Five Ways to Save Money By Investing

Systematic Investment Plans (SIPs)

This one is a favourite with most investment advisors, thanks to the lucrative returns on offer. A systematic investment plan (SIP) is a low-cost method of investing in the equity market, with a medium to long-term view (more than three years). This is the best option for all age groups, especially for the young and middle-age group, who are in the phase to build wealth.

SIP is good for youngsters and people in their 30s, but is not recommended for retirees and senior citizens. Also, although it is capable of generating high returns, the element of risk constitutes the downside. After parking your money in an MF for three years, you can still end up with negative returns, if the market crashes.

Recurring Deposits With Banks

While recurring deposits (RD) is a popular instrument, rising inflation has taken away some of its sheen. The advantages of an RD with a bank include the low-risk factor — the returns are quite certain. It is suitable for people who do not have access to quality research on stocks and MFs or fall in the middle and low-income brackets, as taxes eat into 1/3 of returns generated by an RD.

This means that people falling in the high-income bracket can consider more remunerative options. Also, this is an avenue that is worst-affected by inflation. In the current scenario, post-tax RD returns fail to beat inflation. It is for the riskaverse who don’t need to create wealth — taxation on interest earnings is a big negative. The liquidity that recurring deposit offers comes at a cost.

Post Office Recurring Deposits

Post office RD is superior to bank RDs in terms of safety as it is backed by the government, but the returns are lower as well. Experts feel that it is suitable only for the low-income groups

Unit-Linked Insurance Policies (Ulips)

Unit linked insurance policies (Ulips) are avoidable, in general, cutting across age groups and income categories. Ulips come at a higher cost — they are, in a sense, the costlier versions of SIPs. While SIPs can entail a cost of 2-2.5% on your investment, Ulips can take away as much as 20% of your investment in the first year.

Pension Ulips are disastrous. They are good during the accumulation phase, but when you need to get annuity, they can result in real losses as you get a measly 3-5% (assuming this will be the rate 5-10 years hence, given a rate of about 6% now). To make matters worse, the inflow of funds will be fully taxable.

The only feature that may be counted as a positive is the lock-in period that they come with, which makes them suitable for those who are reckless spenders. Premium payments for Ulips can successfully force such people to follow a disciplined approach and save regularly.

Public Provident Fund

Public provident fund (PPF) is a fruitful avenue for those who are not in need of liquidity in the near-term and are looking to save for long-term goals. This is because it comes with a lock-in period of 7-15 years, which means that people saving for short to medium-term goals will find it of little use. You can invest between Rs 500 and Rs 70,000 in a PPF account every year.

PPF, which is deemed to be ideal for middle income and low-income groups, boasts of nearly zero risk, but yields decent returns. What makes it more attractive is the tax benefit (under Section 80 C) attached to it — an investment in PPF, thus, serves the dual purpose of saving and tax planning.