Financial plan must be in such a way that the immediate and long-term financial needs are met. Investment planning is a key component of financial planning. Investments will ensure wealth growth and income generation. After you retire, you will not have a regular salary but you will have monetary needs. Therefore it is important to have financial stability in life. It is easier to face other challenges in life if the financial aspect is taken care of. There are a variety of investment options in India like equity, mutual funds, bonds, PPF etc. but here are few lesser known options:
Exchange Traded Funds (ETFs) & Index Fund
ETFs are funds that invest in other assets such as stocks, indices or commodities. The trade of these are open on the exchange like BSE & NSE. The risk is less in ETFs against direct equity. Also ETF’s has well diversification. In developed countries, people have started preferring ETF over active fund but in India liquidity can be an issue. One such example of Exchange Traded Funds in India is ICICI SENSEX Prudential Exchange Traded Fund where the Underlying product is Sensex.
Real Estate Investment Trusts
As an investor investing in a real estate investment trust (REIT), can be profitable as real estate prices are rising also considering it as a liquid investment. A liquid investment is one that is relatively easy to sell. For example, if the value of a purchased office building increases. However complication will be selling it and time-consuming if you need to withdraw your money. REITs are securities that help in investing in commercial real estate sector. One can buy and sell shares in them like stocks on the major exchanges. Some REITs pay dividends to their investors, usually every three months. There are many kinds of REITs available. Thus it is important to understand the various options available before investing.
DRIP (Dividend Reinvestment Plans):
Corporations are directly offered DRIP and it plans to allow investors to apply their stock dividends immediately toward the purchase of additional shares. There are no commission charges to the buyers for the transaction. One should research any stock purchase carefully and make sure there is growth in the company’s financial future. Potential dividend reinvestment plan provides unique benefits such as diversion of dividends automatically for buying more stock. Thus purchases are not subject to emotional responses to the market’s short-term volatility. Additionally, this type of program allows buying fractions of stock shares, which are not able to do on the open market.
Fixed Maturity Plans (FMPs) are close-ended mutual fund schemes which help to invest in debt instruments such as certificate of deposits (CDs), money market instruments or bonds. They are low risk instruments and it offers no guarantee of returns. The return is usually higher than that on FDs due to tax arbitrage if held for 3 years. Different plans have different maturity periods ranging from 1 year to 5 years depending on the instruments. It is better to invest amount that will not need anytime soon. There is tax applicable on distribution of dividends and capital gains. Thus tax applies on FMPs on the basis of growth.
Public entities such as states, counties, cities, school districts, airports, etc. issue tax-free bonds to raise money for special projects. Since these bonds represent less risk than stocks and corporate bonds, municipal bonds pay a lower interest rate. However, the interest rate is higher than that from current deposits and savings accounts. The most important benefit is that there is an exemption in all interest earned from municipal bonds from federal income tax. In some cases, the interest is also exempt from state income taxes. These types of bonds are an easy trade at any time. Thus the liquidity allows small-scale investors to participate safely in the market.