Investing Handbook for Indians: Chapter 1

Take your first and essential steps. Let’s get your money walking.

This is the 1st of the 10 chapter series where we are going to cover various investment instruments for all categories of investors. Whether you are a salaried employee, freelancer, running your own business or a student, it will be applicable and useful for you.
In this first chapter we will start with securing tomorrow. We are going to go big in terms of time and corpus. Let’s sort your retirement with some easy steps.

Before we do that, let’s get our mental foundation in place.

• Do not fall trap of the misguidance that your retirement planning is for later. Absolutely NOT! It’s right here. Right now.
• You need to save for the future only when you start making enough. Enough is a lie. Later never comes. You can start with a minimal amount that you wouldn’t otherwise notice and that little amount set aside now will make all the difference to your tomorrow.

I have often heard self-employed personnel and freelancers complain that investing is difficult for them. Someone else handles their finances. All they do is pump in the money. They are happy that their money is safe. They are happy escaping all the extra hassle.
Well, there are 2 major flaws to this arrangement. One, you are blocking yourself out of a life skill. Second, you’re avoiding responsibility of something that directly affects you and is yours.
Please do not be lazy with your money. You did not earn it by being lazy.

An employed professional (one Mr. Varun Awashthi) gets a nitro boost here since the organization he is working for has set up and is contributing to his pension fund every month. Even if she/he is not saving an extra rupee, their retirement corpus is being fed into monthly through instruments like PF and Gratuity deductions from the set CTC(cost to company for employing Varun).
On the contrary, my freelancer friend(Ms. Ruhi Basu) has all her earnings stockpiled in her savings bank account.
Someone suggested Ruhi to gather a corpus and convert it into a fixed deposit. On doing that, she will be parking her money someplace that gives her annual interest more than her savings account ever would. Also, money when left idle in her savings would get whiled away in unnecessary purchases. Ruhi feels powerful because she is about to take a step ahead.
We know better. We know this is silently eroding her hard earned bucks. (Read Fixed Deposits: The horror).
We do not want Ruhi to lose out in the long run.

Let’s walk through the proper channels of growth and allow money to unveil its true potential.

I will be discussing 3 instruments one can and should invest in right away irrespective of the kind or status of your employment/income. We will be going through the what(s), how(s) and why(s) of each of these. In the end, if you have any doubts and queries, feel free to shoot them through the comments section & I’ll be more than happy to address those.

Assumptions:

1. You are of legal age(18+)
2. Have valid IDs(Aadhar and PAN)
3. Hold an operational bank account

The stage is set, let’s get this party started!

1. Public Provident Fund

Public Provident Fund

• You are here for a slightly long term which means this is for building a corpus. The initial lock-in period is 15years followed by multiple 5 year voluntary extensions. This means that you cannot take your money out for 15years from the date you have started investing. Post completion of 15years, you can choose to invest for 5 more years, again and again.
• It’s a fund held and operated by Government of India and made accessible to investors (you and me) through national and private banks and post offices.
• Opening a PPF account is the easiest of the lot. If you have a KYC verified bank account(which most of you should), you can dive into the mobile app and get your PPF account created and operational under 5minutes.
  (Please please enable mobile and internet banking. This pandemic has vividly shown what a blessing that is!).
  You can otherwise visit your nearest bank or post office. A bank account is mandatory because it will be used to send funds to your PPF.
• It is not mandatory that you invest every month. While signing up you can chose for options to invest voluntarily or periodically. Although, I would suggest opting for a monthly auto-debit option because that helps you stick to it. Time and disciple is money. More than money being money.
• Let’s talk money. As of today, PPF investments will earn you an interest of 7.1% compounded annually. Have a look at the two snapshots below.

15years investing in PPF final yields.

