Investing In India: A Guide To Making Smart Choices

India offers a wide range of investment opportunities, from traditional options like fixed deposits and gold to modern ventures such as cryptocurrencies and exchange-traded funds (ETFs). The best investment avenue depends on an individual's financial goals, risk appetite, and investment time horizon.

Some popular investment options in India include:

- Direct equity or stock market investments: These are considered volatile and carry a high degree of risk, but offer the potential for high returns.

- Mutual funds: These are managed by professionals and allow investors to diversify their portfolios by investing in a pool of equities, bonds, or other assets.

- Fixed deposits (FDs): Offered by banks and financial institutions, FDs provide capital protection and guaranteed returns but may compromise on the overall returns.

- Public Provident Fund (PPF): A long-term, tax-saving investment option backed by the government, offering tax benefits and guaranteed returns.

- National Pension System (NPS): A retirement-focused investment option that allows investors to build their corpus aggressively, suitable for both risk-averse and aggressive investors.

- Real estate: A big-ticket investment option that can provide regular income through rent and capital gains upon selling the property.

- Gold: A traditional investment option in India, often seen as a hedge against inflation, with options like gold ETFs and gold mutual funds gaining popularity.

- Bonds: Including government and corporate bonds, these are considered low-risk investments, especially when backed by the government.

Direct equity investing in stocks

Direct equity investment, or investing in stocks, is one of the most potent investment vehicles in India. When you buy a company's stock, you buy partial ownership of that company and directly invest in its growth and development.

To benefit from direct equity investment, you need to have enough time and possess market knowledge. If not, investing in direct equity is as good as speculation. Stocks are ideal for long-term investments, and various economic and business factors influence them. It is also important to understand that the returns are not guaranteed, and one must be willing to assume the associated risks.

• Timing the market: Timing the market is crucial in direct equity investment. Historically, investors have found timing the market very rewarding. Buying stocks during a bear market, such as in 2001, 2008, and 2011, can lead to significant returns.
• Understanding financial statements: To make informed investment decisions, it is essential to know how to read and analyse a company's financial statements, such as the balance sheet. This includes understanding parameters like 'return on capital employed (ROCE)'.
• Choosing the right companies: It is important to select companies with strong business fundamentals and good growth opportunities.
• Investing for the long term: Direct equity investment is typically suited for long-term horizons of more than seven years. This allows investors to take advantage of the company's growth, as short-term gains are often driven by speculation.
• Diversifying your portfolio: It is recommended not to put all your eggs in one basket. As a rule of thumb, no more than 50% of your portfolio should be in stocks. Holding between 15 and 20 different shares in your portfolio can provide good diversification.
• Investing intelligently: This includes setting clear objectives for buying shares, analysing the company's financial statements and performance, and being disciplined in your investment approach.
• Tax implications: When investing directly in equity in India, there are tax implications to consider. For example, if you sell shares within a year of purchase, a capital gains tax of 10% will apply. However, if you hold the shares for more than a year, there is no tax liability. Additionally, all dividends are tax-free.

In summary, direct equity investment in India can be rewarding, but it also carries a high risk of loss. It is essential to balance risk and return, possess market knowledge, and make informed investment decisions to succeed in this investment avenue.

Equity mutual funds

Returns

Tax Benefits

Risk

The risk factor associated with equity funds is relatively high due to their strong connection with market fluctuations. As a result, these funds are suitable for investors with a high-risk tolerance.

Expense Ratio

Long-Term Investments

Types of Equity Mutual Funds

• Thematic or Sectoral Funds: These funds follow a specific investment theme or invest in a particular sector of the market, such as BFSI, IT, or pharmaceuticals.
• Focused Equity Funds: This type of fund invests in a maximum of 30 stocks of companies with specified market capitalizations at the time of the scheme's launch.
• Contra Equity Funds: These funds follow a contrarian strategy by identifying and purchasing under-performing stocks at low prices, assuming they will recover in the long term.
• Large-Cap Funds: Large-cap funds invest a minimum of 80% of their assets in equity shares of large-cap companies, typically the top 100 companies by market capitalization.
• Mid-Cap Funds: Mid-cap funds invest around 65% of their assets in equity shares of mid-cap companies, which are usually the 101st to 250th placed companies by market capitalization.
• Small-Cap Funds: Small-cap funds invest around 65% of their assets in equity shares of small-cap companies, which are the 251st and below placed companies by market capitalization.
• Multi-Cap Funds: Multi-cap funds invest in a combination of large-cap, mid-cap, and small-cap companies, with the fund manager rebalancing the portfolio to match market conditions and the scheme's investment objective.
• Large and Mid-Cap Funds: These funds invest in both large-cap and mid-cap companies, offering a blend of lower volatility and better returns.

How to Invest in Equity Mutual Funds

When deciding to invest in equity mutual funds, it's important to assess your financial goals, risk tolerance, and investment horizon carefully. Here are some additional considerations:

• New Entrants: New investors may be wary of investing in the capital market due to the need for more capital, time to monitor investments, or expertise in choosing the right shares. Equity mutual funds offer a more accessible option, but selecting the right fund still requires consideration of investment horizon, risk tolerance, and market conditions.
• Seasoned Investors: Experienced investors should leverage their market understanding to choose the right scheme and earn higher returns compared to other funds.

