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5 Best Investment Options for Millennials for Financial Freedom in 2020

Mayur Pirgal & Kanchan Dwivedi

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Today on the eve of 74th Indian Independence Day, we would like to share the benefits of having financial freedom & investing for a secure future. A majority of the millennials would not have thought about saving for the long term, maybe before COVID-19 struck the nation and the world. The economy was called the Gig-Economy, and was about how the current generation lives for the experiences. This mindset was evident in the purchase choices she/he made by opting for co-living, renting homes, renting furniture, fridges, A/Cs, scooters, sharing taxis, ordering food online, opting to stay in AirBnBs and Oyo Homestays rather than in hotels, within India and abroad to rejuvenate themselves and for fun experiences. It was clear that the Millennials did not have a penchant to save for later years as the Baby Boomers or a Generation X would have tended to, but their decisions were more oriented towards unique experiences.

Well, going by the way the economy, society & businesses have been negatively impacted because of Corona Virus, it is a time to seriously think towards investing for a secure future. The good news is that, it is possible to adopt a golden middle where you can enjoy your lives & simultaneously make sure that you do not compromise your future. Towards that, we bring to your attention the top best investment options a millennial can consider in 2020, below.

1.Mutual Funds: The basic concept of mutual funds is that it that pools money from a number of investors (you and others like you) and invests the money in a variety of securities such as stocks, bonds, long-term debt, etc. This combined holding is known as the portfolio of a mutual fund. And when you invest in a mutual fund, you effectively buy a share in the portfolio, making you a part owner of the income that the mutual fund generates.

Though, the mutual funds industry has received a battering in the recent times due to poor equity performance, competition from portfolio management system as well as stock brokers, and a weak distribution network comprising of only 1 Lakh mutual fund distributors ( compare that figure to 20 Lakh insurance agents in the country), it still remains an investment option where one can get a return of upwards of 8% on Large cap funds and 9-11 % on Mid-Cap and Small-Cap funds.

Like most of the investment options, even mutual funds are subject to market risks (fluctuations in the market). There are also exit fees to be considered when redeeming mutual fund units , that vary anywhere from 0.25% -4 %.

Advantages of investment in Mutual Funds:

  • The mutual funds are managed by finance experts and professionals who perform all the research, select the securities and monitor the performance.

  • Investment in Equity Linked Savings Scheme (ELSS) allows the investor, tax savings of upto 1.5 lakh in a financial year under Section 80 C.

  • Allows the investor access to diversified securities for an amount as low as Rs. 100.

  • Redemption of shares is possible in mutual funds for the current Net Asset Value (NAV) The funds are normally transferred within 1-5 days.

Disadvantages of investment in Mutual Funds:

  • Since there is no foolproof method to predict market behaviour, the risk of losing money, if the security held by the fund goes down in value, exists. In this case, dividends and interest payments also change. It is therefore good to invest in ELSS Mutual Funds, in case if you have a higher risk appetite or a longer investment horizon.

  • Although a fund’s past performance might give hints about its volatility and stability, the past performance by no means can be considered as a basis to estimate the future returns. But as a thumb rule, the volatility and investment risk in the fund are directly proportional.

2. Public Provident Funds ( PPF): The PPF is a Savings-Cum-Tax Savings scheme among individuals looking for long-term investments, saving taxes and pooling up a good sum for retirement. PPF is for individuals who want a low-risk option for investments, that has tax free returns . The rate of interest earned on the principal amount, which stands at ,7.10 % from Jul-Sep 2020, changes every quarter as per the government guidelines.

The Public Provident Funds are mostly used by individuals to build their retirement corpus as the maturity period (the period after which the whole amount is received) is 15 years. An extension of tenure is possible by 5 years, after the 15 year period ends, with or without investments. The minimum and maximum cap for investments in PPF are Rs. 500 and Rs. 1.5 lakh respectively, annually.

In addition, any Indian citizen is entitled to investments in the PPF, including minors provided that the account is operated by their parents. The registration for a PPF account, subject to eligibility, is available in online as well as offline ( post offices, nationalised banks, select private banks) mode after submission of the requisite documents.

Advantages of PPF:

  • Since it is not market-linked, and backed by the Government, PPF is a low-risk option for investment

  • Exempt- Exempt- Exempt Category of investments- Tax benefits can be availed for investments in PPF. A maximum of Rs. 1.5 lakh per year can be claimed as tax deduction, further the interest earned on these investments as well as returns at the end of the 15 year period are exempt from tax, under the Income Tax Act.

  • From third year onwards till the sixth year, loans at 1% rate of interest can be availed, against 25 % of the balance of the previous year.

  • The PPF accounts opened in the name of your spouse and child are tax free as well.

Disadvantages of PPF:

  • The rate of return on PPF is assured, but it is not fixed and keeps fluctuating. It is fixed on the basis of the 10 year Government Bond yield, for a period of 3 months.

