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.

Tips to Teach Money Management to Your Children

Managing money is as difficult as earning it. So, it’s always good to teach your child about earning and saving early. But using financial jargons like stock loans and investing will not bring the desired results. Instead, you should teach your child about money in an interesting manner and make it a fun-filled experience. Here are some tips:

Playing money
Educating kids through games is always a good option. You can teach your child about money management through board games, PC games or online games. Parents can interact with children over a game of ‘Monopoly’. This can be a productive, yet leisure-filled way of spending an evening together. ‘Monopoly’ is all about collection and payment of rent, as well as buying and selling of property. If your child is netsavvy, you can even play this game online, which comes with tokens and property auctions, as in the real game.

Another good board game is ‘The Game of Life’, which also has an online version. The main objective of this game is to opt for a lucrative career by getting the highest salary and signing off with a high net worth.

For internet addicts, there are several online games. A popular one is Practical Money Skills For Life, which is a collection of six games.

The first one is ‘Financial Football’, which is a quiz-style game packed with finance-themed questions. The second game is ‘Countdown to Retirement’, where you key in the career and lifestyle of your choice and you come to know if you’ll have a comfortable retired life.

The third one is ‘Ed’s Bank’, which is all about how you manage your pocket money. Then there is ‘Road Trip to Savings’, which requires the child to make decisions about income, expenses and savings to achieve financial stability

Different approach for a growing child
If you have a young adult at home, and if he/she has grown out of such games, you can try some real life techniques. If your child wants the latest bicycle, just don’t go and buy it. Ask the child to save money every month from his/her allowance. Then set a target that if he/she needs a bicycle at the end of six months, how much will he/she have to save every month to reach that target.

If your child reaches the target by the defined time, you can reward him/her with a one-time bonus which offers incentive to him/her to save even more.

Get over the piggy account
Another way you can impart financial education to high school or college kids is by opening a bank account in their name. Most private sector banks like ICICI Bank and HDFC Bank, as well as foreign banks like Citibank and Standard Chartered, offer accounts for kids.

Usually, the minimum deposit amount is Rs 5,000 and you can transfer the monthly allowance to your kid’s account. It helps if you have a savings account with the same bank.

Like any other savings account, even this one comes with a cheque book and debit card. Usually, debit cards have withdrawal limits of around Rs 500 per day, but this may vary from bank to bank. You can also set mobile alerts, which will allow you to monitor your child’s expenditure.