How to grow your money — Personal Finance for Millennials Part 2
Lessons on savings taxes as well as protecting and growing your money.
This is the second part of the Personal Finance for Millennials series. If you haven’t read part 1 yet, read it here.
How and where to invest your money
There are many kinds of assets and investment schemes where you can invest your money. These are stocks, mutual funds, provident funds, fixed deposits, real estate, gold, cryptocurrency, etc. Some assets/schemes generate higher returns for you and some generate lower returns. The catch is, if you want higher returns, you will have to take higher risks. Now let me talk about various asset classes and schemes one by one.
Fixed Deposits (FD)
Fixed deposits are the first love of Indian generation X. Fixed deposits are usually offered by banks and some NBFCs (non-banking financial companies). With FDs, you deposit some lump sum amount of money for a set amount of time and you get fixed interest, which is usually 5%-7% depending on the amount, time, and bank. When you invest in an FD, you already know how much money you will receive after maturity because the interest rate is fixed.
Let’s talk about the pros of FDs
- Fixed interest rate / returns
- Very low risk
- Investments in FDs can be used as a tax deduction under Section 80C
The cons (which outweigh the pros in my opinion)
- Returns are very low by today’s standards (only 5%-7%)
- Returns are taxable according to your income slab
- Not enough liquidity, as you can only withdraw the invested amount after maturity. Some banks allow you to withdraw before maturity, but you have to pay a penalty.
Given that returns are usually only 5%-7% and are taxable, you may likely lose your money to inflation, which is why I don’t recommend investing in FDs.
Public Provident Fund (PPF)
PPF is a long-term investment cum tax-savings scheme backed by the Government of India (GoI). Under this scheme, you can invest a minimum of INR 500 and a maximum of INR 1,50,000 in a fiscal year. It offers a moderate return that is higher than FDs. The interest rate is set by the Finance Ministry each year so it can vary. For the current fiscal year (FY), it’s 7.1%.
- Very low risk as it’s backed by GoI.
- It has an EEE status, which means the investment you make in PPF can be used as a tax deduction under Section 80C. Also, the accumulated amount and interest (return) you receive in a PPF are tax-free.
- Higher returns than FDs.
- As it’s a long-term investment scheme, it has an initial maturity period of 15 years, which means the entire sum cannot be withdrawn before that. However, partial withdrawals can be done after 5 years. After the maturity, the scheme can be extended in blocks of 5 years.
The best part of PPF is it’s entirely tax-free. So it can be used for investment and tax savings as well. However, compared to stocks and mutual funds, PPF still gives less returns.
I mentioned earlier that owning a business and making money as your business grows is one of the best ways to make money work for you. Don’t worry if you don’t have a business though, as you can buy some stake in a business through stocks. If the business does well, stock prices appreciate and you can get rich. Stocks are one of the higher returns-yielding assets. But with higher returns come higher risks. In India, you may have been told by generation X relatives not to invest in the stock market because it’s like gambling. Yeah, they are right, it’s like gambling, but only for people who invest their money in penny stocks or in stocks they know nothing about (because somebody gave them a “tip” to invest and double their money in 2 days). There is no shortcut to getting rich in a few days with the stock market. If you are going to invest with the intention to multiply your money in a few days, there is a very, very high risk that you are going to lose a lot of money. I can’t teach you how to become an experienced investor, but I am going to talk about what you shouldn’t do to lose your money in the stock market, and how to get moderately good (12%-15%) returns.
How to not lose your money in the stock market
- Don’t invest in stocks you know nothing about — The biggest mistake people make is investing in stocks they don’t know anything about because somebody gave them a “tip” that the stock will go up shortly. What happens? They buy the stock, it goes up. They become more greedy and invest more money in the same stock, but then it goes so down they lose most of their money. This happens a lot. Many people also invest in penny stocks (stocks that are ultra-cheap), hoping that one day it’s gonna go up, but then it never goes up and instead loses more of its value. Rather than doing this, a fairly good starting approach is to invest in brands you use daily — brands where you would recommend their products to others. Another approach is to invest in stocks that are market leaders in their sectors and you know them well.
