Financial literacy

Finance is very important in life. I did not know how to save money for many years even after my employment. There are many like me in India. In India, people are not that financially literate. There are so many cases of cheat funds and bank frauds which eat away hard-earned money of innocent people. In recent times, we have come across many cheat fund cases like Sahara, Saradha, Rose valley etc. These small financial organizations have operated for years in India taking advantage of the loopholes in Indian laws. These cheat funds promise to double money in record time without giving you a sustainable business model. This is all due to illiteracy widely prevailed in India regarding financial matters. People of the highest intelligence or acumen also step into these traps. I have come across people like professors, doctors, engineers who have invested in those short-lived funds. After a few months or years, these organizations cease to operate. People line up in long ques to withdraw money. Some invest their lifelong savings and live in eternal distress. Therefore, we need to avoid such kind of organizations because they lead to distress in life only. Let us learn a few things in simple words regarding financial literacy.

What is an asset? What is the liability?

I have read the the book “Rich Dad, poor dad” by Robert Kiyosaki. It is an eye-opener. An asset is something that helps you to earn money. Some people think that a flat is an asset. Yes, it will be an asset if you rent it and earn something out of it or you buy and sale flats very frequently for profit. If you are using it to live, you can consider it shelter which is not giving you anything. Similarly, your car, refrigerator, TV, washing machines etc. are not an asset. We always have the wrong idea about the asset.  What could be an asset? Well in modern times, you can consider yourself as an asset of the family or anything that helps you earn money. Suppose you have developed some mobile apps, youtube channels, blogs, software, wrote a book etc that helps you to generate some income can be considered an asset. Well, you have to use your own idea in this regard. Therefore, you need to observant in this regard. Now, let us come to liability. Suppose you have to pay something to someone for the services you are having. Your TV is a liability. You have to pay Rs 400-500 per month to watch it. It is generating income for someone else but not for you. Well, without TV, how can anybody live? Please don’t disconnect TV after reading it. We need to find other ways to generate some revenue with limited opportunities. You have to use your ingenuity in this regard.  

Where to save?

I have already discussed that we tend to invest in wrong places. Recently, we have come across many bankrupt banks and shadow financial organizations such as PMC, Yes bank, Saradha, Sahara, Rose valley etc. PMC is a cooperative bank and Yes bank is private banks. These banks have given loans to individuals or company who cannot pay. They gave loans aggressively by taking deposits at the highest interest rates than market rates. Since they could recover the money handed as loans; they went bankrupt in lament sense. They could not raise money from the market also by selling their equity due to a bad name.  This way the investments of small investors stuck in the bank. Recently, the Government has taken care of things by allowing SBI to lift Yes bank from this mess. But, this is going to be trouble for SBI too. The cumulative non-performing asset due to Yes bank bailout may be on the shoulder of SBI which in turn pose threat to depositors of SBI. Moreover, many mutual funds have invested in Yes bank. So, the money invested in those mutual funds is stuck. Well, looking at this scenario where do we keep our money. In that case, we need to always avoid cooperative banks like PMC or any other to save money. The banking operations by these types of banks are very shadowy. PMC has given 60% of its loans to a single entity increasing risk. Also, if you are going for any private bank, you need to check the health of the bank in the current situation. Try to find its liability and non-performing asset currently standing. Nonperforming asset (NPA) means the money which is never coming back to the bank. It is lost and written off. Apart from that, we need to check the provisioning of the bank. This is the money which a bank keeps aside for such a situation. You can assess the bank based on these parameters. Generally, it is safe to save money in nationalized banks since the Government generally comes to rescue at such a situation. But, some money should be saved in good private banks too so that you do not keep all the eggs in the same basket.

Which scheme to take?

