When we Indians start earning for the first time, the first brush with savings happens via EPF deductions. Your salary is automatically deducted and some amount goes towards your EPF corpus. Then comes the first tax-saving season. When we wake up to the need to save more taxes somehow. So for starters, Indians get introduced to investments in the guise of saving taxes.
Saving taxes is no doubt important. Why pay more if you can (legally) avoid doing so. But saving taxes is not enough.
You need to invest in line with your goal requirements. And it’s always best to link your investments to your financial goals. That way, your money gets a solid purpose and you get an internal drive. That is the whole concept of goal-based investing.
So once you do decide to do investments more properly and in line with your goals, comes the next question about which are the suitable investment options.
We discuss a few in this article.
Remember that there are hundreds of investment options available that are vying for your wallet. But you only need a few of them to get your financial life in order. No clutter. Just simplicity.
So let’s move on.
Best Investment Options for Salaried Individuals (2023)
This is assuming you already contribute to Employee Provident Fund via salary deductions.
So here are a few of the top investment options that salaried individuals can pick from (based on their risk profile and time horizon) to meet their investment needs to achieve their life’s financial goals:
Voluntary Provident Fund (VPF) – VPF is a solid debt option that gives risk-free and (almost) tax-free interest. VPF in reality is just a part of the existing EPF. In EPF, you make mandatory contributions (like 10% of Basic, etc.) But if you want to contribute more every month, you can do so by making additional voluntary contributions to your existing EPF account via VPF. For example – Your monthly EPF contribution via salary deduction is Rs 15,000 but you want to invest more. So you can increase your EPF contributions above the mandatory Rs 15,000 per month to let’s say Rs 35,000 per month by making additional Rs 20,000 VPF contribution. Also. The contributions made to VPF qualify for tax deduction under Section 80C.
Public Provident Fund (PPF) – PPF is similar to EPF but anyone, even self-employed people can use this. With a tenure of 15 years, it’s a solid product for long-term savings and is risk-free. Nowadays, PPF interest rates are reviewed every quarter but tend to be 1-2% more than the prevailing FD rates. The PPF investments also qualify for tax deduction under Section 80C. But you can only invest a maximum of Rs 1.5 lakh per year in your PPF account.
You might find this discussion on VPF Vs. PPF useful if you are considering investing between the two of them.
Equity Funds – These are one class of mutual funds which invest in equity stocks. Given their nature, they are volatile and hence can have good years as well as bad years. So your returns from equity funds will not move in a straight line. But in general, average returns from equity funds are expected to comfortably beat inflation in the long run. The equity funds where the portfolio is just a replication of an existing underlying index are passive index funds. While funds, where fund managers take discretionary calls about which stocks to invest and how much to invest, are actively managed funds. These days, there is a debate between Active Funds Vs Passive Funds. Though one can earn great returns by investing directly in stocks, I think equity funds are best suited for small investors who do want to invest in stocks and profit but do not have the time or expertise to do so. And best way to invest in equity funds is via regular monthly SIP in mutual funds.
Debt Funds – Like equity funds, there is a class of mutual funds that invest in debt. These are called debt funds and invest in fixed income instruments such as government securities, corporate bonds, and debt, money market instruments, etc. These are best suited for those who want steady returns. But mind you, the returns are not guaranteed like a provident fund or bank fixed deposits. Also, they aren’t exactly risk-free as they do have exposure to risks related to interest rate risk, credit risk, and default risk. But still, these tend to give better returns than your bank deposits. More so when you consider indexation benefit to reduce debt fund taxation.
National Pension System (NPS) – NPS is a post-retirement-focused corpus accumulation product. The NPS subscribers can choose different asset allocations between equity, government debt, and corporate debt and invest in a judicious and suitable mix of equity, corporate bonds, government papers, etc. Since this is pension focused product, it is locked in till the retirement age. Also, there is a mandatory annuitization of a minimum of 40% of the accumulated corpus. This has to be invested to purchase an annuity. The remaining 60% of the amount is tax-free and can be withdrawn on maturity in lumpsum. Also, NPS investing offers an additional tax deduction of Rs 50,000 under Section 80 CCD 1(B). This is over and above the tax deduction of Rs 1.5 lakh that you get under Section 80C.
Gold Bonds & Gold ETF – Gold has been a store of value and a hedge against inflation for hundreds of years. So once other core components of the portfolio, i.e. equity and debt are properly invested in, one can also consider investing in gold. And the best way to invest in gold is not in the form of jewelry. But via Sovereign Gold Bond and ETF. And remember that gold is more of a portfolio diversifier and hence, your exposure should be limited to 5-15% of your overall financial portfolio.
Real Estate – I am personally not much of a fan of real estate. But the fact is that once in a while, good real estate investments do come up and they can change life’s trajectory. But these are exceptions and not the norm. So one needs to be careful. And please note that here I am not talking about your residential property which is not exactly an investment asset. It’s more for personal use. So you should never your residential house as an investment. As an investment, real estate can work. But one should not go overboard with it. It’s a high-ticket purchase and can skew your investment portfolio considerably. I have seen people with Rs 1 crore portfolio with Rs 80-90 lakh in real estate. That is not the right thing to do. Also, one more thing that most people don’t consider is one’s personality. Not everyone is made out to handle real estate property. It’s a different ball game altogether if you know what I mean. It looks lucrative from the outside and you may have heard several success stories. But reality and your personal investment outcome may and will be very different. There are thousands of messy real estate stories with sad endings. So be careful.
So these are 7 of the top investment options that a salaried Indian can consider. There are ofcourse many more instruments that one can explore. Like safe bank fixed deposits that all Indians are very familiar with. Then there are specific instruments for those above 60 like SCSS (Senior Citizen Savings Scheme), PMVVY (Pradhan Mantri Vaya Vandana Yojana). You can read more about these options at SCSS Vs. PMVVY where I did a detailed comparison. Then there are post office savings scheme and investment options. Even those can be considered for those who are suited for such products. That reminds me of a friend outside India who got ‘very’ lucky few years back. He used to buy a lottery ticket every now and then. He was honest enough to say that he was just trying his luck and he did invest properly elsewhere. But when the lady luck shines then it does. Who can get in her way? Isn’t it?
Then there is another option that many youngsters are exploring. Bitcoin and other cryptocurrencies. But to be honest here, the risk-reward matrix is so asymmetric with Bitcoin and it is so nightmarishly volatile that it’s still not something that one should seriously invest a lot in. Best to limit it below 1-5% for the time being.
So with so many options available, what should one do?
I would suggest keeping things extremely simple.
Simple is what works and simple is what you too will stick to with in the long term. The more you complicate it, the less headache you will have.
So attempt should be made to have a judicious mix of investments by keeping your risk appetite, goal time horizon in mind. And if you plan it well, your tax-saving will automatically be taken care of. If you can do it yourself, then well and good. Nothing like it. But if you can’t, it does make sense to introduce an investment advisor in your financial life who can properly do a financial planning exercise with you. It’s just like a doctor. You can handle few medical issues on your own. But if things seem to be getting out of control, then it’s best to bring in a doctor. By bringing a doctor in the mix in time, you reduce the risk of future deterioration and the need for complex surgery later on.
So that’s it. I hope you found this discussion about the Top 7 investment options for salaried Indians (2023) useful.