Monthly Salary Investing: A Guide For Indians

Investing your monthly salary in India can be a great way to create wealth for the future and achieve your financial objectives. It is important to start with a budget and save a fixed amount from your salary, rather than spending first and having nothing left to save. There are various investment options available, each with its own benefits and risks. These include the Public Provident Fund (PPF), mutual funds, company fixed deposits, gold jeweller schemes, Systematic Investment Plans (SIPs), equity funds, and more. It is recommended to follow the 50:30:20 rule, where 50% of your income is spent on needs, 30% on wants, and 20% is saved for emergencies and investments.

Public Provident Fund (PPF)

The Public Provident Fund (PPF) is a government-mandated, long-term investment scheme that is ideal for individuals with a low-risk appetite. It was first introduced in India in 1968 and has since been a popular investment option for those seeking high but stable returns. The PPF account is a safe investment vehicle that enables individuals to accumulate retirement funds while reducing yearly taxes.

Features of a PPF Account:

• Tenure: The PPF account 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 a minimum monthly deposit of Rs. 100. 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; only one individual can hold the account.
• Risk Factor: PPF accounts are backed by the Indian government, offering guaranteed, risk-free returns and complete capital protection.
• Tax Benefit: The interest earned and maturity amount are tax-free under Section 80C of the Income Tax Act, 1961.
• Partial Withdrawal: Partial withdrawals are permitted from the 5th financial year onwards, with a maximum of 50% of the account balance allowed for withdrawal.

How to Open a PPF Account:

PPF accounts can be opened with either a post office or a nationalised bank, such as the State Bank of India or Punjab National Bank. Some private banks, like ICICI, HDFC, and Axis Bank, are also authorised to provide this facility. The following documents are required:

• Duly filled account opening application form
• KYC documents (Aadhaar, Voter ID, Driving License, etc.)
• Residential address proof
• Nominee declaration form
• Passport-size photograph

Mutual funds

Before investing, it is important to calculate your Fixed Obligations to Income Ratio (FOIR) to determine your disposable income for mutual fund investments. This can be done by dividing your total expenses by your total income and multiplying by 100. For example, if your monthly income is INR 50,000 and your fixed expenses are INR 20,000, your FOIR is 20,000, leaving you with INR 30,000 for investments.

When investing in mutual funds, it is also crucial to consider your risk tolerance and investment goals. Equity and equity-oriented mutual funds typically offer higher returns but come with greater risks due to market volatility. On the other hand, debt funds are more stable but yield lower returns. It is recommended to choose funds that align with your risk profile to ensure the best long-term returns.

Additionally, it is advisable to build an emergency fund before investing in mutual funds. This fund should be kept in liquid assets, such as liquid mutual funds, which offer high liquidity and returns of 6-7%, higher than the average savings account.

When investing in mutual funds, you can choose between growth and dividend options. The growth option reinvests returns, reflected in the net asset value (NAV), while the dividend option provides periodic payouts. It is important to note that mutual funds do not guarantee fixed income, as dividends depend on the fund's surplus and NAV performance and are subject to market conditions and fund performance.

In summary, when investing your monthly salary in mutual funds, follow these steps:

• Calculate your FOIR to determine your disposable income.
• Assess your financial goals and risk tolerance.
• Choose funds that align with your risk profile and investment goals.
• Consider building an emergency fund in liquid assets before investing.
• Decide between growth and dividend options, understanding that returns may vary.

Pradhan Mantri Vaya Vandana Yojana

Benefits of the Scheme

The PMVVY scheme provides an assured interest rate of 7.40% per annum for the year 2023-24, which is higher than the interest rates offered by banks and non-banking financial companies in India. The interest rate is reset every year. The pension is payable at the end of each period during the policy term of 10 years, and the frequency of payment (monthly, quarterly, half-yearly, or yearly) can be chosen by the pensioner. The scheme also allows for premature exit under exceptional circumstances, such as the treatment of any critical or terminal illness of the self or spouse. In such cases, 98% of the purchase price shall be refunded. On the death of the pensioner during the policy term, the purchase price shall be paid to the beneficiary.