• Investing 1000INR every month for 15 years at 7.1% rate of interest will bring home the final amount of ~3.2lacs. If you are a tax worried personnel, there is more good news for you. PPF is completely tax free up to 1.5lacs per annum. This means the amount you invest and the interest you earn will come back to you exactly as we calculated above.
  Totally worth the discipline.
• Now, if you were to take maximum advantage of it and invest 1.5lacs every year (i.e. 12500 per month).Take a deep breath and look. The beauty of compounding!

2. National Pension System

• NPS, like PPF is a scheme/system designed by Government of India for voluntary pension planning. Unlike PPF you can withdraw funds only at the age of 60. This makes it a perfect instrument for your retirement corpus building.
• Age limit is 18–65 years & like PPF, the contribution amount and the profit earned is tax free up to 1.5lacs annually covered under Section 80C of the Income Tax Act.
  Note: 1.5lacs is the net amount you will get tax redemption for. It’s not 1.5lacs for PPF + 1.5lacs for NPS (there are other instruments covered under 80C)
• The money you put into your NPS account gets divided into different market instruments which brings higher returns than PPF. Over the years NPS has been giving ~10% average returns.
  Read return details here.
  1. Scheme E (equity) which allows up to 75% equity participation, this is invested in stocks
  2. Scheme C (corporate debt) which invests only in high-quality corporate bonds up to 100%
  3. Scheme G (government/gilt bonds) which invests only in government bonds up to 100%
  4. Scheme A (alternative investment) which allows up to 5% (newly added asset class only for private sector subscriber with active choice)
• NPS accounts are of 2 types: Tier I and Tier II. Start with Tier I. Tier II account offers some flexibility in terms of liquidity(how easily you can withdraw the money invested), nonetheless it deviates us from our purpose in hand.
• NPS requires you to have an active internet banking enabled account as well. Most banks have an easy NPS account application window on their net banking portal and phone banking app. I have seen the same in ICICI, HDFC and Kotak Mahindra.
• While applying for an NPS account, you will be asked to choose 2 crucial things:
  1. The Scheme: Check the performance online and choose the best one.
  2. The % division into the 4 asset types(E, C, G and A). You can choose the percentage based on your risk appetite or choose the automatic option that will periodically change the % and over time move you to lower risk instruments.
• Pull out your phone, go to the calculator app and check what will that corpus land at in 30–35 years(for someone in their 20s) with 10% average returns. I am sure, you will find the numbers impressive.

3. Atal Pension Yojana

• APY or Atal Pension Yojana was formed with a noble cause in mind. This scheme wanted to target the unorganized sector (maids, delivery boys etc.) and make sure they have some sort of sustenance and an opportunity for retirement.
• The good news is, you need not be living below the poverty line to avail the perks of APY.
• An APY Investor is entitled to a fixed pension of Rs 1000/-, Rs 2000/-, Rs 3000/-, Rs 4000/-, or Rs 5000/- on attaining an age of 60.
• The monthly premium is beyond “low”. It is calculated based on your starting age. I started at 23 and my monthly premium is Rs 292/- only. You can find yours using the premium calculator here.
• 5000 looks like a small amount even today. Nonetheless, it can pay off a bill or two. Extra help never harmed anyone. When your major source of income is dead, every penny counts.

The idea, as always has been to get started ASAP. We cannot deny how essential money is to our livelihoods and sustenance. From things as simple as putting food on the table, clothes on your back and a roof over your head to affording education, healthcare, vacations and the myriad forms of leisure. Needless to say, none of those come cheap.
Money is not everything. So true. Staying knit with your family, having good friends, following your passion, satisfaction at your job and other non-tangible elements, are extremely essential. What we cannot ignore is being able to afford more is powerful and enhances the experience.
Camping out and staring at a sky full of stars with your loved one(s) is beautiful. A nice tent with a transparent roof will enable that & shield you from those mosquito bites. I’d choose the latter. 🙏

This is no goodbye. Move on to Chapter 2 next. Let the journey continue.

Disclaimer: I am no certified financial advisor. What I will be recommending here is common sense and purely logic driven with some understanding of how money and markets work in India.

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