  • Liquidity is an issue for the investment since the complete principal cannot be withdrawn before maturity. Only a partial amount (50%) can be withdrawn, and that too, post the 6th year.

  • Although there is risk involved with other investments, investment options like ELSS, Equity Funds, Debt funds & NPS provide a better return than the PPF.

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3. National Pension Scheme: On a broad scale, NPS can be considered as a hybrid of Mutual Funds and PPF, with some variations. The analogy with Mutual Funds is that in NPS too, the investments are done in financial instruments like equity and debt securities by the scheme managers and the similarity with PPF is that the maturity period is long, till 60 years of age of the individual.

The NPS is attractive for people with moderate risk-appetite and is generally preferred by the individuals who want to secure a monthly income after retirement, something like a salary. This scheme by the Central Government initially was applicable only to the government employees but now is open to all the Indian citizens, above the age of 18.

While the minimum NPS contribution remains Rs. 500 per annum, there is no cap on the maximum. Over the years, the Market Linked scheme has provided 8% - 10% annual returns. While the NPS is mandatory for central government employees (10% of basic salary), it is voluntary for other citizens of India.

Advantages of NPS:

  • Tax Benefits- Investments in NPS are eligible for deduction upto Rs. 1.5 lakh under section 80(C) and an additional Rs. 50,000 under section 80(CCD) of the IT Act.These benefits make it particularly attractive for the Salaried class.

  • The NPS is attractive for people with low risk-appetite, who want to plan for retirement early on, and who work in the private sector as it provides a monthly income after retirement.

  • It is a transferable across jobs and a voluntary scheme.

  • Of the total amount, a maximum of 60% can be withdrawn at retirement and the remaining amount is paid as a monthly pension, thus securing the future especially of people having a private-sector job.

Disadvantages of NPS:

  • Like the PPF, the maturity period is on the higher side (in fact, sometimes even more than PPF). Thus, a large sum of money cannot be withdrawn, before retirement, in case of an emergency, except in certain conditions.

  • Also, even though there is tax exemption during the tenure of the NPS, the sum withdrawn post maturity is taxable, thus making this scheme less attractive to investors.

4. Fixed Deposits: Like the name suggests, the fixed deposits offer a fixed interest rate on the principal amount invested. This type of Risk-Free security is provided by most of the scheduled banks in India. The simple concept of the FDs is that the investor makes a lump sum investment and it earns interest during the deposit period. At maturity, the principal as well as the accrued interest is paid to the investor.

The pre-defined maturity options are flexible, ranging from 7 days to 10 years. Unlike the NPF or PPFs, you can deposit an amount in the Fixed Deposit only once, and to deposit another amount, you need to create a new account.

The interest earned on FDs is taxable, which is based on the tax bracket. In case your PAN details are available with the Bank, a 10% TDS is deducted if you earn more than Rs. 10, 000 interest in a year and a 20% deduction takes place if PAN details aren’t available. But if your total income is below the 10% tax bracket, you can claim a refund of the tax deduction.

Advantages of FDs:

  • Fixed Deposits have higher interest rates than a normal savings account.

  • Returns are independent of market fluctuations, thus guaranteeing a fixed amount at the end of maturity.

Disadvantages of FDs:

  • The flexibility of a day-to-day savings account is lost since withdrawal of the amount before maturity is penalised in the form of penalty fees or lower interest rates.

  • In terms of investment options specifically, the returns earned through fixed deposits are on the lower side, albeit at lower risk.

5. ULIPs- Unit Linked Insurance Plans: These are Life Insurance plans that have a insurance cover provided to the applicant along with the investment part, wherein the decided amount is invested in equity, bonds etc. The insurance cover ensures the same standard of living for your family in your absence. With regards the investment part of ULIP, if you have a fair risk appetite you can invest in equity funds and if you have a low risk appetite, you can go for debt funds. At maturity, the invested amount is returned to the insured.

Advantages of ULIPs:

  • It offers tax benefits of Rs. 1.5 Lakh under section 80 C.

  • ULIP are the only Equity-Linked plans exempted from Long-Term-Capital -Gains (LTCG) Tax .This comes in handy at maturity and when withdrawing returns.

  • Switching between funds- When the markets are down, you can transfer the amount to debt funds and when the market is on the upswing ,one can switch to equity funds thus, ensuring good returns.

Disadvantages of ULIPs:

  • The ULIP Premiums are higher than those of Term Insurance plans

  • There is a Lock-in period of 5 years, during which no partial withdrawals is permitted.

The above mentioned options are ideal for someone who has less responsibilities, but is looking to secure a good future. Not only that, these options can also act as emergency funds in case of unforeseen adversaries like the pandemic we are facing or even sometimes job losses.

So earn diligently, spend wisely and invest regularly!

Disclaimer: LoanGini advises readers to check with certified experts before taking any investment decisions.

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