Investment Guide: Best Wealth Creation Plans Available in India
Every investor is on a constant lookout for ways to increase the overall wealth corpus in the long run. This stabilises the financial platform thus reducing the tendencies of risks considerably. A stronger financial platform ensures better protection and coverage thereby ensuring a comfortable lifestyle and easier fulfilment of the financial targets. Therefore, earning money and letting it remain to lie idle is not enough. You need proper well-planned avenues for investment for ascertaining optimum benefits.
What is a Wealth Creation/Investment Plan?
The investment plans can be broadly termed as those financial products that possess the opportunity for creating future wealth corpus. The investment plans or the wealth creation plans help the investors to make a regular and periodic investment(s) thus inculcating a disciplined manner of investment to secure future financial goals.
How to Proceed?
The primary step towards planning financial investments is to ascertain the financial requirements, targets and the investment horizon that ideally suit your profile. You need to research well regarding the financial investment instruments available in the market and analyse it accordingly based on your needs and targets, risk appetite and wealth status. This article will discuss some of the top wealth-creating investment plans that are currently available in India.
- Mutual Funds
Mutual funds are one of the most popular investment options of the country. This is an investment vehicle that is formed when an asset management company or a fund house pools investment from institutional investors as well as individual investors with a common investment target(s). Mutual funds can be equity-oriented or debt-oriented. Depending on the asset allocation factor, the mutual funds can be broadly classified into 3 types: equity funds, debt funds and balanced mutual funds.
- Equity Mutual Funds
Mutual Funds with a minimum of 65% exposure in equity are called Equity Mutual Funds.
There are various classifications:
- Large-cap funds invest mainly in equity-linked instruments and equities of companies with medium market capitalisation, i.e. which are ranked between 1 and 100.
- Mid-cap funds invest mainly in equity-linked instruments and equities of companies with medium market capitalisation, i.e. which are ranked between 101 and 250.
- Small-cap funds invest in company shares with small market capitalisation, i.e. ranked after 251 in the market capitalisation rating
- Multi-cap funds invest mainly in equity-linked instruments and equities of companies with all sorts of market capitalisations. Depending on the market trends, the fund manager will decide the asset allocation.
- Sector or thematic funds: Sectoral funds invest mainly in equity-linked instruments and equities of companies in sectors like IT and FMCG, while the thematic funds focus on investing in companies based on a particular theme like travel.
- Index funds track and emulate the performance of any popular stock market index like NSE Nifty50, BSE Sensex.
- ELSS is covered under Section 80C with a tax deduction of up to INR 1,50,000 p.a.
- Debt Mutual Funds
Debt-oriented Mutual Funds are called debt-funds. The investment in debt-oriented funds have their investments in money market instruments, debts products and various other fixed income instruments like government bonds, treasury bills, high-rated securities, certificates of deposit. There are several classifications under this head:- Dynamic bond funds portfolio gets modified with the fluctuations of the market performance
- Income funds invest in securities with a long maturity period of at least 5 years.
- The Short-term and ultra short term debt funds invest in securities with a maturity period of 2-3 years
- Liquid funds invest in assets and securities that mature within 91 days
- Gilt funds invest in high-rated government securities
- Credit opportunities funds invest in low rated securities with a potential for higher returns
- Fixed maturity plans are close-ended debt funds investing in fixed income securities.
- Balanced or Hybrid Mutual Funds
These types of mutual funds invest in both debt and equity instruments. It efficiently balances the risk-reward ratio with a diversified portfolio. Depending on the prevalent market conditions, the fund manager modifies the asset allocation ratio. If the equity exposure in this fund is less than 65%, then it follows debt taxation and if the equity exposure is more than 65%, then the fund would be able to avail equity taxation.
There are certain classifications:- Equity-oriented Hybrid Funds invest at least 65% of the portfolio towards equities while the rest is spent on debt instruments and money market. Here the mutual fund has equity taxation
- Debt-oriented Hybrid Funds allocate a minimum of 65% of its portfolio for purchasing debt instruments while the remaining is invested in securities. Here the mutual fund has debt taxation
- Monthly Income Funds mainly invest in debt instruments ensuring a steady return over time.
