Just got into a new job and don’t know where to invest? While the market is full of investment options, it may not be easy to understand all of them when you are taking baby steps into your financial life. At this stage, you would want simple products that are easy to understand and yet are able to build a base for your financial portfolio.
Here are five products that won’t ask for a churn or demand complicated procedures and yet would give you returns that are tax-friendly and, in some cases, are able to counter inflation.
Public Provident Fund
Public Provident Fund, or PPF, is a risk-free and tax-free product that is also capable of generating positive returns after accounting for inflation. PPF had been giving steady returns over the past several years, but last year its returns got linked to government securities’ rates. So now every year the return on your investment will vary. For the last financial year, the rate was 8.6% but for the current financial year, FY13, it is 8.8%.
Even as the interest rate will vary every year, given the favourable tax treatment PPF enjoys, it continues to remain an attractive long-term vehicle. PPF enjoys the exempt-exempt-exempt or EEE tax status, which means the contribution, accumulation and withdrawal are all exempt from tax.
Tip: You can maximize your returns by opening your account early in the financial year. Says Veer Sardesai, Pune-based financial planner: “If you open your account in April, then you will earn interest for the entire 12 months. But if you open late, say, in December, then you will earn interest only on the remaining four months in the financial year.”
Also, investing early means the interest on your account has more time to compound. For example, if you invest Rs 1 lakh every year in the beginning of the year for 15 years, you will be richer by Rs 2.86 lakh assuming the rate of interest to be 8.8% per annum.
Employees’ Provident Fund (EPF)
If you are a salaried individual, then this is probably the best investment product you have in your portfolio. Every month you park 12% of your basic plus dearness allowance in your account and your employer matches the investment.
From what your employer contributes, 8.33% goes into the Employees’ Pension Scheme or EPS, which offers you pension for life after the age of 58 years. The remaining corpus then earns a rate, which is declared by the Employees’ Provident Fund Organisation (EPFO) for each fiscal year. EPFO hasn’t declared the rate for the current fiscal, but for FY12, the rate is 8.25%. For about six years till FY10, EPF offered a rate of 8.5% and due to a windfall gain it offered 9.5% in FY11.
A dip of more than a percentage point means your money will be earning less but that is no reason to withdraw your money from the account. EPF still enjoys a favourable tax treatment. Like PPF, this product has an EEE status. But you need to maintain your account for at least five years to make the maturity proceeds tax-free. You needn’t be in the same organization and under the same EPF account to clock up five years.
Tip: You can transfer your account as you change jobs by filling up form 13. At the time of joining a new organization your HR will hand out this form to you along with PF account opening forms. You can also download this from www.epgo.org.in.
You need to fill in the details of your previous EPF number, organization and regional PF office and give it back to your HR, who will then fill in details of the current organization along with your new PF number and submit it to the regional PF office with which they hold their account. The regional PF office gets in touch with your previous regional PF office and gets your account transferred. Ideally, the process should take about 30 days but depending upon the backlog it may take longer.
Fixed deposit (FD)
For investors having short-term goals and senior citizens looking for periodic income, FDs are useful investment products. These also work for investors who have just started working since their income is likely to fall into the lower tax bracket.
Even as FDs offer no substantial tax relief, five-year FDs qualify for section 80C deduction. Currently, these FD are offering 8.25% to 9.4% per annum. The interest that FD earns can be taken periodically or on maturity and is taxable. Says Pankaj Mathpal, Mumbai-based financial planner: “For conservative investors having short- term goals, FDs make sense. But it is most useful for investors in the lower tax bracket.”
Tip: Since the interest is taxable, the effective yield on FDs will depend on your tax bracket. Returns will be highest for the lowest tax bracket.
We have said this plenty of times in the past but we would say it again: if you want a life insurance policy to protect your family in case of your death, pick up a plain vanilla term plan.
A term plan only includes the cost of insurance. If you die during the term, you get the sum assured or death benefit and if you survive the term, you get nothing back. Unfortunately, term plans are still not popular with insurance agents. Even now, what gets pushed as insurance policies are savings plans or market-linked investment plans. In these plans, your premium not only includes the cost of insurance, but a chunk also gets invested. But both the elements in one product comes at a huge cost.
Stick to a term plan that is the cheapest way to buy life insurance. The premium that you pay on term plans qualifies for a tax deduction under section 80C.
Tip: You can reduce the cost of term plans by buying it online. By selling term plans online, the insurer saves on distribution and administrative costs.
A single premium policy will also come cheap as compared with a regular premium term plan, but concerns far outweigh the benefit. In a single premium policy, you pay all the premiums upfront, while in a regular premium policy you pay every year. In a regular policy, you have the option to exit the policy at any stage. Also even as the difference in absolute terms may seem stark it may not be that huge if you factor in inflation and calculate the present value of all your future premiums. For example, a 35-year-old will have to pay Rs 4,267 every year for 20 years for a sum assured of Rs 10 lakh. That’s a total of around Rs 85,340 in 20 years. Compare this with a single premium policy that will cost you only Rs 46,460. But look at the numbers by comparing them in their present values. Regular premium today will cost you around Rs 49,000, assuming inflation to be at 6% per annum.
A basic health insurance policy is an indemnity policy that pays your hospital bills. It also reimburses expenses incurred before and after hospitalization. Even the premiums on health insurance policy qualify for tax deduction under section 80D up to Rs 15,000 if you are not a senior citizen.
Begin with buying an individual policy. If you have a family you could top up your cover with a family floater. This policy considers the family as one unit and covers all the members of the family. If one member makes a claim, the sum insured is reduced on the entire family by that much in a year.
Tip: Look for policies that offer comprehensive cover. If your policy has a co-payment clause or sub-limits on expenses, you can port your policy from one insurer to another that offers comprehensive cover.
Also See | What to keep in mind (PDF)
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