- Understand your investment profile — Every investor has a different investment profile. This is how much money you would like to accumulate in a period of time and the risk you’re willing to take to do so. If your goal is to accumulate 10 lacs in 3–4 years to buy a car, you will need higher returns, which means you will likely have to take higher risks. If you want to accumulate a corpus amount for your retirement, you might want to take moderate or low risks. If you are in your early twenties, you can likely take higher risks for higher returns. If you are in your thirties or forties, you might not want to take high risks, which means you will also have to expect moderate returns.
- Don’t try to time the market — You need to understand that as a long-term investor you shouldn’t time the market. It’s very difficult to guess a stock’s highs and lows, and it’s a very risky thing to do. Some investors wait for the market to go down to invest but it’s not easy to guess and it happens very rarely. During the COVID-19 pandemic, stocks markets all over the world fell by 30%-50%, but this is a once-in-a-decade event — it happens very rarely. There is a difference between a trader and an investor. A trader is a person who buys stocks at the beginning of the day and sells in a few hours. You are an investor, not a trader. In the long-term, investments tend to climb up (given that you have invested in a balanced portfolio).
- Don’t let emotions drive your investment decisions — The stock market is very volatile. If you own some stocks of a company and its price starts to go down to a point where you are in a loss, you sell off the stock in panic and suffer a loss. But what if after a few days that stock price goes up again? Your emotions just incurred you a loss which could have been avoided if you hadn’t made this decision because of your emotions. Remember, you are investing for the long term.
- Diversify — Try to diversify your portfolio in different sectors. This way, even if one sector is not doing well in the market, you are still protected by other sectors. For example, if you own stocks that belong to FMCG, finance, and IT sectors, even if the finance sector is not doing well in the short term, you still have stocks in other sectors to protect you. You can also consider geographic diversification, which means owning stocks of companies in other countries like the US, Japan, Hong Kong, etc. I will cover this shortly.
- Keep your returns expectations real — You may find some stocks which give over 100% returns in a year but are very unpredictable and risky, so keep your expectations real. One can expect returns in a range of 12%-35% in the long term, depending upon the investment profile.
How to invest in the Indian Stock Market
To invest in the Indian stock market, you need to open a Demat account first. There are so many discount brokers available online you can use to create your Demat account. I use Zerodha and I find it pretty good, but there are a few others like Upstox and Groww. Once you open a Demat account, it can be funded using your bank account and you can start investing right away!
Open a Zerodha Demat Account here.
Pre-built Portfolios (smallcases)
If you neither have the experience nor the time like me to do the research and come up with an investment strategy, this is a really good way to invest in the stock market. Smallcase is an awesome product that lets you invest in some pre-built portfolios built by experts. There are dozens of portfolios based on various strategies and have been backtested. All the portfolios are created by SEBI-certified investment advisors. You can choose the portfolios based on volatility (high, medium, low). A higher volatility means higher risk. So you can choose the portfolios based on your investment profile. A pre-built portfolio is a kind of like a mutual fund. The portfolio consists of many different stocks with some weightage and there is a minimum investment amount required to invest in a portfolio. I find it better than a mutual fund because I have full transparency and control of what I own. Smallcase is supported by 12 stockbrokers right now, including Zerodha and Upstox. So when I invest in a portfolio, I can see the holdings on my Zerodha account.
There is an All Weather Investing smallcase that consists of equity, gold, and debt, which makes it low volatile and recession-proof. If you are looking for an investment instrument that gives you more returns than FD and lower risk, you should go for it.
The pros of investing in the stock market:
- Higher returns
- High liquidity
- Low tax rate if your income is higher: For short-term capital gains (if equity was sold within a year of purchase) tax rate is 15% on profit. For long-term capital gains (if equity was sold after a year of purchase) 0% up to profit INR 1 lac and 15% above 1 lac. Tax on long-term capital gains can be minimized or avoided using a technique called Tax Harvesting.
