It is that time of the year again. Students at professional institutes, from Indian Institutes of Engineering (IITs) to Indian Institutes of Management (IIMs) and others, would now be either done with campus placements or be in the middle of the interviews or awaiting the companies to come to their institutes.
After years of studies and living on a student budget, it is natural to look forward to a dreamy life—buying new gadgets, going out more often to eat, dressing up well, purchasing a vehicle, etc. But while doing it, it is also important to start thinking about saving and investing early in life.
One of the questions individuals often face is which investing instrument to start with. "The selection of the investment instrument depends on various factors, and you need to ask yourself certain questions. One, why is the investment being made, or what is the goal? Two, how much risk is the person willing to take? Three, how long can the investor hold the investment? Four, what is the tax slab of the investor?" says Kiran Telang, a Mumbai-based Certified Financial Planner.
Once you have the answers to those, the choice will be easier. Here's a list of three simple-to-understand instruments that can help you build a savings habit and serve you over various periods.
Public Provident Fund (PPF)
Moreover, it is a long-term saving instrument that can help build a saving habit and a kitty for the future. The government-backed instrument has various benefits, such as tax saving, tax exemption on interest and withdrawal, loan facility, partial withdrawal, and decently higher interest rates.
PPF works for young investors as the investment size is flexible. One can start saving in this account with a minimum of Rs 500 per year. You have the flexibility of putting money regularly in this account throughout the year, up to Rs 1.5 lakh, which is the maximum annual limit.
Moreover, the long lock-in period of 15 years can help you build a kitty. However, there is a partial withdrawal option after five years, excluding the year of account opening (if the account opened during 2010-11, the withdrawal could be made after 2016-17). Even if you have not fixed your goal yet, saving in this scheme will ensure you have a kitty after 15 years, which can be deployed as per your needs. If you don't need the money, you can extend the account in blocks of five years. So, you can remain invested in the fund after the lock-in period and keep earning interest.
At present, the scheme is offering 7.1 per cent annual interest. The interest is reviewed quarterly by the Government of India, and the amount of interest is credited annually at the end of every financial year, March 31.
Mutual Funds
Equity exposure at a younger age is advisable as there is typically enough time for such individuals to grow their money due to the long horizon of their goals, such as retirement.
Rushabh Desai, Founder of Rupee With Rushabh Investment Services, says, "Any investment should be based on one's goals, risk appetite, time horizon, and asset allocation. If you are 20-25 years old and have no financial burden or responsibilities, investing a higher allocation towards equity asset class for the long-term would be ideal. The compounding process takes time, and the earlier you start investing in equity, the higher are the returns."
One of the easiest ways to invest in the stock market is the equity and equity-oriented mutual funds, which have also become popular lately. As per the Association of Mutual Funds of India (AMFI), the total number of mutual fund folios or accounts stood at 14.42 crore as on February 28, 2023, where the maximum investment came from retail investment at around Rs 11.54 crore.
A popular investment choice within equity mutual funds is equity-linked savings schemes (ELSS) that come with a lock-in of three years and also offer tax deduction benefits.
Mutual funds are available across investing categories such as equity, debt and hybrid, and you can choose the one that suits your needs. For instance, depending on your investing horizon, you could choose debt or hybrid mutual funds for short-term goals.
The investment size in mutual funds could be as small as Rs 100, and you can trust the fund manager to make the right choices for you instead of researching stocks on your own. Plus, the systematic investment plan (SIP) facility can help build a saving habit.
Fixed Deposits (FDs)
FDs with banks and post offices have been a preferred instrument for decades because of the guarantee and security they offer. The interest rates have been on the rise recently, and these could be a good option for lump sum savings. For regular savings, you could also look at recurring deposits (RDs) that allow you to save every month.
Note that there are many more instruments to choose from, but the choice will depend on your preference and circumstances. Before selecting any instrument, check the returns, taxability and suitability. Consulting a financial advisor can help you do so.
