Indian middle class now has multiple options such as Mutual Funds, Peer to Peer Lending, PPF, Crypto Currencies and Government Bonds to invest their hard-earned savings. It is advisable to have a mix of 2-3 types of investments in portfolio.
Salaried middle class always looks forward to the performance bonus where he gets to save decent sum of money in one go. Now is that time of the year and like most of us, you will be wondering how to invest this hard-earned money for maximum returns to secure your future better. Let’s look at the top 5 options below:
#1 – Mutual funds
Mutual funds help retail investors to investinto portfolio of equities, bonds, and other securities which are administered by a fund manager. Here, every customer can participate commensurably in the fund’s gains or losses. Mutual Funds are basically investment vehicles which collect money from multiple investors for investing in securities and other assets.
Advantages of Mutual Fund investments:
Diversification: Mutual funds provide access to a diversified basket of securities.
Efficient for small accounts: One can start investing even with small amount of capital.
Expert money management: Mutual funds are managedby fund managers who are better trained in reading the market forces and invest more effectively than an average Joe.
No intra-day trading: Mutual funds do not support intra-day trading. This means that it is difficult and/or impossible to take advantage or capitalize unexpected market movements.
Costs: A mutual fund is managed by a team of high cost fund managers. The fund management fee can be as high as 2% per annum in addition to bonus linked to fund’s annual performance. In good years, the fund manager gets well rewarded while in bad years, he continues to get nice pay cheque. These costs significantly impact the returns. It has been well established that on an average, mutual funds are unable to beat the market whether it is in India or United States.
Market Risks: Mutual funds are subject to market risks, which means you *could* potentially lose significant amount of investment during bad times.
#2 – P2P Lending
Peer-to-peer (P2P) lending helps individuals and small businesses to borrow by connecting the borrowers to individual investors.The borrowers get loans at affordable interest rates while for investors that interest rate is substantially higher than returns from many other sources such as Fixed Deposit, or possibly the stock market over a long-term. Plus, you also get monthly interest payments from borrowers.
Advantages of participating in P2P lending
Higher returns: P2P lending can give significant access to considerably higher returns than that of a high-street savings account. At i2iFunding, lenders stand to make as high as 30%.
Risk diversification: P2P platforms allow (and often mandate) the spreading of your capital across multiple loans. This helps manage your exposure. For instance, if Rs 5,00,000 is spread over 100 borrowers, and one of these loans defaults, you’re looking at a potential loss of Rs 5000 only.
Freedom of Choice: P2P Lending allows you to choose whom you want to lend to, based on their credit profile. You decide the interest rate you’d want to lend to, the tenure, and nearly all other parameters.
Things to Remember:
Choosing the right platform is important: If you decide to deploy your capital through a P2P platform, choosing the right platforms is important. This is because reputed portals (such as i2iFunding) have strongsystems of checks and verifications in place to ensure that only high credit quality borrowers get the loan. A portal with weaker verification processes may simply be a one-way ticket for your money.
#3 – Public Provident Fund (PPF)
A Public Provident Fund or PPF is a scheme introduced for long-term investment options. It is backed by the Government of India, which offers safety along with decent interest rates. Returns that are tax exempted (under Section 80C).
Pros of investing in PPF
- Guaranteed tax-free returns every year, as set by the government.
- Absolute protection of invested capital.
- It is very easy to open a PPF account from banks or post offices.
- They require only a minimum investment of Rs. 500 every year.
- They give the option of extending tenure with or without any contribution.
Cons of investing in PPF
- Their interest rates might not always be able to beat inflation.
- They have a compulsory lock-in period of 15 years.
- NRIs and HUFs are not given an opportunity to open a PPF account.
- There is a limit of one account per citizen, which cannot be closed until its expiry.
#4 – Cryptocurrencies
Cryptocurrencies are digital currencies that use cryptography for security, and are not issued by any central authority. Cryptocurrencies allow easy transactions between parties, allowing users to steer clear of the steep fees charged by most banks and financial institutions. Some major cryptocurrencies include Bitcoin (2009), Ripple (2013), Litecoin (2011).
Advantages of cryptocurrency investments
Safe and secure payments: Since cryptocurrencies use military grade cryptography, all transactions remain safe and secure. No individual other than the wallet owner can make transfers or payments from their wallet.
Low/no fees: Banks and such financial companies charge fees in order to conduct payments and fund transfers. However, with cryptocurrencies, these fees are very low.
Risks of cryptocurrency investments
Negative View from Multiple Regulators: Manyregulators including the RBI has been sceptical of crypto currencies and have banned it.
Irreversible payments: Since no center point exists during payment processing, there also exists no option to undo a processed payment.
They are not widely accepted: Though cryptocurrencies have recently made it into the news, very few are aware of their existence. Not many companies or websites accept them as payments.
Wallet losses: There exist many ways to store your cryptocurrencies, but there is no way to get your money back if your keys/passwords are lost.
#5 – Government Bonds
A government bond is a debt security issued by the National Government, in order to support government spending. Indian Government bonds are typically denominated in Rupees.
Pros and cons of Government Bonds
Government bonds are said to be risk-free, and are traded in highly liquid markets. However, they have their shortcomings. They usually return fairly low rates of returns. Moreover, only selected bonds have protection against inflation, which could surpass the bond’s interest rate. And finally, the bonds with fixed interest rates do not provide protections against variation in interest rate in the market. Higher interest rate in the market reduces the bond value and vice versa.
Where are you investing your bonus?
It is advisable to invest for long-term. An astute investor would get his money work for him rather than work to earn it. If you’ve just landed a bonus, invest it wisely. Invest in 2-3 options with a flavour of debt, equity and fixed deposit depending on your investment horizon. People with medium to long term equity horizon should invest in equity and high yield debt. While people with short term horizon should invest in low yield debt and fixed deposits. Equity exposure can be taken through direct investment or equity mutual fund while high yield debt exposure can be taken through peer to peer lending (high return loans). Low yield debt exposure can be taken from peer to peer lending (high grade loans) and corporate bonds.
It can be noted that peer to peer lending is a unique asset class which provides exposure to both high and low yield debts.