BackDYK: Five simple financial products for the first-time investor
Start with simple products that are easy to understand and manage
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Just got into a new job and don’t know where to invest? That’s understandable given that you are taking baby steps into your financial life. You may want to start off with simple products that are not only easy to understand, but also easy to manage. These products are relevant even for other investors.
Public Provident Fund (PPF)
PPF is a tax-free product that is also capable of generating positive returns after accounting for inflation. The returns on PPF are now linked to government securities and the rate applicable for each financial year is declared at the beginning of the year. For FY15, the rate will continue to be 8.7%. PPF enjoys the exempt-exempt-exempt, or EEE, tax status, which means the contribution, the accumulation and the withdrawal are all exempt from tax. Maximize your returns by opening the account early in the fiscal so that the interest gets more time to compound.
Employees’ Provident Fund (EPF)
If you are a salaried individual, you would know about EPF. Every month you park 12% of your salary in your account and your employer matches the contribution. A portion of the employer’s contribution goes into the Employees’ Pension Scheme, or EPS. The remaining corpus then earns interest and that rate is declared by the Employees’ Provident Fund Organisation (EPFO) for each fiscal year. Currently, it is 8.75% per annum. EPF also enjoys the EEE status. But you need to maintain your account for at least five years to make the maturity proceeds tax-free. You can transfer your account as you change jobs using EPFO’s online transfer claim portal.
Fixed deposit (FD)
FDs are good for first-time workers because their income is likely to fall in the lower tax bracket. FDs don’t offer any substantial tax relief: five-year FDs qualify for section 80C deduction of up to 1 lakh but income from them is taxable. The interest rates are guaranteed for the entire tenor.
Term insurance
A term plan includes only the cost of insurance, which makes it the simplest and the cheapest life insurance policy available. The premium qualifies for tax deduction under section 80C. If you buy online, you can get a discount on the premium of up to 60%.
Health insurance
A basic health insurance policy pays your hospital bills. Given the spiralling medical expenses, this is a must-have. The premiums qualify for tax deduction under section 80D up to 15,000 (for senior citizens it is 20,000). Go for a comprehensive plan that does not have restrictive clauses such as co-payment or sub-limits on expenses. If you already have a policy with these clauses, consider transferring (called “porting") to a better policy.
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