Why Should You Diversify Your Investments?

What Does Diversification Mean?

The concept of not putting all your eggs in one basket largely applies to money management. Diversification essentially implies that we should allocate our investment money strategically among different types of assets and asset categories. If money were eggs, then divide the eggs into several baskets. In case something goes wrong with one basket, the eggs in the other baskets remain safe.

A basic principle of investing is to ensure a diversified portfolio. The idea is to spread the capital amongst different investments so that investors aren’t reliant upon a single investment for all of their returns. Diversification helps minimize the risk of capital loss to an investment portfolio.

Why Diversify?

Minimize risks of loss – if one of your investments doesn’t perform well over a certain period, your other investments may perform better during that time. It significantly reduces the potential losses of your entire investment portfolio. Had you been concentrating all your capital under one type of investment, your finances might have gone for a toss.

Generate returns – investments might not always perform as expected. Let’s say you put your entire corpus into a single mutual fund that’s been constantly performing well; you rely upon this single investment to be the source of a bountiful return. What if the fund fails to perform well? By diversifying your investments, you’re not merely relying upon a single source of income or return.

Preserve capital – not all investors are accumulating wealth;  those who are close to retirement are more focused on the preservation of capital. Diversification helps protect the savings that you’ve accumulated over the years.

What Defines a Diversified Portfolio?

If you intend to diversify your investment portfolio, you must focus on reducing your overall investment risk by spreading your corpus across different asset classes. You need the right mix of defensive and growth assets.

Investments such as cash or fixed interest deposits qualify as defensive assets. Such investments provide a lower return over the long term. However, they also come with a low level of volatility and risk.

Investments such as shares or property that generally provide more capital gains over a longer term are called growth assets. Although these investments are lucrative, they typically have a high level of risk since the return on such investments is largely dependent on market fluctuations.

How to Diversify Your Investments

• To build a diversified portfolio, you should aim to spread the investment risk across different asset classes. Keep some of your funds in fixed income investments (like bank FDs, PPF, debt funds), some in the share market, and some in properties.
• Within each of these asset classes, diversify your money even further. For instance, if you’re purchasing shares, then do so across different industry sectors.
• If you’re investing in managed funds, make sure to spread it across different fund managers.

No investment can consistently outperform other investments. Different types of investment perform in different ways owing to a range of factors like:

• Current market conditions
• Interest rates
• Currency markets.
  

For instance, your share portfolio may suffer losses during periods of increased share market volatility. If you simultaneously hold investments in other asset classes, such investments may perform better during the same period. Moreover, the returns from safe and steadily growing investments like Fixed Deposits, Post Office Monthly Income Schemes, Public Provident Fund, etc. can help mitigate the losses. Thus, diversified investments can keep the returns of your overall investment portfolio smooth and steady.

Best Government Schemes to Invest In - Sukanya Samriddhi Yojana

Most investors opine that investing is all about getting super-quick returns. In fact, many actually follow that strategy. After all, who does not want a quick and high return for their investment, right? However, that does not work like that in the real world. That being said, there are government top investment plans which may double your investment with minimal risk, if at all.


In the real world, high return and low risk investments do not exist. These are not real, and whoever is telling you otherwise is trying to sell you something cheap and super-risky. You see, the more risks you take, the more returns you can expect. Thus the more returns you get, the more is your risk.

When picking investment avenues, you need to match your own risk tolerance levels. You may find some investment avenues which require a high tolerance level. These have a higher earning potential too. Others are more inflation-adjusted in comparison in the long term.

Top government investment schemes

Want to invest in the best government investment schemes? Here are the top five!

Sukanya Samriddhi Yojana or SSY
 

This investment scheme was launched to encourage parents to give their daughters a good future, It was launched in 2015 under the Beti Bachao Beti Padhao initiative by the Prime Minister Narendra Modi and was for minor girls. One can open SSY accounts in the name of such a girl from her birth to the time before her 10th year. The minimum investment is Rs. 1000 and the maximum is Rs. 1.5 lakh.

National Pension Scheme (NPS)

This is one of the best and well-known investment schemes offered by the Indian government. This is a retirement saving scheme which anyone can take advantage of, but government employees must take it mandatorily. NPS seeks to give an income after retirement. Anyone between 18 and 60 years of age can invest in the National Pension Scheme. Here you can divide your investment between equity, government securities and corporate bonds.