The cons (which can be totally avoided if you are careful):
- High volatility in the short term
Invest in US Stocks from India
If you want to invest in the companies you love, then you should consider investing in the US stock market. Many people think it’s not legal to invest in the US stock market, but that is not true. You can invest in the US stock market from India legally, and you don’t have to pay any brokerage fees for it. The US stock market is the world’s largest stock market with a $44 trillion market cap as of Jan 2021. All of my favorite brands which I use daily — Google, Facebook, Apple, Adobe, Atlassian, etc. — are listed in the US stock market. Also, the US stock market has yielded more returns than the Indian stock market in the past decade.
Last but not least, INR has depreciated by more than 44% against the USD in the past decade. If you had invested INR 4,921 (USD 100) in January 2010 in the SENSEX, your investment would have grown to INR 11,564 (USD 162) over a 10 year period. But had you invested the same INR 4,921 or USD 100 in the US stock market, the investment would have grown to INR 19,149 (USD 268) [read more here].
The pros of investing in the US stock market from India
- Higher returns than the Indian stock market.
- You can invest in global brands like Apple, Tesla, Google directly.
- INR depreciated against the USD in the past decade, making US stock market returns even higher in comparison.
- Fractional share investing. If 1 share of Tesla costs USD 750 currently, but you can buy even just 0.1 shares.
The cons of investing in the US stock market from India
- To be able to invest in US stocks, you need to deposit USD in your US brokerage account. To deposit the USD, you need to remit INR from your bank account to a US bank account. Though banks like HDFC, ICICI, Kotak, etc. support online remittance facilities, some banks may require you to visit the bank to remit the money.
To invest in the US stock market, you need to open a US brokerage account. Using Vested, you can open the brokerage account in minutes, and invest commission-free.
Use this link to open a Vested account and get $5 when your KYC is approved.
Disclosure: I am a Software Engineer at Vested. However, these views are my own, not of Vested.
Mutual Funds / ETFs
If you don’t have the time or experience to invest in stocks, you can still invest in the stock market using Mutual Funds. There are various types of Mutual Funds: equity funds, debt funds, hybrid funds, etc. As the name suggests, Equity funds consist of stocks, debt funds consist of bonds, treasury bills, etc, and hybrid funds can have many asset classes. Mutual funds can yield 7%-25% returns based on asset classes. Equity funds are at higher risk, hence they also yield high returns. Debt funds have low volatility and risk, so they yield low returns as compared to equity and hybrid funds. You can invest in mutual funds in 2 ways:
Lump-Sum Investment — You can manually invest a lump-sum amount in a mutual fund. There is no limit on how many times or how much you can invest.
Systematic Investment Plan (SIP) — SIP is a great way to build an investing habit. When you start a SIP, you set an amount that gets invested into a mutual fund every month for a period of time. Currently, this is one of the most used ways to invest money. If you don’t want to invest in the stock market yourself, you can just start SIPs for a few equity mutual funds.
ELSS Funds — ELSS (Equity Linked Savings Scheme) funds are a kind of mutual fund that helps you save taxes. Investment in ELSS mutual funds can be claimed as tax deductions under section 80C.
The pros of investing in mutual funds
- It is a great option for people having no experience or time to invest in the stock market.
The cons of investing in mutual funds
- Mutual funds charge a maintenance fee to manage your money, this is also called an expense ratio. For example, if you invested INR 1 lac in a mutual fund that has an expense ratio of 2%, you will pay an annual fee of INR 2,000 to the fund manager to manage your funds. It has a range of 0.5%-4% depending upon the mutual fund.
Investing in mutual funds through SIP is the easiest way to invest your money. If you invest in equity-based mutual funds, you can expect good returns. Investing in mutual funds also offers good liquidity as you are free to sell your investment at any time in the time of need. You don’t need a Demat account to buy mutual funds. You can use apps like Zerodha Coin, Groww to buy mutual funds. Lastly, taxes on mutual funds returns work the same way as stocks for equity funds and hybrid funds that have at least 65% stocks. If you invest in debt funds, then for short-term capital gains (sold within 36 months) it’s according to your income slab, for long-term capital gains it’s flat 20%.