- Arbitrage Funds ensure maximum benefits by purchasing securities from one market and then selling them at a higher price in another market.
Benefits of Investing in Mutual Funds
- Expert Fund Managers
handle the fund allocation to ensure maximum benefits and returns. Moreover, the fund managers are actively supported by the team of efficient analysts who cherry-pick the best available options. - Cost-effective
Since mutual funds are managed for many people together, the cost of handling it is distributed. Hence the cost structure of mutual funds is very low thus making it ideal for small investors. - Investment Tenure
Most mutual funds do not have a fixed tenure for investment. They are open-ended funds. However, some mutual funds are closed-ended too but they can be traded on the exchange rate. There is also no locked-in tenure for investing in a mutual fund except for ELSS or Equity Linked Tax Saving Mutual Funds, which has a lock-in period of 3 years. - Systematic Investing is Allowed
This allows you to make a regular investment of small amounts through SIP or Systematic Investment Plan, thereby inculcating the habit of investment and curtailing the tendency of unnecessary expenditure. - Diversification
The mutual funds invest in several assets and shares thus ensuring diversification for maximum returns. - Liquidity
For most mutual funds, there is no lock-in period and therefore, the liquidity is very high. - Transparent and Simple
You can easily track your investment status thus enabling you to take prompt decisions in times of need. The investments are even flexible in nature. The entire procedure of mutual fund investment is simple where most of the vital factors are taken care of the respective fund managers.
Mutual funds at a Glance
| Risk | High |
| Returns | Market Linked |
| Tax Status | No tax benefits except 80C benefit upto INR 1.5 lakhs a year for investing in ELSS.
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| Issued By | Asset Management Companies |
| Investment Amount | The minimum investment is INR 500 with no limit for maximum investment |
| Liquidity | Redemption can be done at any point of time for open-ended funds except ELSS which has a lock-in of 3 years |
- Public Provident Fund (PPF)
PPF or Public Provident Fund is a tax-savings-cum-savings instrument that has been introduced by the Ministry of Finance. It is a long-term investment option with a lock-in period of 15 years. A PPF account can be opened easily from any post office, nationalised banks or private banks.
Benefits of investing in PPF
- Tax-exemption
This financial investment instrument falls under the EEE or Exempt-Exempt-Exempt category. The EEE status implies that the amount invested up to INR 1,50,000 is eligible for tax deduction under Section 80C of the Income Tax Act. - Small Savings with Reasonable Returns
PPF allows considerable flexibility for the investors regarding the investment options. The minimum investment amount is INR 500 while the maximum limit is INR 1,50,000. The interest rate of 7.10% is compounded annually. - Safety
It possesses sovereign backing. The invested amount is credited to the National Small Savings Fund, administered by the government. The interest is also paid by the Indian government which makes it a significantly safe investment option. - Withdrawal Facility
As an investor, you are allowed to make a partial withdrawal from the 7th year onwards i.e. after the completion of 6 financial years. You can also avail a loan facility from PPF investment. - Tenure
You can withdraw the entire amount on maturity after 15 years or you can extend the limit of the tenure in a group of 5 years.
Eligibility of investing in PPF
- The investor must be an Indian citizen above 18 years
- It can be opened by individuals above 18 years on behalf of a minor
- NRIs holding a PPF account during their Indian citizenship period are eligible to operate the account for up to 15 years without the extension option
PPF details at a Glance
| Risk | Sovereign with variable returns |
| Rate of Interest | Currently at 7.1%, compounded annually |
| Tax Status | EEE with 80C benefit upto INR 1.5 lakhs and tax-free maturity |
| Issued By | Banks and Post offices |
| Investment Amount | The minimum investment is INR 500 while the maximum limit is INR 1.5 lakh p.a. |
| Liquidity | Maximum 25% loan can be taken from the 3rd financial year onwards while partial withdrawal can be done after 6th financial year |
- Fixed Deposits
This investment scheme is provided by both bankings as well as non-banking financial institutions offering considerable returns based on the principal amount invested. The fixed deposits come with a fixed tenure which can be both short-term and long-term depending on your financial requirement. The interest rates offered are variable depending on the chosen institution. Premature withdrawal is not allowed except with penalty.
