Toiling away on 9 to 5 jobs, juggling meetings, and chasing deadlines, it’s no easy feat to keep up with everything. Salaried professionals work hard every day to ensure their families have a comfortable life and a secure future. The best way to realise our financial dreams is by saving consistently and making those savings work for us. But does your money work as hard as you do? In other words, are your savings growing to their maximum potential? The right investments can make all the difference in the world. They help your money grow faster while letting you stay within your risk tolerance. They reduce tax burdens and move you closer to long-term financial goals. There are plenty of good Investment Options for Salaried Employees to choose from, so let’s explore some of the best ones.
Some Considerations Before You Start Investing
Before we dive into the heart of this blog, let’s have a look at some important things to keep in mind, as they will help you build a stronger financial foundation.
Define Your Goals
Investing without a purpose can prove to be ineffective. Clearly defined financial goals help you decide where and how long to invest. For example, if your goal is to buy a new car, try to be as specific as possible. You could say, “I want to buy a new car in two years for around Rs. 10 lakh, with a 40% down payment and the rest financed through an EMI. This will give you a measurable goal. In this case, to amass Rs. 4 lakh over 24 months, you’d need to save over Rs. 16,500 per month. But if you invest roughly Rs. 15,500 in a suitable short-term investment like a debt fund offering around 7-8% returns, you could comfortably reach your Rs. 4 lakh goal within two years.
Assess Your Risk Tolerance
Your risk tolerance depends on a number of factors, such as age, income, financial responsibilities, debt, and your comfort with risk. It also depends on the need to take risks, that is, how much risk you must assume to achieve your financial goals. This assessment helps you understand how much risk you can comfortably take with a particular investment. Generally, for short-term goals, you can’t afford to lose money, so it’s best to stick with low-risk options like FDs or debt funds. For medium-term goals, you can consider a moderate approach, and for long-term goals, you can afford to be more aggressive by investing in equities.
Manage Debt
If you have any liabilities, make paying them off a priority. High-interest debt can erode your savings faster than an investment can grow them. So before committing large amounts to investments, pay off high-interest debt first. Some loans, like home loans or education loans, come with attractive tax benefits and can even be viewed as investments in themselves. Thus, it’s equally important to distinguish between good debt that supports your growth and bad debt that drains your income.
Get Insured
Protection against risks to health and life must also be a top priority. Without health insurance, you could end up losing your savings to cover unexpected medical expenses, which can cost tens of lakhs today. These expenses can easily throw you off track and force you to liquidate investments or take on loans.
Life insurance is equally important, even more so if you are the breadwinner of the family. It ensures that your family stays financially sound and does not have to compromise on their standard of living or goals.
Build an Emergency Fund
For smaller unexpected expenses like car repairs or unforeseen situations like a loss of a job, you need to have a separate fund that can support you. This is called an emergency fund, and experts suggest having at least 6 months of essential expenses like rent, EMIs, groceries, bills, etc., so you don’t need to dip into your investments during unexpected events.
Some of the things we’ve discussed above, like getting insured, building emergency funds, and paying off debt, can be financial goals in themselves. That’s why it is absolutely essential to prioritise your goals. Guidance from an investment consultant can be invaluable at this stage. With these basics in mind, let’s turn our focus to the best Investment Options for Salaried Employees.
Best Investment Options for Salaried Employees
Long-Term Investments
If your goal takes more than 7-10 years to achieve, like buying a house or building a retirement fund, it can be classified as a long-term goal.
Equity Mutual Funds
Equities are the preferred asset class for achieving long-term goals because their risk tends to even out over a long period, and they have the potential to deliver inflation-beating returns compared to instruments like FDs and bonds. Equity funds are those that invest at least 65% of the fund’s total assets into stocks or equity-related instruments. This is a broad category that includes a variety of funds like large-cap funds, small-cap funds, sectoral funds, and ELSS.
The main difference between these types of equity funds lies in their objectives and risk levels. For instance, large-cap funds invest in top companies by market cap, so they are relatively less risky. Sectoral funds, on the other hand, invest in industries like banking or tech, so the focused exposure carries concentration risk.
