Long term investment products

We need short term savings products to match our short term goals. We also use short term savings products to keep our money safe when a long term goal is fast approaching and we have saved up enough to achieve it. However, when we begin planning for a long term goal, we need long term investment products to help us grow our money. Here are some long term investment products:

Post office savings schemes

Post office schemes are also called small savings schemes. These are designed to provide safe and attractive investment options to the public and at the same time to mobilise resources for the postal department.

Post office savings accounts

• These accounts are very popular as they can be opened at any post office in India with a minimum of Rs. 20. On the outer limit, a maximum of Rs. 1 lakh can be deposited per single holder (across all post office accounts held in that name) and Rs. 2 lakh for joint holders (again Rs. 1 lakh per person across all post office accounts held).
• Maturity period: There is no lock-in/maturity period, just as in the case of a savings bank account.
• Withdrawals: Any amount can be withdrawn as long as the account holder keeps a minimum balance of Rs. 50 in simple account and Rs. 500 if he/she opts for the cheque facility.
• Interest: Interest is paid at a rate as decided by the Central Government from time to time. It has been is 3.5 per cent per annum since March 2001.
• Pass Book: As in the case of a bank deposit, depositors are provided with a pass book with entries of all transactions duly stamped by the post Office.
• Tax: Income tax relief is available on the amount of interest that you receive in this account.

Post office time deposit accounts

These deposits can be compared to bank fixed deposits and like the post office savings accounts, they can be opened at any post office in India.

• Types of Accounts: Accounts of different maturities are available - 1 year maturity, 2 year maturity, 3 year maturity and 5 years maturity.
• Deposit amount: A deposit can be opened with a minimum of Rs. 200. There is no maximum limit.
• Maturity period: The deposited amount is repayable after expiry of the period for which it is made viz.: 1 year, 2 years, 3 years or 5 years. The money in the deposit can be withdrawn 6 months after the deposit is made, if necessary (with certain conditions).

• Interest: Interest is payable annually. At present, since March 2003, the rates are as follows:
• 1 year deposit - 6.25
• 2 year deposit - 6.50
• 3 year deposit - 7.25
• 5 year deposit - 7.50
• Pass Book: Depositors are given a pass book with entries of the deposited amount and other particulars, duly stamped by the post office.
• Tax: Income tax relief is available on the amount of interest that you receive in this account.

Post office monthly income accounts

This account is somewhat like a bank fixed deposit too. Only one deposit can be made.

• Maturity: 6 years. The deposit can be closed after one year, subject to conditions.
• Deposit limits: A minimum deposit of Rs. 1000 has to be made. The maximum amount is Rs. 3 lakh in case of a single account and Rs. 6 lakhs in case of a joint account. Deposits in all accounts taken together should not exceed Rs. 3 lakh for a single name and Rs. 6 lakh for a joint account.
• Interest: Interest is paid at the rate of 8 per cent per annum, every monthly. In addition, a bonus equal to ten per cent of the deposited amount is paid at the time of maturity.
• Pass Book: The depositor is provided with a pass book with entries of the deposited amount and other particulars, duly stamped by the post Office.
• Tax: Income tax relief is available on the amount of interest that you receive in this account.

National Savings Certificate

• National Savings Certificates are available for purchase at Post Offices.
• Maturity: Period of maturity of a certificate is six Years.
• Deposit limits: Certificates are available in values of Rs. 100, Rs. 500, Rs. 1000, Rs. 5000 and Rs. 10,000. There is no maximum limit for purchase of the certificates.
• Interest/maturity value: The maturity value of a certificate of Rs. 100 denomination is Rs. 160.10 and certificates of other maturities are calculated at a proportionate rate. On maturity the certificates can be encashed at the post office where it is registered or any other post office.
• Tax: An income tax rebate is available on the amount invested and interest received every year.

Kisan Vikas Patra

Kisan Vikas Patra are available for purchase at Post Offices.

• Maturity amount / period: The invested amount doubles on maturity after 8 years and 7 months.
• Deposits: You can invest in KVP in values of Rs. 100, Rs. 500, Rs. 1000, Rs. 5000, Rs. 10,000 and Rs. 50,000. There is no maximum limit for purchase of the certificates.
• Tax: No income tax benefit is available under the scheme.

Public Provident Fund Scheme

Public Provident Fund schemes can be opened at certain designated post offices throughout the country and at certain designated branches of Public Sector Banks throughout the country.

• Maturity period: The account matures after 15 years. It can be continued with or without subscriptions after a block of five years.
• Deposit limits: A minimum deposit of Rs. 500 per financial year is required. The maximum deposit limit is Rs. 70,000 in a financial year. The maximum number of deposits in a financial year is twelve
• Withdrawal: Premature withdrawal is allowed every year after 5 years from the end of the year of opening the account.
• Interest: The interest rate payable is notified by the Central Government from time to time. At present it is 8% per year
• Tax: An income Tax rebate is available on the deposits made and the interest credited every year is tax-free.

