Investments in India: Meaning, Types, Best Plans & How to Start Investing

Investing is allocating money to assets in the hope of improving one's financial future. Investments are made with the view of earning returns, which grow the amount invested to a higher sum. This article has covered the importance of investing.

What is Investment?

An investment involves allocating money into assets to generate returns, thereby enhancing your financial future. By investing, you aim to grow your wealth over time, ensuring economic security and the ability to meet long-term goals. Investments can range from stocks and bonds to real estate and cryptocurrencies, each with a risk and return profile.

Why Should You Invest?

Investing is essential to achieve your financial goals. By making investments, you are also saving and accumulating a corpus for a rainy day. Apart from that, making regular investments forces you to set aside a sum regularly, thereby helping you instil a sense of financial discipline in the long run.

Impact of Inflation and the Importance of Investing

Inflation, in simple terms, is a surge in the price of materials and services. It decreases the worth of your money and reduces your purchasing power. When there is a rise in the inflation rate, you buy fewer things with the same amount of money. You have no control over the inflation rate. 

To stay ahead of inflation, you need more money to purchase the goods you intend to purchase in the future with the money you have today. But money doesn’t grow on its own. If your money has to grow, then it has to earn returns. To earn returns, you need to invest. 

Therefore, making investments is necessary to tackle inflation. Inflation at the rate of 8% means that you need 8% more money than what you have to purchase the same item next year. Here’s how inflation at 8% reduces the worth of Rs 1 lakh over eight years.

It is very important to earn inflation-beating returns. Otherwise, you may not be able to afford materials and services in the future from the savings you are making now.

Why Should you Invest

Early investing leverages the power of compounding, allowing your money to grow exponentially. For example, Rs 10,000 invested at 10% annually grows to Rs 25,937 in 10 years, but to Rs 67,275 in 20 years. Starting early maximises returns, mitigates inflation, and builds a substantial corpus for future needs.

Types of Investments

You have numerous investment options to choose from. You have to assess your requirements and risk profile before deciding to invest in any particular investment option. Investments are broadly divided into active and passive. Active investment requires you to dynamically change assets in your portfolio, depending on the market and economic developments. 

You need to have enough time and knowledge of investments to indulge yourself in active investments. Equity investments are the best example of active investments. On the other hand, passive investments do not require you to be hands-on with your investments. You invest your money and stay invested for a certain duration of time. 

It is also referred to as the buy-and-hold strategy of investment. This investment strategy is advisable for those who can’t spare time to manage their investments. The following table shows the significant differences between active and passive investments.

You have to choose to adopt either an active or passive strategy after you have assessed your requirements and risk tolerance level.

Types of Investments

Investments are broadly categorized into active and passive strategies:

Active Investments: 

Require frequent monitoring and adjustments based on market trends. Suitable for those with financial expertise and time, these involve higher risks and costs due to regular trading but offer potentially higher returns. Example: Equity investments.

Passive Investments: 

Fixed deposits or mutual funds involve a buy-and-hold strategy and require minimal management. Ideal for those with limited time, they carry lower risks and costs but typically yield lower returns.

Popular Investment Options in India

You have numerous investment options to choose from. However, you must ensure that you invest in only those options that meet your risk tolerance and serve your requirements.

The following are the top 7 investment options in India:

Direct Equity 

Direct equity, commonly referred to as investing in stocks, is the most potent investment vehicle. When you buy a company’s stock, you buy partial ownership of that company. You directly invest in the company’s growth and development.

You need to have enough time and possess market knowledge to benefit from your investment. If not, then investing in direct equity is as good as speculation.

Publicly listed companies offer stocks through recognised stock exchanges. Stocks can be bought by any investor who has a Demat account and has undergone KYC verification. They are ideal for long-term investments.

You must actively manage your investments, as various economic and business factors influence stocks. You also need to understand that returns are not guaranteed and be willing to assume the associated risks.

Mutual Funds 

Mutual funds have existed for the past few decades and are gaining popularity among millennials. A mutual fund pools investments from various individual and institutional investors who have a common investment objective.

The pooled sum is managed by a finance professional called the fund manager, who invests in securities and assets to generate optimum returns for investors. Mutual funds are broadly divided into equity, debt and hybrid funds. 

Equity mutual funds invest in stocks and equity-related instruments, while debt mutual funds invest in bonds and papers. Hybrid funds invest across equity and debt instruments. Mutual funds are flexible investment vehicles, in which you can begin and stop investing as per your convenience. Any individual may consider investing in mutual funds. 

You don’t need to have time or knowledge to invest in mutual funds, as the fund manager takes care of portfolio construction, and you only have to invest. However, it is advisable to invest in only those funds whose risk levels and objectives match yours. 

Returns are not guaranteed as they are dependent entirely on market movements. Note that a fund's past performance does not indicate future returns.

