised sector. It aims to provide financial security for retirement to those who may not have access to traditional pension plans. Under this scheme, individuals can contribute a fixed amount each month and receive a guaranteed monthly pension ranging from ₹1,000 to ₹5,000 upon turning 60. The eligibility criteria include being aged between 18 and 40 years old, and the contributions can be made monthly, quarterly, or semi-annually. The APY also offers tax benefits under Section 80CCD of the Income Tax Act.

Post Office Monthly Income Scheme (POMIS)

The Post Office Monthly Income Scheme is a low-risk investment option offered by the Indian Postal Service. It provides investors with a fixed monthly income, making it attractive for those seeking regular cash flows. The scheme has a minimum investment amount of ₹1,000 and a maximum of ₹9 lakh for a single account and ₹15 lakh for a joint account. As of April 2024, it offers an interest rate of 7.4% per annum. POMIS is open to Indian citizens, minors (through guardians), and joint accounts.

Kisan Vikas Patra (KVP)

The Kisan Vikas Patra is a government savings scheme that encourages long-term financial discipline. With a tenure of approximately 9.3 years, KVP offers a guaranteed return by doubling the one-time investment upon maturity. The minimum investment amount is ₹1,000, with no maximum limit. As of April 2024, the interest rate is 7.5%. KVP is open to Indian residents, including minors (through guardians), and the interest earned is exempt from Tax Deducted at Source (TDS).

National Savings Certificate (NSC)

The National Savings Certificate is a government-backed fixed-income scheme available through post office branches. It encourages individuals to invest their savings while providing tax benefits under Indian tax laws. NSC offers an interest rate of 7.7% per annum (as of April 2024) and has a minimum investment amount of ₹100, with no maximum limit. The scheme is open to Indian citizens, excluding NRIs, and provides tax deductions of up to ₹1.5 lakhs under Section 80C.

Public Provident Fund (PPF)

The Public Provident Fund is a long-term government investment scheme that promotes small investments with reasonable returns and tax benefits. PPF has a minimum investment amount of ₹500 per year and a maximum of ₹1.5 lakh per financial year. It offers an interest rate of 7.1% (as of April 2024) and has a tenure of 15 years. The scheme is popular among individuals seeking secure savings and tax deductions. PPF accounts can be opened for minors through guardians.

Senior Citizens Savings Scheme (SCSS)

The Senior Citizens Savings Scheme is a government-backed retirement program for Indian citizens aged 60 and above, as well as retired individuals between 55 and 60. It offers regular income, safety, and tax-saving benefits. The scheme has a minimum investment amount of ₹1,000 and a maximum of ₹30 lakhs. As of April 2024, it provides an interest rate of 7.4% per annum. SCSS offers tax deductions of up to ₹1.5 lakhs under Section 80C.

These government-backed fixed-income schemes offer Indian citizens secure investment options with guaranteed returns and tax benefits. They cater to different financial goals, such as retirement planning and saving for a child's future, providing a diverse range of choices for investors.

Equity mutual funds

Understanding Equity Mutual Funds

Steps to Invest in Equity Mutual Funds

• Risk Profiling: Before investing in equity mutual funds, it is essential to assess your risk tolerance and capacity. This will help you determine the amount of risk you are comfortable taking.
• Asset Allocation: Divide your investments between various asset classes, including a mix of equity and debt instruments, to balance the risk factors.
• Fund Identification: Identify the funds that invest in each asset class and compare their past performance or investment objectives to make an informed decision.
• Scheme Selection: Choose the specific equity mutual fund scheme you want to invest in, considering factors such as investment objectives, risk appetite, and affordability.
• Diversification and Monitoring: Diversify your investments across different funds and regularly follow up to ensure better results and higher profits.

Ways to Invest in Equity Mutual Funds

You can invest in equity mutual funds in India through the following methods:

• Mutual Fund Distributors: Engage an AMFI-registered distributor for financial advice and transactions. Distributors aid in risk assessment and selection but charge higher regular plan costs.
• Direct Investment with AMC: Invest directly with an Asset Management Company (AMC) by submitting KYC documents. Direct plans have lower expense ratios and are suitable for experienced investors.
• Registered Investment Advisors (RIAs): Opt for SEBI-registered advisors to access direct plans without AMC commissions. RIAs may charge fees and offer unbiased advice.
• Registrars and Transfer Agents (RTAs): Transact in both direct and regular plans through RTAs, streamlining multiple investments across different AMCs.
• Online Investment: Invest through AMC or RTA portals, distributor websites, or mobile applications provided by AMCs or RTAs.
• Stockbrokers: Leverage stockbrokers offering online trading and demat services, who predominantly provide regular plans.
• Bank-Enabled Investment: Explore wealth management services offered by banks, which typically facilitate regular plans.

Important Considerations

When investing in equity mutual funds, consider the following:

• Investment Goals: Define your investment goals, such as retirement, child's education, or wealth accumulation.
• Risk Tolerance: Assess your risk tolerance and choose funds that align with your comfort level.
• Time Horizon: Consider how long you plan to invest, as equity mutual funds are typically suitable for long-term investors.
• Investment Amount: Determine how much money you want to invest, keeping in mind the minimum investment requirements of mutual funds in India, which can range from Rs. 500 to Rs. 5,000 or more for certain funds.
• Fees and Taxes: Factor in the various costs associated with mutual fund investing, such as management fees, exit loads, broker commissions, transaction charges, and taxes on capital gains and dividends.

National Pension Scheme (NPS)

The National Pension Scheme (NPS) is a government-sponsored pension scheme that was launched in January 2004 for government employees but was opened to all Indian citizens aged 18-70 in 2009. It is a voluntary, long-term investment plan for retirement, regulated by the Pension Fund Regulatory and Development Authority (PFRDA) and the Central Government.

NPS subscribers can contribute to a pension account at regular intervals during their employment. After retirement, subscribers can take out a certain percentage of the corpus, and the remaining amount is received as a monthly pension. NPS offers two types of accounts: Tier I and Tier II. Tier I is the default pension account, while Tier II is a voluntary savings account with no tax benefits but no withdrawal restrictions. NPS is a quasi-EET instrument, where 40% of the corpus escapes tax at maturity, and 60% is taxable.

The PFRDA offers both online and offline means to open an NPS account. To open an account offline, an individual must find a Point of Presence (PoP), which could be a bank, fill out a subscriber form, and submit it along with the KYC papers. The PoP will then send a PRAN (Permanent Retirement Account Number) and a password to operate the account. It is also possible to open an account online by linking your account to your PAN, Aadhaar, and mobile number.

Benefits of NPS

The NPS is a good scheme for those who want to plan for their retirement early on and have a low-risk appetite. It is one of the lowest-cost pension schemes in the world and offers tax benefits under Section 80C and Section 80CCD. NPS also offers the flexibility to change the pension scheme or fund manager if one is not happy with their performance.

Tax benefits of NPS

NPS subscribers can claim the following tax benefits on their contributions:

• Tax deduction of up to 10% of pay (Basic + DA) under Section 80CCD(1), subject to a maximum of Rs.1.5 lakh under Section 80CCE.
• Tax deduction of up to Rs.50,000 under Section 80CCD(1B), along with the overall limit of Rs.1.5 lakh under Section 80CCE.
• Tax exemption on annuity purchase or superannuation at 60 years under Section 80CCD(5).
• Tax exemption on a lump sum withdrawal of 60% of accrued NPS funds upon reaching 60 years or superannuation under Section 10.

Frequently asked questions