Successful investing is about managing risk, not avoiding it, said Benjamin Graham, a British-born American investor who was known for his theories on investment. His quote has become a mantra for several Indian millennials who seek exciting investment opportunities in lieu of textbook options.
Experts explain that the herd mentality’ in investment, where children follow the path shown by parents, has witnessed a sharp reduction. It indicates that young investors are now looking for diverse options rather than opting for traditional fixed deposit or tax-saving post office schemes.
Most youngsters have developed a larger risk appetite and are not satisfied with fixed-income schemes. Higher income levels, more access to banking and equity markets have played an important role in this crucial transformation.
For instance, data shows that young working professionals are now more likely to invest in equity-related schemes as they offer both tax-saving benefits and higher returns on investment, albeit 10 per cent tax on capital gains.
In fact, youngsters are even following another golden rule of investment more than ever before: To start investing from the age of 22-25, giving themselves enough time to build a diverse investment portfolio.
Having said that, here is a look at how investment patterns have evolved over the years:
ELSS (mutual funds): A youth favourite
Equity-linked investment schemes have emerged as one of the most ideal investment options for young working professionals. To explain why youngsters are favouring ELSS a high-risk option over post office schemes, you need to know how it is different (and better).
ELSS is a diversified equity mutual fund product that allows tax-saving under Section 80C of the Income Tax Act. Each individual who invests in ELSS can get tax exemption up to Rs 1.5 lakh under Section 80C.
While the introduction of 10 per cent long-term capital gains (LTCG) tax on equity earnings dented the scheme, it is still more profitable than a regular tax-free scheme due to high returns on investment.
Speaking to India Today Magazine, Radhika Gupta, CEO, Edelweiss Mutual Fund, confirmed the above statement. Even with LTCG tax, equity remains attractive from a taxation standpoint. Investors should continue looking at equity as an asset class for the long term.”
The bottom line here is that a tax of 10 per cent would hardly dent your income on the investment. For example, if your gains are above 1 lakh, you will be paying roughly Rs 5,000 after taking into account 10 per cent LTCG tax.
As mentioned earlier, equity schemes can provide much higher returns and you can even control investments according to risk appetite. Go for a larger portfolio if you have a bigger appetite and vice-versa.
The only challenge one may face after opting for ELSS schemes is having a long-term understanding of the market.
The average returns percentage from top ELSS funds, at almost 20 per cent, is way higher than returns from normal post-office savings schemes. If you are a first-time investor, you should start diversifying your portfolio in due course.
Private life insurance schemes
With deeper tech penetration, the life insurance industry has played a defining role in 2018.
There is more focus on customer services and it is not merely sold as an investment instrument. In fact, more and more young women are also going for private life insurance options.
Part of the reason for the change is due to informed individuals on the lookout for a health/life insurance schemes which offer maximum cover but with minimum premium payment. Term insurance plans usually offer more cover at a lesser premium than a complex insurance plan-cum-investment option.
Such health insurance policies also qualify for tax deduction under Section 80C of the Income Tax Act to the tune of Rs 1.5 lakh. Therefore, a large number of informed youngsters are choosing term health insurance plans deemed as value for money’.
Public Provident Fund (PPF) is probably one of the best long-term investment schemes and preferred by both millennials and the older generation. It not only offers complete tax-free benefits but also offers a steady interest income.
It is an ideal risk-free option with an interest rate of 7.60 per cent in 2018-19. The interest rate on PPF is determined by the government. You can only deposit 1.5 lakh in an annum so you do not even have to spend a significant amount.
The interest keeps compounding annually and credited at the end of every years. While it does not offer quick returns, it is a does provide long term stability and decent returns after a span of 15 years. You can extend the tenure further in blocks of five years after the initial lock-in period.
Direct equity investment
It is considered one of the most volatile options in investing but direct equity can earn profits like no other scheme, provided investors are well-informed about the market.
While previous generations have been apprehensive about investing in direct equity, numerous youngsters are now investing in the equities in order to gain higher returns.
Although the risk involved in this market-related scheme is more than any fixed-income scheme, it can help you earn significantly on your investments if you are well-informed about day-to-day market operations.
Patience is the key: If you can hold on to a stock till the right period, it is unlikely that you will encounter a loss. However, there are several external factors can riddle profit-making prospects so you always have to be on your toes if you choose to invest in direct equity.
The National Pension Scheme (NPS), introduced in 1999, is an extremely diverse retirement plan, managed by the Pension Fund Regulatory and Development Authority (PFRDA). It is a concoction of equity, fixed deposits, corporate bonds, liquid funds and government bonds.
The 1, 3, 5-year plans offer good returns on investment. Another important reason why the fund is so much in demand is the fact there is no need to actively manage it. It offers completely tax-free benefits under section 80C of the Income Tax Act to the tune of Rs 1.5 lakh.
You can claim another additional tax-free deduction up to Rs 50,000 under Section CCD (1B). Under NPS, you have the option to invest both in equity (75 per cent). It is one of the most ideal retirement option young professionals can sign up for.