Salaried individuals can easily invest in these instruments via SIPs and make regular contributions to slowly accumulate wealth. It’s very convenient, doesn’t require a demat account, and offers benefits like professional management, instant diversification, and rupee-cost averaging.
Stocks
Direct equity also offers the potential for very high returns, but it also comes with higher risk. One should not buy stocks on a whim. Successful stock investing demands proper research, patience, and emotional discipline from the investor. If you’re going to buy stocks on your own, a good rule of thumb is to either ‘buy what you know’, meaning that you should stick to sectors you’re familiar with to avoid speculation, or seek guidance from an Investment planner who can suggest a basket of good stocks that suit your goals.
Government Securities
G-secs like 10-year government bonds are considered very safe instruments due to sovereign backing. As the risk is lower, returns on offer are also modest. These securities come with varying maturities, for example, T-bills for short-term needs and dated securities like 5-year, 10-year, or 30-year bonds for long-term investors. If you’re looking for capital preservation and regular income, you can give this option some consideration. G-secs can be bought through platforms like RBI Retail Direct or through secondary markets. Do note that while G-secs are virtually free from default risk, they are still exposed to interest rate risk. The market value of your bond can fluctuate whenever interest rates change.
Public Provident Fund
PPF is a very popular government-backed instrument because it offers guaranteed returns in the form of interest, capital safety, and tax benefits. The government revises the interest rates quarterly, and the returns are tax-free. It has a long 15-year lock-in period, which makes it ideal for goals like retirement planning. Upon maturity, investors have the option to lengthen the tenure by blocks of five years. While the government restricts the maximum contribution to Rs. 1.5 lakh per financial year, one of the biggest advantages of PPF is that it enjoys the Exempt Exempt Exempt tax status, so your contributions, returns, and the maturity amount are all tax-free.
Real Estate
Real estate remains a popular asset class that offers not only the potential for spectacular capital appreciation but is also a source of passive income in the form of rent. Like any other investment, real estate comes with its own set of risks, the biggest of all being low liquidity. You’ll likely find it very hard to sell your property in a jiffy, and chances are, the quicker you want to sell it, the lower the price you may have to settle for. It also costs significant capital upfront and has expenses like taxes and maintenance costs that can add up.
If you’re looking to diversify your portfolio, you can also look into REITs. These work like mutual funds in the sense that money is pooled from multiple investors to purchase and manage income-generating properties like offices and malls.
National Pension System
NPS is one of the best Investment Options for Salaried Employees looking to build a retirement corpus. Unlike the PPF, the returns offered by NPS are market-linked. One can choose the allocation between equity, corporate bonds, and government securities based on their risk appetite. Not only does the NPS also enjoy the Rs. 1.5 lakh tax deduction benefit under Sections 80C, it also offers an extra Rs. 50,000 deduction under Section 80CCD(1B).
When it comes to maturity, NPS has some specific rules. It stays locked in till the investor reaches the age of 60. Even then, one can only withdraw up to 60% of their accumulated corpus as a lump sum. The left over amount must be used to buy an annuity plan to ensure a regular monthly pension. While partial withdrawals before maturity are allowed, the rules surrounding them are quite strict. Only under specific conditions, such as medical emergencies or the purchase of a house, can one withdraw a limited percentage of their corpus.
ULIPs
Unit-Linked Insurance Plans are a mix of insurance and investment. You pay a premium like you would with any term insurance, but with ULIPs, a part of that premium goes into a professionally managed fund that invests in equities, debt, or a mix of both, depending on the option you choose. They come with a lock-in period of 5 years and also offer tax benefits under Section 80C. If you want both protection and growth potential in one product, ULIPs can be a good option.
Mid-Term Investments
These refer to investments ideal for goals that are 3 to 6 years away, like buying a home or funding a child’s education.