There are several classifications of FDs:
- Corporate FDs are held by companies, other than banks.
- Standard FDs are basic investment schemes that allow you to invest a fixed amount for a pre-fixed tenure based on the prevailing rate of interest. On maturity, you receive the principal amount along with the accumulated interest.
- Senior Citizens Fixed Deposits are specially made for individuals above 60 years of age, offering flexible tenure options and a slightly elevated rate of interest than the standard schemes.
- Tax-saving Fixed Deposit offers tax-saving benefits limited up to INR 1.5 lakh p.a. and comes with a standard lock-in of 5 years.
- Cumulative FDs issue compounded interest either on quarterly, half-yearly or yearly basis. The total interest payout is done at maturity
- Non-cumulative FDs issue interest payouts either monthly, quarterly or half-yearly basis. It is a good plan issuing a regular source of income.
- Flexi-deposit Plans enable the investment to shift between the FD account and savings account. By choosing this plan you are eligible to enjoy a slightly higher rate of interest.
- NRO FD has been designed for the NRIs where the interest earned can be entirely repatriated while only partial repatriation is possible on the principal amount by the NRI account holder.
- NRE FD allows the remittance of the income generated abroad and investment in any NRE FD account. Both the principal and the interest can be repatriable.
Benefits of Investing in a Fixed Deposit
- Assured Returns
FD investments offer assured returns, unlike several other financial instruments. - Flexibility
When it comes to tenure, the best FD schemes offer certain flexibility. The maturity tenure ranges between 7 days and 10 years. - High-capital Appreciation
The cumulative FDs compound interest either monthly, quarterly or half-yearly basis. Therefore, the capital gets significantly appreciated on maturity. - Source of income
The frequency of interest payout depends on your choice thus creating an individual source of regular fixed income. If you need regular income, you can opt to receive the interest in your account on a monthly or quarterly basis. - Taxation
As per the Income Tax norms, the interest on FD is eligible for TDS. However, the interest income gets deducted only when the interest earnings from all sources exceed INR 40,000. If it remains within INR 40,000, you need to submit a 15G/H form. If you opt for tax-saving FD, you are eligible for tax exemption of up to INR 1.5 lakh in a single financial year based on the principal amount.
FD at a Glance
| Risk | Very low risk with guaranteed returns |
| Rate of Interest | Usually ranges between 5-9% |
| Tax Status | Usually, there is no tax benefit in an FD except for Tax Saving Fixed Deposits wherein you get 80C Tax Benefit for investing upto INR 1.5 lakhs in a 5-year locked-in FD. At the time of maturity, TDS @10% to be deducted from interest if the interest earned is above INR 10,000 |
| Issued By | Banks, Post offices and other Non-banking financial corporations |
| Investment Amount | No fixed amount |
| Liquidity | Can be prematurely withdrawn at any point for 1% of applicable interest for the premature tenure |
Senior Citizens’ Savings Scheme (SCSS)
This is a government-sponsored savings and investment instrument that has been specially designed for the individuals above 60 years of age. This particular scheme was introduced in 2004 with the interest of providing senior citizens with a steady and regular source of income. it is considered one of the most lucrative investment options currently available. The current prevalent SCSS rate of interest is 7.4% p.a. you can apply for SCSS through public and private banks as well as post offices.