Equity

All the products that we have looked at so far offer a fixed rate of interest. Some have a fixed maturity, some do not. But in general, we know more or less how much money we can expect to get from such products. That’s why those products are called fixed income products.

Equity or shares is different from such products. In the case of fixed income products, you are lending your money to some organisation or depositing it with an organisation. They pay you a fixed amount of money, called interest, for allowing them to use your money. In the case of equity, instead of loaning the money, you are actually purchasing a part of the business. That’s probably why what you own are called “shares”.

When the company whose shares you hold makes a profit, it shares some of this profit with you and the rest of its share holders. The amount that is given to share holders is called dividend.

The share price of a company will move up and down on a regular basis depending on how well it performs. You can sell the shares at a price that is higher than the price at which you bought and make a profit. As the years go by, companies that do well will see an increase in their share price. The amount of profit that a company distributs to its share holders may also increase. It is for this reason that investing in well chosen shares can give investors a very good return over the long run. Studies from across the world and across different time frames show that shares give the best return from all investment products, when kept for a long period of time – 7-10 years.

People are advised to keep shares for a long period of time because

• It takes time for businesses and companies to grow. So investing and expecting good results immediately is not possible
• The prices of stocks are affected by factors other than the performance of the company. Political events, economic performance of the country, natural calamities, international happenings, etc. All make the price of shares go up or down. So investing for the long run usually insures that though prices may move up and down due to other factors in the short run, they will reflect the value of the company in the long run.

Cautions while investing in shares

If somehow, you purchase the shares of a company that does not do well, the value of the share may fall and although you invested Rs. 50 to purchase one share you may get back only Rs. 20. Worse still, no body may want to purchase your shares when you need the money and want to sell them. This is a rare case... but it is possible.

When you need your money urgently, you may be able to sell your shares but you may not get a good price for them, simply because you sold during a down market.

Make sure you are truly convinced that the company will do well. Learn about its management and how they plan to grow the business. Take interest in every little aspect of the company. It is, after all, partly your company.

Stay invested for the long term but keep a track of the performance of the companies that you have invested in from time to time. Don’t panic and sell your shares if the price of the stock is falling – especially if the prices of most stocks in the market are falling. Don’t be greedy and sell off your shares if you find that the price of the company you have invested in has risen a little. Sell only if you feel that the company does not show any future promise.

Insurance

Whenever you hear the word insurance, “protection” and “financial security” are the ideas that come to mind. Fundamentally, that is what insurance is all about. It involves paying a small fixed sum of money (premium) for a specified number of years (term of the plan) and then receiving a lump sum payment in the event of the death of the insured (sum assured). If the insured lives beyond the term of the insurance policy, you get back nothing. Such insurance plans are called term plans.

However, insurance has changed over the years. Insurance products which help you to meet long term goals have developed. These goals could be anything from giving your children an expensive post-graduate education to funding your retirement. At the same time, they give you the traditional insurance protection and financial security in the event of the death of the insured.

In such cases, insurance companies still collect a fixed amount from the insured. Then part of the money goes towards the basic insurance protection and the remaining is invested on behalf of the insured person. Let’s look at some of the most popular types of insurance plans which act as a long term financial product in addition to fulfilling the basic function of insurance.

Moneyback plans: In such plans, you pay a regular premium. Part of the premium is invested on your behalf and the rest pays for your insurance. Then, at fixed intervals – for example every 5 years, for the next 20 years - you will receive lump sums of money. If you die during the term of the plan, your dependents will receive the sum assured. If you do not die, you will still receive the payouts at regular intervals.

Such plans are ideal for those who would like to match the incomes from the plan to milestones in their children’s lives. For instance, let’s say you purchase a moneyback plan when your child is 10 years old. Suppose this plan promises to pay out lump sums of money every 5 years for the next 20 years. When you child is 15 years old and ready to go to college, you will receive money. Then, when your child completes his graduation and is ready for post-graduation, you will receive money. After 5 years, you can gift your child a lump sum of money to help him settle in his career. When you receive the last lot of money from the policy, it may contribute to your child’s marriage expenses.

Endowment plans: These plans require you to pay a regular premium. If you expire during the term of the plan, your dependents will receive the sum assured; if you survive the plan, you will receive a lump sum.

Such plans are made for those who would like to receive a large amount after a fixed number of years. This could be used towards paying for a home or as a retirement kitty.

