Investing your hard-earned money can make you feel nervous, but it’s essential if you want to build wealth and secure your financial future.
In this guide, I’ll walk you through the basics of investing in India, including some popular investment options and tips for getting started. So, let’s dive in and learn how to make your salary work for you!
You can invest your salary by following 5 easy steps:-
Step 1 – Fix Your Monthly Investment Amount
The first step in investing your salary is to determine how much money you can set aside each month for investments. This helps you to plan your budget accordingly and avoid overspending.
Step 2 – Select Your Investment Pattern, Lumpsum, or Monthly
The next step is to decide between two options: lump sum investment or systematic investment plan (SIP). Lump sum investment involves investing a large amount of money in a single transaction, while SIP involves investing a fixed amount of money at regular intervals, usually monthly.
The SIP option would not work if you want to invest in the stock market or real estate at the right time. In this case, you can open a separate savings account to save money only to invest in stock or real estate.
Step 3 – Define Your Goals
Define your goals before start investing your salary in different investment options. Your goals can be short-term, or long term
Short-term goals are those that you want to achieve in 1 to 3 years like foreign travel, house renovation, buying iPhone, or creating an emergency fund.
Long-term goals are those that you want to achieve in the long duration like buying a house, saving for retirement, and child education.
Defining your goals will help you determine how much money you need to invest and for how long.
Step 4 – Pick the Right Investment Option
The next step is to choose an investment option that aligns with your investment goals, both short-term and long-term. Right Investment options depend on factors like your financial situation, age, risk tolerance, and investment horizon.
There are various investment options available in India, such as fixed deposits, mutual funds, stocks, gold, real estate, and more. Each option comes with its own set of benefits and drawbacks, and it’s important to understand them before making a decision.
Step 5 – Diversify Your Portfolio
Diversification helps to spread out your risk and reduce the chances of losing all your money in case of a market downturn. You can diversify your investments by investing in different asset classes like stocks, bonds, mutual funds, and real estate. You can mix different asset classes to reduce risk and maximize returns.
If you prefer stock investment, you can also diversify your investment portfolio by investing in different stocks of different categories like banking, FMCG, Technology, and Automobiles.
How Much of Your Salary Should You Invest
There are many schools of thought and rules that define the portion of your salary you should invest.
The most common rule is the 50:30:20 rule of budgeting.
This rule suggests that you allocate 50% of your salary toward essential expenses, 30% towards discretionary expenses, and 20% towards savings and investments.
Other schools of thought say you should save a minimum of 50% of your salary.
I believe the same rules are not applicable to everyone. I suggest you calculate your own investment percentage based on your financial goals and situation. You should start investing with a minimum of 10% of your salary and increase with time.
10 Investment Options to Invest Your Salary in India
1. Stock Investment
Stock investment is a high-risk-reward investment option best suitable for long-term goals. It involves buying stocks of publicly traded companies in the stock market with the aim of earning a return on investment. Stocks are essentially ownership shares in a company, and their value is determined by the performance of the company in the market.
If you are a beginner then you must learn how the stock market works and focus on learning the art of picking the right stocks.
Expected returns: 15-20%.
But the returns are dependent on various factors such as the company’s performance, the economic environment, and market conditions.
- Potential for high returns over the long term.
- Stocks are a highly liquid investment option as compared to real estate.
- You can diversify your portfolio with different sectors and industries.
- High risk
- No guarantee of returns
- Need time to learn
2. Public Provident Fund (PPF)
The Public Provident Fund (PPF) is a government-backed savings scheme that offers attractive returns and tax benefits under sec 80C. The investment tenure is 15 years, and you can invest up to Rs 1.5 lakh per year. The interest rate for PPF is revised every quarter and is currently at 7.1% per annum.
Expected return: The current rate of interest is 7.1%
- Tax-free returns
- Safe investment option backed by the government
- Higher interest rate compared to most fixed deposits
- Long investment tenure
- Premature withdrawals not allowed (partially allowed)
- A maximum investment limit of Rs 1.5 lakh per year may not be enough for people with higher income levels
3. National Pension System (NPS)
The National Pension System (NPS) is a government-sponsored pension scheme that offers tax benefits and a regular income stream after retirement. The investment tenure for NPS is until the age of 60.
You get tax benefits under Section 80C and Section 80CCD, making it a great investment option for people in higher tax brackets.
Expected return: Around 8% to 10%.
- Tax benefits under Section 80C and Section 80CCD
- Great investment option for people in higher tax brackets
- Offers a regular income stream after retirement
- Potential for high returns
- Investment locked until the age of 60
- Premature withdrawals are not allowed
- Returns are market-linked and subject to market fluctuations
4. Equity Mutual Funds
Equity mutual funds are investment schemes that invest in stocks and shares of companies listed on the stock exchange. The investment is managed by professional fund managers who aim to generate high returns for investors.