Benefits of investing in SCSS
- Quarterly Revision of the Rate of Interest
The interest rate of SCSS is revised every quarter. This revision depends on the overall market performance, prevalent market rates, level of inflation, etc. - Fixed Income
The rate of interest declared at the time of investment remains fixed throughout the tenure and remains unaffected by the later changes. If you deposit INR 2,00,000 in SCSS on 10 January 2019. The interest will be calculated on the prevalent rate as declared in the 3rd quarter of 2019-2020 financial year. It will remain fixed despite the changes. - Deposit Limit
The minimum deposit of INR 10,000 is required to open the account. The deposit quantum limit is INR 15 lakh or the amount received as a retirement benefit, whichever is lower. If you receive INR 10 lakh as a retirement benefit, you can invest up to that limit within the scheme, irrespective of whether it is held jointly or individually. You can have multiple accounts within the scheme however, the total invested amount must not exceed the optimum limit. - Maturity Tenure
The maturity tenure is 5 years which can be extended up to 3 more years on maturity. The extension is allowed only once, however, the interest rate of the extended fund will change to the prevalent rate of the current quarter. - Premature Withdrawals
Premature withdrawal is permissible after 1 year of account opening. If you close the account before completing 2 years, 1.5% of the deposited amount will be charged and deducted as penalty. If you close after 2 years, then 1% penalty charge will be deducted. - Mode of Deposit
You can cash deposit if the amount is below INR 1 lakh or use cheque it exceeds the INR 1 lakh limit. - Security
Being a government-endorsed scheme, the investment enjoys sovereign security and guarantee.
SCSS at a Glance
| Risk | Moderate with guaranteed returns |
| Rate of Interest | The current rate of interest is 7.4% |
| Tax Status | Usually, there is no tax benefit. At the time of maturity, TDS @10% to be deducted from interest |
| Issued By | Post offices |
| Investment Amount | INR 1,000 to INR 15,00,000 |
| Liquidity | Allowed to be premature after 1 year but before 2 years at 1.5%. After 2-3 years, the cost is 1% with no charge after 3 years. |
National Pension Scheme (NPS)
To enjoy a secured post-retirement phase, the government has introduced schemes like NPS. The contributions made by the individual investors under NPS accumulate till retirement and the corpus growth continues depending on the market-linked returns. You can also choose to exit the plan before retirement and select superannuation. Therefore, on retirement, superannuation and exit, a minimum of 40% of the contribution is used to procure a lifetime pension fund via purchasing the annuity. The remainder of the funds is paid as a lump sum to the investor.
Benefits of investing in NPS
- Liquidity and Flexibility
There are two different types of accounts under NPS- tier I and tier II. The tier I account functions as a pension account and the withdrawals are subjected to certain restrictions. A minimum deposit of INR 500 is sufficient to open the account. Tier II investments are permissible only if there is an active tier I account under the same name.
The flexibility can be classified into auto choice and active choice. The auto choice is available as a default option where the fund investments are automatically managed by the respective fund manager, depending on your age profile. Active choice flexibility allows you to decide where to invest the funds among the available asset classes. Moreover, you can also switch your investment option or change your fund manager.
- Partial Withdrawal
Partial withdrawal is permissible up to 25% of the total investment towards the tier I scheme. However, up to a minimum of 10 years contribution is essential for withdrawal. There must be a minimum gap of 5 years between 2 consecutive withdrawals. - Tax Benefits
| Applicable sections under ITA | Permissible Tax Benefits |
| 80CCD(1) | Own contribution of the investor for tier I tax deductions within the total ceiling of INR 1.5 lakh u/s 80C |
| 80CCD1(B) | Apart from deductions under 80CCD(1), an additional discount of INR 50,000 is applicable towards tier I contributions |
| 80CCD(2) | Contribution of an employer for tier I investments is eligible for tax deduction up to 14 % of the central government contributions along with 10% for others. This is an additional discount above the limit of deduction under 80C. |
Other additional tax benefits of tier I investments include:
- Up to 25% of the tier I contributions that are withdrawn by the investor enjoy tax exemptions
- A lump-sum withdrawal of up to 40% of the total NPS fund after the investor attains 60 years, enjoy tax exemption
- An annuity purchase from NPS is tax-exempted.
This is a detailed guide regarding the popular wealth-creating investment options that are currently in circulation in India. Depending on your investment horizon, risk appetite, wealth status and financial goals, you can choose to invest. But, the primary rule of investment is to maintain a diversified portfolio. Therefore, to enjoy maximum returns and benefits, you should carefully plan to diversify your funds.