Unit Linked Insurance Plans (ULIPs): When you purchase a ULIP, you will have to pay a regular premium as is usual with insurance products. Part of your premium is used to purchase insurance and the other part is invested. In the case of ULIPs, you decide how the money has to be invested –by choosing a fund or combination of funds presented to you by the mutual fund company. These funds work in a similar manner to regular mutual fund. You are allocated a number of units, based on how much of your money is channelled towards investing. If the fund does well, the value of your units increase.

Such plans enable you to shift your money from one fund offered by them to another. They also allow you to withdraw some part of your money by encashing your units, subject to conditions. And, as in the case of other insurance plans, if you die during the term of the plan, your dependents will receive either a sum assured or the value of your units, depending on the plan you have chosen. If you survive the term of the policy, you receive the value of your units when the plan matures. You can use this money to meet a long term goal.

There are many variants of the above mentioned plans. They are given different names and packaged as solutions to meet different goals. But one thing remains common, they have become financial products which could help you to meet your goals.

Life Insurance – a basic financial necessity

Let’s suppose you plan for your goals and invest in various long and short term financial products. Let’s also say that all’s going as per your plans and you are contributing to these products as per your financial schedule. What happens if you are suddenly not around anymore to ensure that the money keeps flowing into these products? Should the dreams that you had for your loved ones suddenly disappear? It should not. If you have purchased adequate insurance, it will ensure that your loved ones continue to live the dreams that you planned for them.

Insurance is a very important foundation which all earning members of a family must have before they invest elsewhere.

An earning individual must pay a certain amount of money each year (once a year or every month or every quarter) called premium for the term of the policy. The term of the policy is the time span during which, if the individual dies, the family will receive a large lump sum amount. This lump sum amount is called the sum assured. Some insurance policies called Unit Linked Assurance Plans or ULIPs offer individuals a chance to invest and grow their money. Other insurance products, such as Money back plans and Endowment plans return some amounts of money at pre-determined times. The most basic type of insurance does not pay back any amount if the insured individual lives past the term of the policy. However, it pays out a large amount if the individual dies during the term of the policy.

Features of insurance

• Return: The return from different insurance products differs. Term plans offer a fixed sum assured only if the insured individual dies during the term of the plan. Other insurance plans, like ULIPs offer returns that are linked to financial products as they invest part of the money in such products. Still others pay out predetermined sums of money and different intervals. Some policies also pay out unexpected bonuses.
• Risk: In a pure term policy, if you live beyond the term of the policy, you will get nothing back. In the case of ULIPs, the investment portion of your insurance product depends on the investment options available to you. It also depends on how these products perform.
• Tenure: Usually long term.
• Taxes: The government allows you to get a deduction from your income for premium payments that you make towards your insurance policies.

Cautions while investing

• While there are many options to invest, be aware that there are recognized, legitimate financial products and fake ones. The genuine ones give you returns based on how they use the money you invest. For example, when you lend to a bank for a fixed period of time, the bank further lends that money to someone else. The rates that banks offer and charge are fixed by the RBI and the banking system and your money is very safe with them. Similar is the case with post office savings and other recognized organizations that we have covered so far.
• However, you should be careful about investing in schemes offered by people or organizations that are not recognized by a regulator like RBI, SEBI, IRDA, etc. The schemes promoted by unrecognized companies may look very attractive when you first hear about them. One such example of a fake financial investment scheme is a Ponzi scheme.
• This is how Ponzi schemes work: You will be approached by an individual or an organisation that promises to give you extremely high returns on your investments. When you invest with them, they will give you unbelievably good returns at first. For instance, if you invest Rs. 1000, you may be given Rs. 500 as interest, in the first 6 months itself. Sometimes, they may return double your initial investment in a short period of time. This will encourage you to invest more and also tell your friends and relatives about the scheme.
• How do they give this kind of returns? What they actually do is take your money and give it to someone else without investing anywhere. Similarly, what they get from someone else, they give it to you. When you tell your friends and family, they also invest in the scheme. The firm then just pays circulate the money until a very large number of people start investing with them. As an investor in such a scheme, once you start receiving very high returns regularly, you will be tempted to invest even higher amounts to get more returns. Once a sizeable number of people invest huge sums of money, they will disappear with the money. Since they have not registered with any regulatory body, you will not be able to track them down. The documents, contact numbers, etc. will all be invalid and you would have lost a huge sum of money.
• There can be many complicated variants to this scheme. The main indication that you must look forward to is that if the returns seems to be too good to be true, study it further. Ask a lot of questions about the scheme and consult people whose financial knowledge you trust before you invest. If you fall for such a scheme, it can wipe out years of efforts that you or your loved ones would have made to save money. So be careful. Don’t be greedy when it comes to investing. There are no shortcuts to investing. Always be patient.

Source: Portal Content Team