Taxation Rules of Equity Mutual Funds

The taxation of equity mutual funds in India is as follows:

• Short-Term Capital Gains (STCG): If the units of the scheme are held for up to one year, the capital gains are taxed at 15% as STCG.
• Long-Term Capital Gains (LTCG): If the units are held for more than one year, LTCG above Rs. 1 lakh is taxed at 10% without indexation benefits.
• Dividend Distribution Tax (DDT): DDT is deducted at source when the mutual fund pays out dividends, typically at a rate of 10%.

Debt mutual funds

When investing in debt mutual funds, it is important to consider the lending duration and the type of borrower, as these factors determine the risk level of the fund. Debt funds are typically considered for investment horizons ranging from one day to up to three years. They offer better post-tax returns compared to fixed deposits if the investor stays invested for at least three years.

Liquid debt funds are a great option for parking emergency funds, as they provide better returns than a savings bank account without taking on too much risk. Debt funds are also suitable for investors seeking moderate returns and those with short or medium-term investment goals.

• Taxes: Returns from debt fund investments are taxed, and this can reduce your overall investment returns.
• Selecting funds based on tenure: Debt funds come in various forms, such as liquid funds, overnight funds, short-term funds, etc. Choose a fund that aligns with your investment tenure.
• Credit quality rating: Before investing, individuals can check the credit quality rating of the debt instruments to assess the risk level associated with a particular scheme.

Some of the risks involved in investing in debt funds include interest rate risk, credit risk, and exit load. It is important to carefully evaluate the fund parameters and ensure that your risk-return expectations are aligned with the fund's investment objective.

National Pension System (NPS)

The National Pension System (NPS) is a government-backed investment option that offers guaranteed pension benefits. The NPS fund invests in bonds, government securities, equity, and other market-linked assets. It is a defined-contribution pension system, which means that individuals can contribute to their retirement accounts, and employers can also contribute to the welfare and social security of employees.

The NPS is regulated by the Pension Fund Regulatory and Development Authority (PFRDA), which operates under the jurisdiction of the Ministry of Finance of the Government of India. The NPS Trust, established by the PFRDA, is responsible for safeguarding subscribers' interests and is the registered owner of all assets under the NPS architecture. The NPS is well-regulated and transparent, providing financial security for retirement.

The NPS offers two types of accounts:

• Tier I Account: This is a mandatory long-term savings account with restrictions on withdrawals. It is the primary pension account, and all the tax breaks offered by NPS are applicable only to Tier I accounts.
• Tier II Account: This is an optional account that provides more flexibility for withdrawals. It is an investment account similar to a mutual fund, offering good returns, no exit load, and no commissions.

The NPS has two fund options:

• Auto Choice Funds: This option automatically allocates assets based on the subscriber's age.
• Active Choice Funds: This option allows subscribers to customise their asset allocation in equity, debt, and government securities.

The NPS is open to citizens of India, Overseas Citizen of India (OCI) cardholders, and non-resident Indians (NRIs) between the ages of 18 and 70. The NPS is a good option for those seeking a retirement plan, as it is one of the best tax-saving instruments available, with exclusive tax benefits for subscribers. Contributions to NPS receive tax exemptions under various sections of the Income Tax Act, and it is considered a safe, market-based investment plan.

Public Provident Fund (PPF)

The Public Provident Fund (PPF) is a long-term investment option with tax benefits and guaranteed returns. It was first introduced in India in 1968 and is ideal for those seeking a safe investment option to save taxes and earn guaranteed returns. The interest earned and the returns are not taxable under the Income Tax Act, 1961. The minimum tenure for a PPF account is 15 years, which can be extended in blocks of 5 years. The interest rate for 2024 is 7.1% p.a., compounded annually.

Features of a PPF Account:

• Tenure: The minimum tenure is 15 years, with an option to extend 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 up to 12 instalments.
• Opening Balance: The account can be opened with a minimum of 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 via cash, cheque, demand draft (DD), or online fund transfer.
• Nomination: A nominee can be designated at the time of opening the account or subsequently.
• Joint Accounts: PPF accounts cannot be held jointly.
• Risk Factor: PPF accounts are backed by the Indian government, offering guaranteed returns and complete capital protection.
• Tax Benefit: The interest 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 certain conditions.

How to Open a PPF Account:

PPF accounts can be opened with either a post office or participating banks, including the State Bank of India, Punjab National Bank, ICICI, HDFC, and Axis Bank. The following documents are required:

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

PPF Account Eligibility:

Any Indian citizen can invest in PPF. One citizen can have only one PPF account, unless the second account is in the name of a minor. Non-Resident Indians (NRIs) and HUFs are not eligible to open new PPF accounts, but they can continue contributing to existing accounts.

Frequently asked questions