You can invest in equity mutual funds if you want to invest in stocks but have less time to analyze the stocks.
Expected return: Around 12% to 15% per annum.
- Equity mutual funds have the potential for high returns over the long term.
- They offer diversification.
- They are managed by professional fund managers.
- The returns on equity mutual funds are subject to market risks and fluctuations.
- They are not suitable for short-term investments.
You can also read our comparison of the share market vs mutual funds to get more clarity how both investment segments work.
5. Debt Mutual Funds
Debt mutual funds invest in fixed-income securities such as government bonds, corporate bonds, and money market instruments. The primary objective of debt mutual funds is to generate regular income for investors while maintaining a relatively low level of risk.
You get a higher rate of return as compared to traditional savings accounts and fixed deposits.
Expected return: 6% to 8% per annum
- Lower risk and stable returns
- Suitable for short-term investments
- Lower returns
- Debt mutual funds are exposed to interest rate risks, which means, changes in interest rates can affect the returns of the fund.
6. Sovereign Gold Bonds
If you invest in gold for reasons like hedging against inflation, and portfolio diversification, I would suggest you invest in SBG.
Sovereign Gold Bonds are government securities denominated in grams of gold issued by the Reserve Bank of India.
You get the same benefits of physical gold like the potential for capital appreciation and hedge against inflation. However, unlike physical gold, SGBs do not have the drawbacks of making storage arrangements, purity concerns, and selling at a later stage.
You get an additional 2.5% annual return along with a return due to gold price movement.
Expected return: You can expect a return of around 8-10% per annum.
- SGBs offer an alternative to physical gold investments, eliminating the risk and cost associated with storing physical gold.
- SGBs provide an opportunity to invest in gold without the worry of purity and quality concerns.
- SGBs offer interest at a rate of 2.5% per annum, which is higher than the returns offered by physical gold.
- SGBs are backed by the Government of India, making them a safe investment option.
- SGBs have a minimum lock-in period of 8 years, which means you cannot liquidate your investment before that time.
- SGBs are not very liquid, which means it may be difficult to sell them in the secondary market.
- The price of SGBs is linked to the market price of gold, which means the returns are subject to market risks and fluctuations.
- The interest earned on SGBs is taxable as per the Income Tax Act, of 1961.
7. Real Estate
Real estate is one of the most popular investment options in India, especially among those who prefer tangible assets. Real estate investments offer potential capital appreciation and rental income, making it a popular choice among investors.
Expected return: Around 8-10% per annum.
But the returns can vary widely depending on the location, type of property, and overall economic conditions.
- You can use real estate for rental income to get a regular cash flow.
- High potential for capital appreciation, especially in urban areas with high demand.
- You need a large capital outlay
- Real estate investments are illiquid, and it can take time to sell the property.
- Real estate investments come with high transaction costs such as stamp duty and registration fees.
8. Initial Public Offerings (IPOs)
IPOs are becoming popular after the covid era in India. IPOs offer investors an opportunity to invest in a company before it gets listed on the stock exchange.
Expected return: 20% to 30%
The returns from IPOs can vary widely and depend on the performance of the company after listing. In recent years, some IPOs have provided returns of over 20% to 30% in a short period, while others have generated huge losses after listing.
- YOu may get high returns in a short period if the company performs well after listing.
- IPOs allow investors to invest in a company at an early stage and benefit from its growth potential.
- IPOs can be risky, as the performance of the company is uncertain, and there is no historical data to rely on.
- IPOs are often overpriced, and investors may end up paying a premium for the shares.
You can give a glance to our guide on how to invest in IPO through netbanking. We have taken an example of HDFC bank but the process is similar with other banks as well.
Debentures are long-term debt instruments issued by companies to raise funds from the public. When you invest in a debenture, you are lending money to the company, which will pay you back with interest over a specified period of time.
The return on debentures varies depending on the issuer and the prevailing market conditions. Generally, debentures offer a higher rate of return than bank deposits, but lower than stocks.
Expected Return: 8% to 10% for A-list companies.
- Fixed returns
- Low risk as compared to the stock market
- Long-term investment period of 5-20 years
- No capital appreciation. You will only receive a fixed rate of return on your investment.
- Lower liquidity
Bonds are similar to debentures, long-term debt instruments issued by companies or governments to raise funds. However, bonds are typically backed by the government or a government agency, which makes them less risky than debentures.
Expected Return: 7-8% per annum.
- Fixed returns
- No capital appreciation
- Interest rate risk: Bonds are affected by changes in interest rates. If interest rates rise, the value of your bond may decrease, and vice versa.
The most important thing in investing is consistency. Remember, investing is a long-term process, and it requires patience, discipline, and a long-term perspective. Start small, invest regularly, and enjoy the power of compounding.