Hybrid Mutual Funds
Hybrid mutual funds combine equity and debt securities in varying allocations. For example, a conservative hybrid fund would allocate more of its resources to debt instruments, while an aggressive hybrid fund invests more in equities for higher growth potential. Like any mutual fund, you have the option to invest via SIPs to meet your targets slowly.
Debt Mutual Funds
There are many types of debt funds to choose from, but for mid-term goals, funds such as banking and PSU funds, medium duration funds, and medium-to-long-duration funds are considered ideal. They prioritise capital preservation and offer moderate market-linked returns.
Fixed Maturity Plans
FMPs can be a decent option for goals 3 to 5 years away. These are also debt funds, but they are closed-ended and come with a fixed maturity period. The underlying securities in these schemes include CPs, CDs, government and corporate bonds, and NCDs that mature around the same time as the scheme.
National Savings Certificate
NSC is a post office scheme which provides interest on your investment. Since it’s government-backed and guarantees returns, it’s a safe and reliable option for conservative investors. It comes with a fixed tenure of 5 years, and also offers tax benefits under 80C.
Short-Term Investments
If your financial goal can be achieved within 3 years, it can be considered a short-term goal. Some investments for such goals are:
Liquid Funds
Liquid funds are a category of debt mutual funds which offer relatively safe returns and high liquidity. Certified investment advisory services often recommend these instruments to investors wanting to build an emergency fund because they allow easy withdrawals while still earning better returns than a normal savings account.
Fixed Deposits
No doubt, FDs have long been the go-to investment option for many conservative investors. They offer guaranteed returns, safety of principal, and flexible tenures, so it’s easy to understand their popularity. Before investing, be sure to check the bank’s interest rates and penalties for premature withdrawals, as these can affect your returns.
Short/Ultra Short-Term Funds
These are also debt mutual funds, but they invest in securities with longer durations compared to liquid funds. As a result, they carry a slightly higher risk and return potential. These funds are ideal if you’re looking to park money for a short period, like saving for a family vacation.
Tax-Saving Investments
We’ve discussed many of the tax-saving investments already, so here’s a quick look at some options that can help you reduce your taxable income while also growing your wealth:
- Public Provident Fund: EEE status instrument with tax-free returns and deductions under Section 80C.
- National Pension System: Section 80C benefits and additional tax deduction under Section 80CCD(1B).
- National Savings Certificate: A fixed return investment which is eligible for Section 80C deduction.
- Tax-Saver Fixed Deposits: These are 5-year FDs eligible for Section 80C benefits.
- Unit-Linked Insurance Plans: Also offer tax benefits under Section 80C up to Rs. 1.5 lakh.
- Health Insurance: Premiums paid are eligible for tax deduction under Section 80D.
- Term Insurance: Premiums qualify for Section 80C deductions.
Conclusion
Before putting your hard-earned savings into any particular investment, evaluate key factors such as:
- Past Performance: Assess returns in the last 3, 5, and 7 years. The more consistent the returns, the better.
- Taxation: Every investment has tax implications, which can eat a sizable portion of your returns. Understand how your investment returns will be taxed and focus on post-tax gains.
- Maturity/ Liquidity: Always align the liquidity of your investments with your needs.
- Risks: Some form of risk is always present when investing. It’s essential to understand these risks so you don’t end up taking on more than you can handle.
- Risk-Adjusted Returns: If two investments offer the same return, won’t the one that achieves it with less risk be better? Metrics like Sharpe and Treynor ratios help you compare how efficiently an investment is delivering returns for the amount of risk it takes.
- Provider’s Reputation: Be it banks, AMCs, or insurance companies, always research the reputation of the institution you’re investing with.
- Fund Manager’s Track Record: If you’re investing in mutual funds, check the manager’s performance history and investment philosophy.
The best Investment Options for Salaried Employees are those that make money work to its maximum potential while also staying in tandem with the investor’s goals and risk profile. Start as early as you can, diversify your portfolio, and regularly monitor your investment’s performance so you stay on the path to realising your financial dreams. If you’re ever confused about anything, don’t hesitate to seek help from a certified financial advisor.
