Investment Options - Investing for Dummies

DON'T PANIC.

Amortized costs, P/E, dilution, net asset value...not going to use all those jargons in this post. This is meant to give a layman all the investment options available and a basic info about each of the options.
When I got my first job, investment and tax were two scary and alien words. This happens with most of the adults as we are never taught about these in school. All that terminology may scare you at first glance, but as you keep learning about it, you will feel comfortable. You don't have to learn all about investing in a day, take it slow, start with 10 minutes reading everyday. Investopedia is a great start for beginners.

[The first draft was just too much info, so I have divided it into multiple posts and removed some scary stuff - tried to make this as friendly as possible. However, you may still need coffee before reading this.]


Investment Options
Investment Options

Why Investing?

The beauty of investing is compound interest. See this Investopedia example that shows the magic of compounding. The early you start, the better profits you get.

"Human felicity is produced not as much by great pieces of good fortune that seldom happen as by little advantages that occur every day." 

"A little bit of slope makes up for a lot of y-intercept"

Before even thinking of becoming a millionaire, is your retirement fund set? Is your pay growing on par with inflation? Are all your loans paid? Investment can address these kind of issues at least to some extent.

Money just saved is money rusted. Save money only to invest(including things), not just for the sake of saving.

If you just stash money, say 200 under your mattress in 2010 thinking to buy Domino's choco lava on every Saturday of a stressful month, you will be able to buy only for two Saturdays in 2018.(45 ish in 2010 to 100 ish in 2018).

We will start with things that can be easily understood.

Non financial assets:

Precious metals: 

Gold/Silver/Palladium etc. Coin/bars instead of jewelry with variety of stones(no/less return value) that hold sentimental value and just lies in locker 99.99% of the time incurring storage fee and probably maintenance fees. Check for purity (hallmark) and weight.

Land/House: 

Land is a great investment, but very risky if not done without proper background check. Make sure you get all proper documents like title deed(person's right to property), encumbrance certificate(not under any legal dispute), release certificate etc. It is better to consult with a lawyer and also a surveyor who can verify the dimensions of land.
If it's a house, then make sure the builder is genuine. Also note that house needs lot of maintenance and repairs.

Agriculture: If you have a farming land, you can lease it to farmers and earn a steady income on the crops.

Rare items: 

Coins, stamps, antiques, rare editions/signed editions of books, art, etc.

Business: 

Start your own business or invest in someone else's.

Financial:

Saving schemes:

These aren't exactly like investment, but they provide some form of protection against inflation and tax. Speaking of tax, I just want to use one jargon:

EEE- E stands for exemption of tax. 1st E is on principal amount invested. 2nd E is on returns on principal. 3rd E is on withdrawal of amount on maturity. If someone says that a scheme is EET, it means that you don't incur any tax on principal and returns, but you get tax at the time of withdrawal.

PPF(Public Provident Fund):

PPF can be maintained by anyone through a bank or post office. If you are a minor, you need a guardian for the account. Ranging from 500 to 1.5L per year, amount can be paid to PPF in one go or 12 installments(not necessarily every month). Interest is earned over this amount and it will be paid on March 31st every year. Interest rates are announced by Govt every Quarter. Currently, it's 7.6%.
If you fail to pay min of 500 in a year, then your account is deactivated and you incur a penalty of 50 per year to activate it again. If you deposit more than 1.5L, interest isn't earned on the extra amount beyond 1.5L. Maturity for PPF is 15 years. You can extend it beyond that in blocks of 5 years. After 15 years, you can completely withdraw amount or continue it with/without contribution.
Nominees can be set and even loan can be taken against PPF. Easily transferable from one bank to another. Withdraws before maturity is allowed only from seventh year and only till 50% money. Premature closing of PPF is allowed only after 5 years with a penalty.
EEE. Best for retirement if you don't have any need for liquid cash in immediate future.

EPF(Employee Provident Fund):

If the company you work for has more than 20 employees, then you are eligible for PF. A fixed amount(12% of basic salary) is deducted every month to PF account. Employer pays a minimum of 12% of 15K to your EPF or an equal amount of your deductions. Out of this employer's contribution, only 3.67% goes to EPF, remaining goes to EPS(pension) and charges. Returns on PF and original amount are tax free after 5 years. EEE.

NPS(National Pension Scheme):

NPS is retirement plan with a minimum of 1K contribution yearly. But this is EET unlike EPF/PPF- on withdrawal after maturity, it will be taxed partially. Also, there are conditions that you need to invest some of this amount in annuity which will again get taxed :-|

ULIP(Unit Linked Insurance Plan):

Investment scheme that provides insurance. Just like in insurance you pay premiums periodically which are held partially for insurance and remaining proceeds are invested in shares/bonds. EET. Risky just like mutual funds.

Fixed deposits and Recurring deposits:

Better interest rates(6-7) than savings account (4-6) with a lock in period. 10% TDS(Tax Deducted at Source) on interest earned. Depending on your tax bracket, you need to pay remaining amount. For example 30% tax bracket people need to pay 30% tax minus TDS. In Fixed deposit, a lump sum amount is deposited and in case of recurring deposit, it happens in installments. So, FD gives better returns than RD.

Savings account:

Not really beneficial, but still better than money just lying around the house. Interest rate amount beyond 10K is taxable and needs to be declared by individual at the end of financial year.


There are other schemes like Sukanya Samridhi(8.6%) if you have a girl child aged below 10 years.

Investment in the traditional sense:

All these generally incur 15% tax on Short Term Capital Gains(STCG) and 10% on Long Term Capital Gains(LTCG) when sold and profits are realized.

Bonds:

Bonds are issued by debtors to creditors- which are majorly municipal and corporate bonds. Holders get interest on it periodically and get the face value(principal) back on maturity. They have priority over stockholders as creditors are prioritized over owners.They last for certain term unlike indefinite stocks.

Stocks

A company will have assets(factory,patents,etc) and liabilities(wages,lease,long term bonds etc).
Equity= Assets-Liabilities.
This Equity divided among shareholders gives them ownership on the company. This is different to bonds as in bond holders are creditors and not owners.
Stocks are of two types- common(CS) and preferred(PS). CS holders have voting rights in company policy. PS holders take preference over CS holders. So overall, bonds>PS>CS in terms of dividend payment. But in case of profits, it's distributed among CS holders.

Mutual Funds:

Mutual funds are professionally managed funds/pool of money so that one can indirectly invest in stocks/bonds. They are supposed to be less risky as they are managed by professionals and provide more diversification. On the downside, they come with fees.

ETF(Exchange Traded Funds):

ETFs are like mutual funds but traded on exchange just like stocks and bonds. Index funds are popular as they follow a particular stock index(like S&P 500) and provide a great deal of diversification. A good alternative for Gold is investing in Gold ETFs that have gold as underlying asset.

ELSS(Equity Linked Saving Scheme):

ELSS have the benefits of Mutual Funds in terms of high returns from equities and benefits of PPF in terms of partial tax exemption under 80C. They have a lock in period of just 3 years. Lump sum/SIP payments can be made. Risky just like any mutual funds compared to PPF/NPS.

Crypto currencies: 

Okay, I was skeptical about adding this. But you can invest in a currency that has lot of business applications(using smart contract) like Ethereum.




As the famous quote goes - the easiest way to double your money is by folding it, be realistic, don't expect or invest in anything that promises way too profits in short term. Anything that fetches erratic high returns is bound to drop too low.

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