How to grow your money tree?

How to grow your money tree?

Four friends Hardik, Divya, Nehal & Prateek had met after a long time in a cafeteria. Hardik was an IT professional, Divya had recently started working in a bank, Nehal had chosen to be homemaker while Prateek had a small business of computer parts.

Hardik: Do you all know, I am the highest taxpayer in my office. My colleagues block their money for tax saving and then borrow money when they require it .I prefer to pay tax instead and then use my money when required so that I do not have to borrow money in any case.

Divya : That means you don’t  save money. I am already looking for saving and investment options and will start investing since my first salary.

Hardik: I do save in Provident Fund (PF) that is deducted from my salary.

Divya: But isn’t that a long term investment?

Hardik: Dunno

Nehal: I do not have to pay tax, so no hassle of investments and all. I save money in my savings account only and use as and when required.

Prateek: I am a businessperson and do not believe in any saving and investment other than my business.

From the above conversation, we understand that many are not sentient about savings and are naive about the investment options available to them.

Tip 1 # Saving and investing early is the first step in planting your money tree

Let us explore some of the investment options, which are easily available to all of us for making small investments. The yields of the same persuade us to save and invest.

Fixed Deposit

Fixed deposit (FD) allows you to deposit your savings with a bank or financial institution for a fixed percentage of interest and for a fixed period. The interest rate on the deposit vary depending on the amount, period and between bank offers. At the time of the maturity, the principal amount along with interest is credited to customer’s account.

Generally, fixed deposits have three types of interest options. The same are expounded as below.

Interest option	Cumulative	Quarterly	Monthly
Feature	Interest is credited to deposit account on quarterly basis and therefore interest upon   interest is calculated and paid at the time of the maturity along with the principle amount	Simple interest is paid to the investor on quarterly basis	Discounted interest is paid to the interest on monthly basis
Benefits	It gives highest return on your deposit	It gives the option of income every quarter, however the interest amount is marginally lesser than the cumulative interest	It gives the option of monthly income; however, the interest amount is marginally lesser than cumulative interest or quarterly interest. Although same interest rates as other fixed deposits are applicable, the monthly interest paid is at a discounted rate.
Tax deducted at source(TDS)	TDS @ 10 % (where pan is registered with the bank) & 20 % (where pan is not registered with the bank )is automatically deducted as and when  your estimated interest income exceeds Rs.10,000 p.a  If your income for a year less than  Rs. 2 lakhs and interest income exceeds 10,000 mark , then it is advisable to submit Form 15G(for individuals) or 15H (for senior citizens) at the beginning of every financial year, i.e in April every year

Tip # 2 Compounding is the eight wonder of the world- Albert Einstein

Recurring Deposit (RD)

This option is an advantage for individuals who cannot save a lump sum amount for availing fixed deposit scheme; instead, they can save small amounts every month. In this scheme, you can deposit a fixed amount every month for a fixed period at pre-determined interest rate, which is generally same as fixed deposit interest rate.  Some banks also provide the option of depositing variable amount every month as per your savings and interest is calculated on the amount deposited by you. Principal amount along with interest is paid to the customer on maturity.

 There was no TDS deducted on interest in RD accounts until May 2015,w.e.f  June 2015 TDS  is applicable on accrued interest or interest paid on RD accounts.

Tip #3 Small savings can help you to build stashes for a rainy day

   Mutual Funds

Mutual fund is made up of the money pooled in by a large number of investors. An expert Fund manager then invests this money across various financial instruments.

 It gives you the option of investing a lumpsum amount at a time or you can opt for SIP   (Systematic Investment Plan). SIP is similar to a recurring deposit, wherein a fixed amount is invested in your selected fund based upon your risk appetite for a fixed duration. However, returns vary from company to company and from funds to funds.

You can choose to invest in a fund based on your risk appetite and fund features. Different types of funds like equity, debt, balanced, gilt, money market, sector specific, index funds are available in the market.


To know more about best SIPs for 2015,click here 

Tip #4 Diversify your investment to mitigate risk- (“Don’t put all your eggs in one basket")

Post Office Savings Scheme

Post office savings schemes are not that popular across small investors’ class whereas factually post office savings scheme are really beneficial for small retail investors.

Some of the post office savings schemes are elaborated below.

      Savings account: This savings account provides interest rate of 4% p.a and bears all the normal features of any savings account. Also account can be transferred from one post office to other. To know more about benefits of a Savings account, click here

      Recurring deposit/ Fixed deposit//Senior Citizen Savings scheme: FD & RD has the same features of any other recurring deposit or fixed deposit, but the maximum duration is of 5 years only. Senior citizen scheme is characterized by higher interest rate with benefit of tax exempton under section 80C of IT Act.

      Sukanya Samridhi Account: This scheme is available for girls upto the age of 10 years only. Rate of interest applicable to this account is 9.2% p.a which is calculated and compounded on yearly basis. You can deposit a minimum Rs.1000 and maximum of Rs. 1,50,000 in the account in a financial year.

      PPF (Public Provident Fund) account: PF account has locked in period of 15 years and is allowed for tax exemption under 80C of IT Act. The current interest at 8.7% is tax free!

      NSC (National Savings Certificate): NSC comes with two maturities:

o   5 years with interest @ 8.5% compounded six monthly

o   10 yrs with interest @ 8.8% compounded six monthly, both payable at maturity.

NSC is eligible for tax rebate in IT Act under sec.80 C

      KVP (Kisan Vikas Patra): Amount invested in KVP doubles in 100 months (approx. interest of 8.4%) and can be en-cashed after 30 months from date of issue.

Tip # 5 A meticulous approach with diversification, buy-and-hold and rupee-cost-averaging strategies makes investment recompensing even in the worst of times.

To know more about Post Office savings scheme click  here

Share your savings and investment tips in the comments below