ETFs are similar to mutual funds, except they can directly be traded on stock exchanges. Similar to mutual funds, ETFs may have stocks, gold, bonds, etc in their composition. You need a Demat account (for the Indian stock market) and a US brokerage account (for the US stock market) to invest in ETFs.
When you think of real estate, you think of home. But here I am going to talk about real estate as an investment. If you want the real estate for yourself to live in, it may not be an investment. There are two major ways to make money from real estate investments.
- Real Estate Appreciation — When the value of a property increases due to a change in the real estate market. For example, if a major commercial hub is being built near your property, its value will appreciate and you can sell it for profit. However, it’s not predictable to guess if a property will appreciate in value which makes it a riskier investment.
- Cash Flow Income — In this kind of investment, you buy a property for tenant income. It could be a house, apartment, or commercial properties such as shops, office space, etc. However, you will have to deal with the maintenance and finding tenants.
The pros of real estate investment
- Less risk and volatility than the stock market
- Can be a good source of cash flow from tenants rent
The cons of real estate investment
- The potential for high returns is not much
- Real estate investments can require a lot of capital
- Dealing with maintenance and tenants can be difficult
- Poor liquidity — you can’t sell your property quickly in the time of need
In my opinion, Real estate investments have more cons than pros. First, you need a lot of cash to buy a property. Also, I don’t recommend taking a loan of more than 50% of the amount to buy the property, else the interest you will pay on the loan will hamper the returns. However, if you still want to invest in real estate, you can do that through mutual funds and ETFs. There are a few mutual funds in India that invest your money in real estate. You can also invest in real estate ETFs directly on Indian or US stock markets.
Gold is one of the most preferred investments in India due to its inflation-beating capacity and high liquidity. Investment in gold can be done in many ways such as buying jewelry, coins, bars, digital gold, gold funds, gold ETFs and gold bonds.
When you buy gold physically, if it’s jewelry there will be making and labor charges included, so you need to keep that in mind. Also, you need to keep it safe as it can be theft. You can also invest in gold by investing in gold ETFs available to trade on stock exchanges, or investing in gold mutual funds. Nowadays, you can even buy gold digitally. Digital gold is available on platforms such as Paytm Gold, and Groww. The advantage of buying digital gold is you don’t need to go anywhere, you don’t need to worry about storing it safely. You can invest as low as INR 100 in digital gold.
The pros of investing in gold
- High liquidity
- High returns in the long term
- Can also be worn as jewelry, can be used for social status in India.
- Physical gold needs to be stored safely
In my opinion, gold is a great investment option. It can be used in some part of your portfolio as gold has given good returns in recessions when stock markets failed.
It’s 2021. People are talking about bitcoin, ethereum, and dogecoin hitting a new high every few days. Should you invest in crypto? I have a mixed answer. Crypto is one of the world’s most volatile assets. You never know if it’s going to go up or not. In the future, if the governments decide to ban the use of crypto, you might lose all your investment, if people continue to adopt it, it will go up. What I can suggest is, you can invest a tiny fraction of your money in crypto. It’s possible that it can grow to a good amount of money or you can also lose it all.
You need to keep in mind that crypto is incredibly volatile. Bitcoin fell below $4,000 per coin in January of 2019 before hitting an all-time high (so far) at $64,750 on April 14, 2021.
There are a few apps you can use to invest in crypto from India like CoinSwitch, WazirX. Though I haven’t used any of them yet.
These are pretty much all the investment assets or savings schemes you can use to invest and grow your money.
Patience is the key
Time and patience are the two most important things when it comes to investing. A good investor is one who has patience. This is why it is important to give your investment time to grow. Start investing early and have patience. Even if you don’t have much money to invest right now, invest whatever you can. Even if you invest INR 1000 every month for 10 years and expect 12% returns, it will grow to INR 2,32,339.
Investing in money-making assets is a great way to create wealth. However, you should also invest in yourself to make yourself better, learn new skills to make more money. If you have more money to invest, you can always create more wealth.