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