There are hundreds of schemes for saving. When you open a bank account, you open a savings account. This is the basic type of account. The interest rate in the savings account is not very much. It is always the lowest. But you can withdraw the saved money at your will. Now a day, the interest rate is 2.5 to 3%. But you have a lot of other options such as

(1) Recurring deposit (RD)

(2) Fixed deposits (FD)

(3) Equity-linked savings scheme (ELSS)

(4) New pension scheme (NPS)

(5) Unit linked Insurance plan (ULIP)

(6) Public provident fund (PPF)

(7) Sukanya samridhi Yojana (SSY)

(8) National savings certificate (NSC)

(9) Senior citizen savings scheme (SCSS)

(10) Life Insurance

(11) SIP (Systematic investment plan)

(12) Stocks

(13) Gold bonds

One has to concentrate on diversifying his investments in these different types of schemes. That means one has to work continually to develop the financial profile. When you diversify your profile, there is a better chance of avoiding any kind of misfortune. The concept is ‘Do not put your all eggs in the same basket’. When you have access to internet banking facility, you can easily open and close RD & FD at your will. Keeping money in the savings scheme is not very wise.

Recurring deposit (RD)

RD is a term deposit. One can invest as low as Rs 500/- on a monthly basis. The interest rate can be earned as that of fixed deposit. This motivates regular earning individuals to save on a regular basis rather than waiting for bulk deposits. If you have online banking, you can easily open and close an RD at the click of the mouse. Generally, you can invest for 1-5 year or maybe more depending on bank. If you close RD account prematurely, you are to pay penalty. Moreover, the interest earned above Rs 40,000 is liable to be taxed. Tax deducted at source (TDS) is 10%. Go to: https://en.wikipedia.org/wiki/Recurring_deposit  

Fixed Deposit (FD)

FD is a deposit having a lock-in period. The interest rate offered by FD is higher than the savings account. If you have a decent sum of the money needed to be saved for a long period, you can take advantage of this financial instrument. There is flexibility in saving time period also. You can invest as low as for 7 days or as high as 10 years. This can be opened and closed easily like RD in internet banking. It takes a few minutes only. Higher the term period, the higher is the income as interest. You can take a loan against the fixed deposits. FD incomes are liable to TDS if the interest exceeds Rs 10000 in a particular financial period. Go to: https://en.wikipedia.org/wiki/Fixed_deposit

Equity-linked savings scheme (ELSS)

This saving the scheme is linked to equity. This scheme is provided by some mutual funds in India. You can consider it a kind of mutual fund in a sense. You can deposit as the bulk sum or through a systematic investment plan (SIP) or in simple words EMI. The income may vary since it depends on the stock market. It offers tax benefits under 80C of Income Tax Act 1961. It has a lock-in period of 3 years. Go to: https://www.paisabazaar.com/mutual-funds/what-is-elss/ 

New pension scheme (NPS)

The scheme was launched by Government of India in January 2004 for the Indian citizen to provide retirement income. This fund is looked after by the Pension Fund Regulatory and Development Authority of India. This can be availed by any Indian citizen within the age group of 18-55. One can invest in NPS through banks, financial institutes or insurance companies. At the time of retirement, one can withdraw only 60% of the total maturity fund and the remaining 40% cannot be withdrawn. This 40% goes to retirement investment which can be withdrawn on a monthly basis as a pension. The NPS gives 8-10% return which is higher than many of the investments. One can claim Rs 1.5 Lakh in tax deduction under 80C of Income Tax Act of 1961. NPS is very flexible. Go to: https://economictimes.indiatimes.com/mf/analysis/nps-frequently-asked-questions/articleshow/58959509.cms       

Unit linked insurance plan (ULIP)

This scheme is offered by insurance companies. It was first started by Unit Trust of India (UTI). This is a hybrid scheme having characteristics of insurance plan and mutual fund. Some portion of the premium goes to the insurance cover of the holder and rest goes to the equity as the investments. The policyholder is given NAVs like the mutual fund to his/her ULIP fund. Based on NAV, the net rate of return is calculated. NAV of each ULIP varies depending on the market. The benefits are simple; market-linked returns, insurance cover & investment at the same time, tax rebate under 80C of Income Tax Act 1961 and flexible. Go to: https://en.wikipedia.org/wiki/Unit-linked_insurance_plan   

Public Provident fund (PPF)

 

