Some people become rich while others stay poor. One may have a decent job earning well while some of the peers may be far ahead in terms of wealth owned. Wealth creation requires good investment planning. There is no point hoarding your money in bank accounts. Your money needs to be invested so that one day it can grow into wealth and make you rich. That is why it is important to consider investing in products such as fixed deposits (FDs), Employee Provident Fund (EPF), Public Provident Fund (PPF), National Savings Certificate (NSC) and National Pension System (NPS).
"Investing helps one to create wealth and/or protect wealth depending on which stage of the life cycle one is at. Smart investing also helps handle planned as well as unplanned events in future," says Professor Rajiv Shah, TA Pai Management Institute.
Top considerations while making an investment
To make a wise investment decision, it is imperative for investors to know and study their investments well. Safety of your capital is important, say experts. "If the intention is to secure one's future, safety of capital invested should be an important factor. Steady returns are also required to ensure that there is no erosion of the investment," says Mr Shah.
As an investor, it is both your right and responsibility to study the key qualities of your investment, the rate of returns, interest rates, tax benefits, and how liquid your investment will be, if the need arises to use it.
"While making an investment in a tax-saving instrument in order to claim a benefit under Section 80C, one needs to consider the following: 1. The rate of return on the investment made and the taxability of the same 2. The level of risk involved in making the investment or the risk appetite of the investor (the level of risk an investor is ready to take) 3. The liquidity of the investment made or the lock-in period of the investment," said Archit Gupta, founder and CEO, ClearTax.
Interest rates - FD vs EPF vs PPF vs NSC vs NPS
EPF, PPF, and NSC come under small saving schemes, the interest rates on which are decided every quarter. Contributions in EPF fetch an interest rate of 8.55 per cent while PPF accounts fetch 7.6 per cent per annum (compounded yearly) until the June quarter. Interest rate on NSC has been fixed at 7.6 per cent (compounded annually) until the same period. Interest rate on NPS is linked to markets. Interest rates on FDs vary across various banks and non-banking financial institutions according to the varying tenures of the investment amount.
While investing in FDs, you have to analyse whether you are investing your money in regular FDs or tax-saving FDs. Regular FDs do not let you save on income tax. Even as tax-saving FDs help in saving the tax outgo, they require a minimum lock-in period of five or 10 years. Bank tax-saving FDs offer an interest rate varying between 6.75 per cent and 7.5 per cent (linked to normal fixed deposit rate of five years); normal bank FDs offer between 5 per cent and 7 per cent. Banks usually give a 0.5 per cent higher interest rate to to senior citizens.
Liquidity - FD vs EPF vs PPF vs NSC vs NPS
EPF is a compulsory retirement saving option with a minimum lock-in period of five years.
"Though the millennial crowd has a resistance to PF on the ground that savings are not relevant to me, they realize the importance of PF once they receive an annual slip or information or when they undertake their first withdrawal or transfer," said Subramanyam, CEO, AscentHR.
Partial withdrawal from EPF accounts is allowed for purchase/construction of house, repayment of loan, non-receipt of wage for two months, marriage of elf/daughter/son/brother, for medical treatment of family members etc.
PPF accounts have a lock-in period of 15 years but partial withdrawal is allowed every year from the seventh financial year from the year of opening account.
Regular FDs can be withdrawn prematurely with the payment of a penalty and a lower interest rate for the period of deposit but tax-saving FDs have lock-in periods.
NSCs come with a lock-in period of five years.
NPS operates via two accounts: 1) Tier-I account is the non-withdrawable permanent retirement account into which the accumulations are deposited and invested as per the option of the subscriber; 2) Tier-II account is a voluntary withdrawable account which is allowed only when there is an active Tier I account in the name of the subscriber. The withdrawals are permitted from this account as per the needs of the subscriber as and when claimed.
Tax benefits - FD vs EPF vs PPF vs NSC vs NPS:
The contribution into EPF, FDs and NSCs is deducted under section 80 C of the Income Tax Act up to a limit of Rs. 1,50,000. So either you can choose to invest the entire Rs 1,50,000 in one of these schemes or may choose to spread it across them. NPS offers an additional benefit of Rs 50,000 under Section 80CCD (1B) over and above the deduction under Section 80C.
PPF investments, however, fall under EEE status (exempt, exempt, exempt) that is, investment, earning and withdrawal from PPF is tax-exempt. "Therefore, for an investor amongst the options of PPF, NSC, and bank tax-saving fixed deposits, obviously PPF stands out as the best option from interest rate and returns perspective, and is a safe, secure and a risk-free investment," said Dr. Rajendra Kumar Sinha, Professor and Chairperson, Centre of Excellence in Banking, IFIM Business School.
Pros & cons - FD vs EPF vs PPF vs NSC vs NPS
|EPF||1.Eligible for 80C deduction||Minimum lock in period of 5 years|
|2.Interest is exempt|
|3.Exempt on withdrawal|
|PPF||1.Eligible for 80C deduction||Lock-in-period of 15 years|
|2.Interest is exempt|
|3.Exempt on withdrawal|
|4.Minimum investment of Rs 500|
|5.Risk free as they are backed by the government|
|6.Return at 7.6%|
|Fixed Deposits||1.Minimum investment of Rs 100 and maximum of Rs 1.5 lakhs||1.Lock in period of 5 years|
|2.Risk free and meant for conservative investors||2.Interest on maturity is taxable|
|3.Return between 6% and 7%|
|4. Eligible fro 80C deduction|
|NPS||1.Returns between 8% to 10%||1.Lock-in-period till retirement|
|2.Minimum investment per month of Rs 500 of Rs 6000 anually||2.Is affected by market related risks|
|3.Additional deduction of Rs 50,000 under Section 80CCD(1B) over and above the 80C deduction|
|National Saving Certificate||Return is 7.6%||1.Lock in period of 5 years|
|2.Interest that accrued on NSC is taxable|
Investments as a tool to deal with emergencies
An emergency can strike you any time. It is best to stay prepared to face it head-on. Surplus funds, over and above your regular income, can help you better deal with exigencies. "These silent investments can build up in a big way over a period of time and the power of compounding offers a healthy amount of cushioning for facing emergencies," said Mr Shah.