How can you grow your surplus money? Here are 3 ways

You have earned some inheritance money or some profits from the sale of ancestral land and wish to reinvest that money. Simply said, you want to grow your surplus money instead of letting it sit idle at home or in your savings account which begets meagre interest rates. To start with, check how much money you have with you. Then, check how much of it you would like to invest. Also, reaffirm your risk appetite before deciding between traditional and market investments. However, if you are new to investing in the stock market but still looking for decent returns that not only beat inflation but also help create wealth, you may as well start by investing some money in mutual funds.

Start with the basics

You just don’t get up one day and decide on a mutual fund investment without knowing anything about its asset allocation or evaluating its inherent risk factor. In such a scenario, putting money in an index fund can help.

Index funds are designed to replicate the performance of a specific market index. These funds are classified as “passive” investments, indicating that they aim to mirror the market's performance rather than actively seek to outperform it. As a result of this passive approach, index funds usually feature lower fees compared to actively managed funds, potentially leading to long-term cost savings.

You may choose an index fund with a wide base like a S&P 500 Index Fund or an alternative index fund with a smaller base like the Nifty50 Index fund. If you understand market capitalization, choosing index funds of differing market caps like a Midcap150 or a Smallcap250 index fund can also help.

The following table illustrates how putting money in an index fund can help you accumulate a decent corpus after some years.

Alternatively, you may put your money in a balanced advantage fund (BAF) or a dynamic asset allocation fund. These funds represent a category of hybrid mutual funds designed to strike a balance between risk and return. Their unique feature lies in the dynamic management of asset allocation between equity and debt, adapting to prevailing market conditions.

During periods of market volatility, BAFs tend to allocate more funds to debt, a relatively safer asset class. This strategic move serves to safeguard investors' capital when the market experiences downturns. Conversely, when the market is more stable, BAFs increase their exposure to equity, which has the potential to yield higher returns.

Investors in BAFs can enjoy the benefit of well-timed investments. Through their adaptive asset allocation approach, BAFs aim to reduce risk and maximize returns over the long run, making them an appealing choice for many investors.

The following table illustrates how putting money in a BAF can help you earn decent returns in the long run.

Investing in gold

There is too much debate surrounding gold investments. A comparison of gold versus equity returns highlights more returns from equities than gold. However, with inflation raising its ugly head every now and then and market volatilities dampening the prospects of equity investments, it helps to put some money in gold. If you are willing to stay invested for a prolonged period while also looking for tax-free returns, you may as well put some money in sovereign gold bonds (SGBs). However, if you are looking to benefit from a rise in gold prices while intermittently taking out the profits every now and then, putting money in gold exchange-traded funds (ETFs) would serve you best.

As times evolve, gold ETFs have become increasingly favoured over physical gold. Gold ETFs are investment funds that focus on gold and operate as open-ended Mutual Fund schemes, tradable on the stock exchange. Each unit of a gold ETF corresponds to one gram of physical gold, with a fixed purity of 99.5 per cent.

Gold ETFs offer distinct advantages over physical gold, primarily due to their independence from geographical price variations. Unlike physical gold, the price of gold ETFs remains uniform across the country, making transactions simple and convenient. This uniformity and ease of trading contribute to the potential for higher profitability when investing in gold ETFs compared to holding physical gold.

High-yield deposits

Age is one of the factors governing one’s choice of investments. Those nearing retirement may not be willing to put their money in the market, which is why putting money in high-yield fixed deposits (FDs) can help them earn good returns. Investors benefit from the power of compounding wherein the interest earned gets re-invested back into the instrument, thus, allowing scope for a higher internal rate of return (IRR).

However, investors looking for interest income may prefer RBI Floating Rate Bonds that promise high yields while earning interest every six months. However, corpus accumulation is not possible with the interest being credited to the investors’ accounts regularly.

Then, there are government bonds too wherein investors may put their money for decent returns. To promote domestic participation in the sovereign bond market, the Indian government has introduced a new initiative, allowing individual investors direct access to purchase bonds. Previously, these investors were limited to trading government bonds solely through gilt mutual funds. This move aims to encourage broader engagement and empower individual investors to directly invest in government bonds.

While the aforementioned investments will help you grow your money, the best investment you must make is in yourself by engaging in some financial literacy course wherein you may learn about the nuances of finance and investments and then where to put your money.