PPf can be opened in post offices and banks. It is a fixed income investment. One should be careful that one cannot withdraw the fund for 15 years. If you have money which can be spared for many years, you can put in PPF. Moreover, it has a great deal of flexibility in depositing. You can deposit as a lump sum or as EMIs limiting to 1.5 Lakhs annually. Moreover, you can show this investment for tax rebate during your tax filing under 80C of Income Tax Act 1961. Currently, the interest rate is 7.1% which is the highest among any kind of such investments. For more details, go to https://www.paisabazaar.com/saving-schemes/ppf/

Sukanya Samriddhi Yojana (SSY)

Sukanya Samriddhi Yojana (SSY) was launched by the Government of India as an initiative to 'Beti Bachao Beti Padhao'. One can open SSY for girl child only account in post offices or any banks. The interest rate is 8.1%. It provides income tax benefits as per section 80 C of IT act 1961. One can deposit a maximum of 1.5 Lakhs in each financial year. The account remains operative until the girl child turns 21 years or till the marriage whenever she turns 18 years. Go to details: https://economictimes.indiatimes.com/wealth/invest/all-you-need-to-know-about-sukanya-samriddhi-yojana/articleshow/55872922.cms

National Savings Certificate (NSC)

It can be purchased by any Indian national by visiting Post offices. It is offered in denominations of Rs 100, Rs 500, Rs 1000, Rs 5000, and Rs 10,000. It is a low-risk investment. It has lock-in period of 5 years. One can deposit any amount he likes. There is no cap. But, one can claim tax benefits up to 1.5 lakhs under section 80 C of IT act 1961.  Currently, the interest rate is 6.8 %. Go to details: https://www.paisabazaar.com/saving-schemes/national-savings-certificate/

Senior Citizens Savings Scheme (SCSS)

SCSS is a low-risk government investment product. One can deposit money up to Rs 15 lakhs in this fund for 5 years period. After five years, the amount matures and can be withdrawn. Though there is provision for early withdrawal, the penalty is to be paid on such withdrawal. This product is for senior citizen above 60 years of age. If you have piles of money, you can save by opening an SCSS under parents name and save for 5 years and garner good interest. Currently, the interest rate is 7.4%.  Go to https://www.paisabazaar.com/saving-schemes/senior-citizen-savings-scheme/   

 

Life Insurance

One can invest in the life insurance policy in any kind of banks or different financial bodies authorized by the Government of India. It is better to go for reputed options rather than investing in shadow bodies. It is a contract between policyholder and insurer that upon payment of premium the insurer will release the policy amount on the death of the policyholder. Generally, insurance policy is done for the earning member of the family. Go to: https://en.wikipedia.org/wiki/Life_insurance

SIP (Systematic investment plan)

SIP is a mutual fund product. This may be directly market-linked garnering higher returns or hybrid type reducing risk. Moreover, it is a low-risk option since it takes advantage of long term investment in a systematic manner and law of compounding & average costing.  One can invest in SIP as low as Rs 500 or higher amounts as he pleases every month. To start a SIP, one should have a Demat account. One can view his holding equities as a SIP investment in his account statement. Go to: https://www.sbimf.com/en-us/sip/what-is-sip

Stock

Stocks are issued by public listed companies who want to draw investments from the market. Having a stock by anyone, he is a shareholder or owner of the company by the share amount in lament change. One can invest in stocks if you have a Demat account. You can have Demat account in any banks or going to different agencies such as Karvy, IIFL etc. You can trade stocks every day like buy or sell or you can hold stocks for long terms. But investment in stock is risky for a novice. In that case, you can take the help of the fund manager. Go to https://economictimes.indiatimes.com/definition/Stocks

Gold Bonds

It is issued by Reserve Bank of India. It can be applied through designated banks and post offices. It is better to have gold bonds rather than physical gold for many reasons such as theft, purity issues, renting of locker for gold in banks etc. Any Indian citizen can buy gold bonds. Even a minor can buy gold bonds. On maturity, one gets paid at the market value of gold.  Go to: https://m.rbi.org.in/Scripts/FAQView.aspx?Id=109