This content originally appeared on DEV Community and was authored by Madhav Ganesan
It is an act of allocating money, time, or resources to an asset with the expectation of generating a return or profit in the future.
Math for investments
Simple Interest
It is a method of calculating the interest charge on a loan or investment based on the initial principal amount.
Compound Interest
It is the interest on a loan or deposit that is calculated based on both the initial principal and the accumulated interest from previous periods.
Key Concepts
Inflation
It is the rate at which the general level of prices for goods and services rises, leading to a decrease in the purchasing power of money.
Pre-Requisite
Emergency Fund
It is a savings reserve specifically set aside to cover unexpected expenses, such as medical emergencies, job loss, or urgent home repairs.
(equal to one year’s expenses)
Insurance
It serves as a safety net, offering individuals, families, or businesses financial security in the face of unforeseen events such as accidents, illnesses, natural disasters, or death.
Investment Products
Savings Accounts:
- Basic bank accounts that earn interest on deposited funds. Method: Simple Interest Interest Range: (2-5) %
Fixed Deposits (FDs):
- Time deposits with banks offering higher interest rates for locking in money for a fixed term.
- Laddering in FD → Strategy of breaking your total investment into multiple FDs with different maturity dates, so you get periodic liquidity and can reinvest at better rates.
- Sweep-in in FD → Facility where surplus money in your savings/current account is automatically transferred to an FD to earn higher interest, and withdrawn back when your account needs funds. Interest Range: (5-9) %
Recurring Deposits (RDs):
- Savings accounts where you deposit a fixed amount regularly to earn interest over time. Method: Compound Interest Interest Range: (4-6) % (some banks and post office provide interest starting from 6%) Tenure: Changes
Public Provident Fund (PPF):
- Long-term savings scheme backed by the government, with tax benefits and a fixed interest rate.
- Indian citizens residing in the country are eligible to open a PPF account in his/her name.
- Tax benefit up to Rs.1.5 lakh under Section 80C Method: Compound Interest Interest Range: (7-8%) fixed by government Tenure: 15 years
Annuity/Pension:
- An annuity is a financial product that provides a series of regular payments made over a specified period.
- These payments can be made either for a fixed number of years or for the lifetime of the annuitant (the person receiving the payments).
- Annuities are commonly used for retirement planning to ensure a steady stream of income after retirement.
- Some plans may allow premium payments only until a certain age (such as 60), there are others that offer more flexibility
- High Surrender and Upfront Costs
Post Office Schemes
- These are government-backed savings options offered by the Indian Postal Service, aimed at providing secure investment avenues with consistent returns.
- They cater to diverse financial needs, including regular income, long-term wealth creation, and tax-saving benefits.
- These schemes are highly trusted due to their safety and accessibility across India.
Gold (Physical):
- It is a popular and traditional option due to its status as a safe-haven asset
- It has the ability to hedge against inflation, and its historical significance as a store of value.
- It is considered a prudent choice for portfolio diversification and wealth preservation.
Mutual Funds
- Investment in professionally managed portfolios that can include equities, debt, hybrid funds, or sector-specific funds.
- Offers diversification, liquidity, and various tax-saving options (e.g., ELSS).
Equity-Linked Savings Scheme (ELSS)
- It is a type of fund in India that primarily invests in equities (stocks) and comes with tax-saving benefits under Section 80C of the Income Tax Act.
- It has a lock-in period of 3 years, meaning you cannot withdraw your money before this period ends.
- After 3Y lock-in it is optional for us to withdraw or leave the ELSS investment as is, but it is always recommended to hold a long-term view when it comes to equity. ELSS is no different from any other Equity investment other than the imposed lock-in & tax benefits.
Bonds
- These are fixed-income instruments issued by the government or corporations to raise funds from the public or institutional investors.
- They are a popular investment option due to their relatively stable returns, various tax benefits, and risk levels.
National Pension System (NPS)
- A voluntary retirement savings option offering market-linked returns.
- It provides flexibility in choosing the allocation between equity, corporate bonds, and government securities.
Real Estate
- Direct investment in properties for rental income and long-term appreciation in property value.
Exchange-Traded Funds (ETFs)
- Market-traded funds that invest in a variety of assets like stocks, bonds, or commodities.
- Offer liquidity and diversification similar to mutual funds.
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This content originally appeared on DEV Community and was authored by Madhav Ganesan