Fixed Deposits 

Fixed deposits are an investment option offered by banks and financial institutions under which you deposit a lump sum for a fixed period and earn a predetermined rate of interest. Unlike mutual funds and stocks, fixed deposits offer complete capital protection as well as guaranteed returns. However, you compromise on the returns as they remain the same. 

Fixed deposits are ideal for the conservative investor. The interest offered by fixed deposits changes according to economic conditions and is decided by the banks based on the RBI’s policy review decisions. 

Fixed deposits are typically locked-in investments, but investors can often avail of loans or overdraft facilities against them. There is also a tax-saving variant of fixed deposit, which comes with a lock-in of 5 years.

Recurring Deposits 

A recurring deposit (RD) is another fixed tenure investment that allows investors to invest a fixed amount every month for a pre-defined time and earn a fixed rate of interest. Banks and post office branches offer RDs. The interest rates are defined by the institution offering it. 

An RD allows investors to invest a small amount every month to build a corpus over a defined time period. RDs offer complete capital protection and guaranteed returns. Like fixed deposits, RDs are recommended for risk-averse investors.

Public Provident Fund 

Public Provident Fund (PPF) is a long-term tax-saving investment vehicle that comes with a lock-in period of 15 years. The Government of India and the sovereign guarantees back your investments, offering it. 

The government of India revises the interest rate offered by PPF quarterly. The corpus withdrawn at the end of the 15 years is entirely tax-free in the investor’s hands. 

PPF also allows loans and partial withdrawals after certain conditions have been met. Premature withdrawals are permitted to meet certain conditions, and you can extend your investment in a five-year block upon maturity.

Employee Provident Fund 

Employee Provident Fund (EPF) is another retirement-oriented investment vehicle that helps salaried individuals get a tax break under the provisions of Section 80C of the Income Tax Act, 1961. 

EPF deductions are typically a percentage of an employee’s monthly salary, and the employer also matches the same amount. Upon maturity, the withdrawn corpus from EPF is also entirely tax-free. 

EPF rates are also decided by the Government of India every quarter, and the sovereign guarantees back your investments in EPF. You can contribute more than the minimum prescribed amount under the Voluntary Provident Fund (PPF). 

However, you must note that you can access your EPF investments only by meeting specific criteria, and your EPF account matures only when you retire.

National Pension System 

The National Pension System (NPS) is a new tax-saving investment option. Investors who subscribe to the scheme will be locked in until their retirement and can earn higher returns than PPF or EPF. 

This is because the NPS also offers plan options that invest in equities. The maturity corpus from the NPS is not entirely tax-free, and a part of it has to be used to purchase an annuity that will give the investor a regular pension. 

You can withdraw only up to 40% of the entire corpus accumulated as a lump sum, while the remaining goes towards an annuity plan. Some government employees are compulsorily required to subscribe to NPS.

Which Investment Option Should You Choose?

Selecting the right investment depends on your financial goals, risk tolerance, and investment horizon. Consider the following factors:

Risk Tolerance

High-risk options like stocks or equity mutual funds suit aggressive investors, while FDs and PPF are better for conservative ones.

Investment Horizon

Long-term goals (e.g., retirement) align with PPF or NPS, while short-term goals may favor FDs or debt funds.

Financial Goals

Define whether you’re saving for a house, education, or retirement to choose aligned instruments.

Liquidity Needs

FDs and mutual funds offer better liquidity than PPF or NPS, which have longer lock-ins.

Tax Benefits

Options like PPF, EPF, and NPS provide tax deductions under Section 80C, enhancing returns.

How to Invest in US Stocks from India

Investing in US stocks from India is accessible through:

• Indian Brokers with International Access: Platforms like Zerodha or ICICI Direct partner with US brokers to offer trading accounts. Open a Demat account and complete KYC.
• Direct Investment Platforms: Apps like Groww or INDmoney allow seamless investment in US stocks. Link a bank account for remittances under the Liberalised Remittance Scheme (LRS), with a $250,000 annual limit.
• Mutual Funds/ETFs: Invest in US-focused mutual funds or ETFs through Indian platforms for diversified exposure without direct trading. Ensure compliance with RBI regulations and consider currency risks and brokerage fees.

How to Invest in Crypto in India

Cryptocurrency investments in India are gaining traction, though unregulated.

• Crypto Exchanges: Some crypto platforms allow the buying of cryptocurrencies (e.g., Bitcoin and Ethereum). You must register, complete KYC, and link a bank account.
• Wallets: Store crypto in secure digital wallets for safety.
• Taxation: Crypto gains are taxed at 30% with a 1% TDS on transactions above Rs 50,000.
• Risks: High volatility and regulatory uncertainty require caution. Start small and research thoroughly.

Conclusion

Investing is a crucial strategy for enhancing financial security and combating inflation, as it allows individuals to grow their wealth over time through various asset classes. By starting early and choosing the right investment options based on personal goals and risk tolerance, one can effectively build a robust financial future.