Eligibility and Investment Limit

The minimum entry age for the PMVVY scheme is 60 years, and there is no maximum entry age. The investment limit is Rs 15 lakh per senior citizen. The minimum and maximum purchase prices vary depending on the mode of pension payment chosen. For example, the minimum purchase price for monthly payments is Rs. 1,000/- per month, while the maximum is Rs. 9,250/- per month.

Mode of Pension Payment

The modes of pension payment are monthly, quarterly, half-yearly, and yearly. The pension payment is made through NEFT or the Aadhaar Enabled Payment System. The first instalment of the pension is paid after 1 year, 6 months, 3 months, or 1 month from the date of purchase, depending on the chosen mode of payment.

Loan Benefits

The PMVVY scheme also offers loan benefits of up to 75% of the purchase price after 3 policy years. The loan interest is recovered from the pension installments, and the outstanding loan amount is recovered from the claim proceeds. The rate of interest charged for the loan amount is determined at periodic intervals.

Taxation

The interest earned on the PMVVY scheme is subject to income tax deductions as per the applicable rate. However, the principal deposits made in the scheme are exempt from income tax under Section 80C of the Income Tax Act, 1961.

Grievance Redressal

Customers can visit the LIC branch office or their official website for redressal of any grievances related to their PMVVY account. Alternatively, they can send an email to [email protected] or call the toll-free numbers 155255 or 1800 425 4732.

Senior Citizen Saving Schemes

The Senior Citizen Savings Scheme (SCSS) is a government-backed savings plan for individuals over the age of 60, offering a high and stable interest rate of 8.2% per annum. The scheme is designed to provide a regular income for senior citizens in India, with the option to invest through certified banks and post offices. The SCSS offers a number of benefits, including tax advantages, a safe investment vehicle, and the ability to make premature withdrawals under certain conditions.

To open an SCSS account, individuals must be over the age of 60 or have retired early between the ages of 55 and 60. The scheme is not available to Non-Resident Indians (NRIs). The minimum deposit amount is ₹1,000, while the maximum is ₹30 lakh. The maturity period is five years, with the option to extend for up to three additional years. The account can be easily opened at post offices or authorised banks, with a simple application process and minimal documentation, including proof of identity, address, and age.

The SCSS offers a high rate of interest, paid out quarterly, which is significantly higher than bank deposits. The interest income is taxable, and if it exceeds ₹10,000 per annum, TDS (Tax Deducted at Source) is applicable. However, under Section 80C of the Indian Tax Act, 1961, individuals can claim tax deductions on investments up to ₹1.5 lakh.

The SCSS provides a safe and reliable investment option for senior citizens, backed by the government. It offers a simple investment process, guaranteed returns, and the flexibility of premature withdrawals, making it a popular choice for those seeking stable and consistent income in their retirement years.

Systematic Investment Plans (SIPs)

Here's how SIPs work:

• Investors choose a mutual fund scheme that aligns with their investment goals and risk tolerance.
• They set up a SIP with the selected mutual fund, deciding on the amount they want to invest regularly and the frequency of their investments.
• Investors provide standing instructions to their bank to debit the specified amount from their account automatically and invest it in the chosen mutual fund scheme.
• The mutual fund allocates units to the investor's account based on the fund's Net Asset Value (NAV).

One of the unique features of SIPs is the principle of rupee cost averaging. This means that when the market is low, investors purchase more units, and when the market is high, they buy fewer units, averaging out the cost of acquisition. This helps to mitigate the impact of market volatility. Additionally, SIPs offer the convenience of automating investments and the flexibility to adjust the investment amount or frequency as needed.

SIPs are a popular choice for long-term investing, and it is recommended to start early to maximise returns. They are suitable for individuals who want a disciplined and gradual approach to investing and are willing to commit to regular contributions.

Frequently asked questions