What are the best investment plans for a salaried person?
An ideal financial plan for a salaried employee involves investing money in different financial instruments like stocks, debt instruments, mutual funds, etc., based on their goals and risk appetite. An investment plan has the potential to generate greater returns. Whereas simply saving an amount from your salary each month even after several years won’t make you much money.
If you are a risk taker, you can invest in stocks and mutual funds to earn profits; but if you don’t want to take much risk, you can invest in safer options like government bonds. To make sure that your hard-earned money doesn’t go down the drain, it is wise to explore the best investment options for a salaried person before making a decision. In this article, we will learn about some of the popular investment options available in India.
Best Investment Options for Salaried Employees in India
The best investment options for salaried people in India depend on their risk appetite, time horizon, liquidity, and tax slab. For example, investors willing to take risks can invest in high-risk investment options for long-term financial gains. In contrast, a person who is not comfortable with a lot of risk can opt for low-risk options to ensure capital protection and income certainty for their short-term financial objectives.
List of investment options for salaried employees is as follows:
- Direct Equity (Stocks)
Investment in the stock market has slowly gained popularity, and now it has become one of the best investment options for a salaried person. It is simply because you can earn good returns, if you plan and manage your investments smartly. Though these investments carry high risk, the risk level is directly proportional to the amount of expected returns. The market performance of stocks is affected by changes in Government policy, economic factors, and activities of FII and DII in the stock market.
- SIP in Mutual Funds
Investing in Mutual Funds through SIP (Systematic Investment Plans) is one of the best investments for salaried people. In SIP, you can invest a fixed sum periodically in a mutual fund and earn a consistent return (depending on the market performance of the underlying fund). This investment option also instills the habit of investing in an individual. Your investment amount can be as low as INR 500 to as high as how much you wish to invest. Another important thing about SIP investments is that if you start early, your scope of returns will be higher.
- Corporate Bonds
A corporate bond is a type of debt security that is issued by a firm and sold to investors. The investors earn interest on the invested principal amount and also receive their capital back when the bond matures. Though corporate bonds are relatively less risky than equity and mutual funds, they still carry certain risks such as default risk, which means that the bond-issuing company may fail to pay back the principal amount. Therefore, if you are choosing corporate bonds as an investment option for a salaried person, then your choice of the company will depend on its creditworthiness.
- ELSS (Tax Saving Funds)
ELSS (Equity Linked Savings Scheme) is a type of mutual fund that enables individuals and Hindu Undivided Families (HUFs) to avail an income tax deductions of up to INR 1.5 lakhs as per Section 80C of the Income Tax Act, 1961.
ELSS is one of the best ways for a salaried person to save money because you can invest as low as INR 500 every month, and you get the dual benefit of tax deduction and wealth accumulation. This investment option comes with a lock-in period of 3 years, and at least 80% of the fund’s corpus is invested in equity or other equity-linked instruments. These funds can provide inflation-beating returns if planned properly.
- Voluntary Provident Fund
The Voluntary Provident Fund (VPF) is an extension of the Employee Provident Fund (EPF), allowing the employee to contribute voluntarily to his/her provident fund (PF). As an employee, you are bound to contribute 12% of basic salary and dearness allowance to EPF. Hence, the contribution to VPF should be over the 12% contributed to EPF. This contribution can be up to 100% of your basic pay and dearness allowance (DA).
VPF is a risk-free investment option because the Government of India backs it. It also offers an interest rate of 8.1% (revised annually by the Government) that allows the investor to accumulate a significant corpus for his/her retirement life. VPF falls under the exempt-exempt-exempt (EEE) category, meaning the principal amount invested, the returns earned, and the maturity amount are all eligible for tax exemption. You can save up to INR 1.5 lakhs each financial year under Section 80C of the Income Tax Act, 1961.
- National Pension Scheme (NPS)
National Pension Scheme is a fixed contribution-based pension system managed by the Government of India. Under NPS, individual savings are pooled into a pension fund which invests in various securities such as Government Bonds, T-Bills, Corporate Debentures and Shares.
NPS is an investment plan that aims to build a corpus for the investor’s retirement life. It requires a minimum contribution of INR 1000 per year (for Tier-1 accounts), while there is no cap on the maximum contribution allowed. Employees contributing to NPS are eligible for following tax benefits on their own contribution:
- Tax deduction up to 10% of salary (Basic + DA) under section 80 CCD(1) within the overall ceiling of INR 1.50 lakh u/s 80CCE.
- Additional Tax deduction up to INR 50,000 under section 80 CCD(1B).
Further, employees can avail tax benefits on employer’s contribution as well. A tax deduction of up to 10% of salary (Basic + DA) (14% if such contribution is made by Central Government) contributed by the employer under Section 80 CCD(2) over the limit of Rs. 1.50 lakh provided under section 80 CCE.
Things to Consider Before Investing
Proper investment planning for salaried employees is essential. Below are some things you should take care of before investing your money.
- Investment Objective
If you understand the objective of your investments, it will get easier to know where to invest your money. Why and when you need that invested money makes a big difference. For example, suppose you need money to repay an existing loan or fund a retirement party. Understand your needs and invest your money accordingly.
- Investment Period
Salaried employees can either invest for a short or medium to long duration, which can range up to 7-15 years. Repaying a loan or planning a foreign vacation are some short-term investment goals for which people generally make investments. If a person is investing for 3 years or less, it is considered a short-term investment. For example, buying a new house or children’s education after retirement is considered under medium to long-term investment plans.
- Tax Efficiency
Some investment plans offer tax exemption in compliance with different sections of the Income Tax Act. For example, ELSS, NPS, etc. offer tax benefits. Considering this as an investment plan, you also have to check the taxation of those returns. For example, the returns from PPF are completely exempted from taxes, while ELSS are partially taxable.
- Investment Flexibility
Some investment plans which help salaried employees in saving taxes call for a lump-sum amount, while people who invest in SIP mutual funds enable the investors to invest a small amount every month. It also helps people manage their cash flow while saving money by investing in different plans.
Investors must first understand their requirements and ability to take risks. According to these factors, they can decide where and how much to invest. A certain investment option may seem fascinating due to its decent returns, but it may not be eligible for a tax deduction. Therefore, before picking the best investment plan, a salaried person must try to gain as much insight as possible into the different options and which one is best for him/her.
FAQs about investment plans for a salaried person
What are some government-supported investment plans available for salaried employees in India?
National Pension Scheme (NPS), National Savings Certificate (NFS), Public Provident Fund (PPF), Sovereign Gold Bonds, Atal Pension Yojana (APY), etc., are some of the best government-backed investment plans for salaried employees.
Which is better for a salaried employee – Mutual Fund or Direct Equity?
The answer to this depends on your individual goals and risk capacity. Direct equity plans offer investors a very high return, while the returns offered by mutual funds are good but relatively less attractive. But a higher return is always followed by higher risk. And that’s why mutual funds are considered a safer option than direct equity as it includes stocks from different companies; so, the risk factor is comparatively lower.
|Plans||Rate of Interest|
|Public Provident Fund (PPF)||7.1%|
|National Savings Certificate (NFS)||6.8%|
|Kisan Vikas Patra (KVP)||7.0%|