Do you ever think about investing but then go that you do not have the budget to invest because of rent, household expenses, kid’s fees, or in the time of this pandemic, the medical expenses?
Well, we have good news for you. Investing does not always require a fat chunk of your budget. You can invest in different investment classes for as low as Rs. 500. This article will go through different ways investors can make smart investments with a small budget. However, it is first essential to set aside some amount of money every month to invest and avoid breaking out of this discipline.
Mutual funds Sahi hai?
In recent years, mutual funds have become a go-to for several urban investors who do not have the time to research stocks, have low budgets, and want to achieve diversification through lower investment amounts. Mutual funds generally combine different stocks, bonds, and other assets into one portfolio and then sell units of these to the inventors, which typically have a lower price per unit than the individual prices of the assets. These lower prices result from the fraction of the asset received by the investors, unlike in the stock market, where the investors receive the entire share.
Mutual funds have different categories like debt funds, equity funds, and hybrid funds (mixture of debt and equity funds), and the equity funds can be further classified into index funds, large-cap funds, mid-cap funds, and small-cap funds. These allow investors to select the category in which they want to invest as per their risk appetite, starting with an investment of just Rs 500.
For example, investors who want to face less risk may invest in index funds that simply track the indices like NIFTY50 and SENSEX or look for debt funds that invest the proceeds in corporate and government bonds, which are generally less risky than equities. On the other hand, the people who enjoy the thrill of risk to achieve higher returns may look to invest in small-cap funds, which generally have a higher degree of risk but can provide higher returns if things go well.
Exchange-Traded Funds (ETFs) are an investment avenue that have the characteristics of both stocks and mutual funds. They are similar to stocks as they can be bought and sold during the market hours in the stock market, and the price keeps on changing throughout the trading hours depending on demand and supply as well as changes in the price of the underlying of ETFs. On the other hand, the ETFs are similar to mutual funds in a way that they are a pool of securities which may be stocks, debt, gold, or currency. Thus, the ETFs can be seen as the mutual funds of the stock market.
Like mutual funds, there are several categories of ETFs, each of which serves different risk-taking capacities. For people looking for less risk and are satisfied with lower returns as a result, index ETF may be a go-to as it tracks a particular market index. The risk-averse investors may also look for debt ETFs which invest in several debt instruments of private companies, public sector units, and the government. By investing in different types of ETFs, the investor can achieve the diversification needs of oneself.
The ETFs have an advantage over mutual funds due to lower costs. Mutual funds generally charge expense ratios, exit load, and management fees, making mutual funds slightly expensive compared to mutual funds. As ETFs are traded like stocks in the market, the cost incurred is generally lower. In addition, ETFs generally have higher liquidity than mutual funds since they can be easily traded over the stock market. However, an important drawback of an ETF is that it requires the investor to have a brokerage and a Demat account while no such thing is necessary for mutual funds.
There exist several government schemes which promise a return higher than the traditional fixed deposits. As a result, these schemes have increasing popularity in both rural and urban sections of society. Due to the government backing, these instruments are considered highly safe, and in few securities, the return is fixed and generally higher than inflation rates.
The first scheme available is the Kisan Vikas Patra (KVP), which currently offers a fixed interest rate of 6.9% but has a high lock-in period of 10 years and 4 months. The minimum amount to be invested is Rs. 1000. As it offers a fixed interest rate through the holding period, it is seen as an attractive option for low-risk investors.
The second scheme available is the Public Provident Fund (PPF). It is a long-term investment option that currently offers an interest rate of 7.1%. The tenure of the PPF is 15 years, and the investor can withdraw the total amount of the investment only on maturity, while partial withdrawal is allowed only from 6 years after the investment. The interest earned on the investment is free from taxation. The minimum investment is Rs. 500.
The third scheme is the RBI floating rate bonds. These are debt instruments issued by the RBI for the government and have a tenure of 7 years. The current interest rate on these bonds is 7.15% and is subject to change every quarter depending on the economic conditions. For the past two quarters, the RBI has kept the interest rate at the current levels. The minimum amount to be invested is Rs. 1000.
The fourth scheme is the Sovereign Gold Bonds (SGBs). These bonds are issued against the prevailing price of gold. The maturity of the SGBs is in 8 years, and the maturity amount to be received will be equal to the prevailing price of gold. This offers excellent exposure to gold as an asset without needing to buy physical gold and store it while also receiving an annual interest rate of 2.5% paid every 6 months. The minimum investment requirement is 1 gram of gold, the price of which changes with every tranche issued. The capital gain on maturity is tax-free.
Making smart investments with a limited budget is not difficult if proper research is carried out. Wealth can be built with limited capital all it requires is commitment, dedication, and effective research.