Public Provident Fund or PPF

The PPF is one of the oldest retirement schemes in the country offered by the Indian government. The amount you invest here, the interest you earn and the amount you withdraw are all tax-free. Investing in the PPF can thus save you money, apart from keeping your money safe from market upheavals. The current interest rate is 7.1%. You can have tax deductions under PPF of up to Rs. 1,50,000.

It has a comparatively longer investment time: 15 years. However, due to compound interest and it being tax-free, you save and gain a lot of money. It is safe since the investment principal amount is backed by the respective sovereign guarantee.

National Savings Certificate or NSC

It is given by the Indian government to promote saving among people. The minimum investment amount here is Rs. 100. There is no maximum investment amount. Its interest rate changes each year. You can have tax deductions under this till Rs. 150000. You can invest in the NSC only if you are an Indian citizen.

Atal Pension Yojana or APY

It is one of the most well known investment schemes offered by the government. It is directed at the workers of the unorganized sector. To be eligible, you need to be between 18 and 40 years, having a valid bank account. It was launched to encourage the poorer sections of the populations to save for their retirement. One can also take the APY if one is self-employed, considered the person fulfills all the other conditions as well. You can apply for this at your bank and post office. However, you can make contributions only till the age of 60.

What are Assets? Why should You Care?

An asset is anything that you own, and that which has monetary value. As you might have guessed already, assets include your house, agricultural land, properties, cars, stocks, checking account, and even investments.

It is important to take stock of, or inventory of, your assets. It helps you to find out what your assets are worth. And remember, the value of assets change over time. The value of your car depreciates with each passing year, while conversely, the value of land increases over time.

That being said, you want to ensure that they are protected. For instance, you want to ensure that your assets are protected from natural disasters, divorce cases, lawsuits, and more. All this helps you to leverage your assets to meet emergency situations on time.

Let’s start by giving you a very basic intro into assets, and how assets can affect you. Your assets can be business-related, or they can be personal things. However, for the purpose of our article here, we shall be focusing on personal assets only.

Let’s look at the type of assets you can have.

Remember, some assets depreciate in value over time.

1. Cash and cash equivalents: These are assets in the form of money which is stored in checking accounts, savings accounts, certificate of deposit, and other account types.
2. Tangible assets: These are physical things which you can touch. This includes business properties, personal properties, boats, cars, art and jewelry.   
3. Intangible assets: These are assets you cannot touch, and thus these are in the form of bonds, stocks, pensions and royalties.
4. Liquid assets: All liquid assets are cash, or can be converted into cash easily. As such, this category includes bonds and stocks which are easily tradable. Price is not affected when you sell these.
5. Fixed assets: These are the opposite of liquid assets, and are also called illiquid assets. These cannot be converted into cash quickly. Additionally, their values change over time. This includes antiques, real estate, furniture, and etc.
6. Fixed income assets: This includes money lent on interest, certificates of deposit, government bonds, securities, and etc.
7. Equity assets: These are the securities and other assets which you own, like mutual funds, stocks, and retirement accounts.

Why do your assets matter?

Your assets are important, not just because of the monetary value, but also because they are essential in determining your financial net worth. Net worth is a fancy word for personal price tag. Over time, your net worth increases.

 Net worth helps you monitor your progress in reaching personal financial goals. 

Here are some scenarios in which you have to know your asset value.

1. Net worth- Net worth, as we said before, helps in shaping your financial health. How can you calculate your net worth? Just subtract your liabilities from your assets?
2. Insurance- Want to insure your jewelry or your house? You need to know how much they are worth before doing that. Insurance helps you to deal with many things which may affect or impact these assets, such as flood, fire, robbery, liability, and even court cases. Assets can earn you an income too; you may want to consider protecting your livelihood from these assets with disability insurance.
3. Loan applications- When you apply for loans, lenders check what liquid assets you have. In case you default, these shall be sold to give them a cover for their loss. If you have assets, you can negotiate a lower interest rate. Besides, having these ensure that you have funds enough to fall back on in times of emergencies.
4. Collateral- Depending on what loan you are taking, you may have to give your car and home as collateral. As with all loans, in case you default, these go to the lender.
5. Divorce- During divorce, your assets, money and possessions get divided between you and your spouse.
6. Bankruptcy- If you file for bankruptcy, your assets can be sold. 
7. Retirement- When you retire, it is important to have assets to fall back on. What if you need money quickly after retirement, and a whole lot of it? You can sell some assets to meet such a situation.

6 Fixed Income Investments Under Section 80C to Save Tax in 2020 - Section 80C

Fixed income investments are specialized for risk-averse investors who want the safety of their money with assured returns. Along with these two aspects, schemes such as Public Provident Fund (PPF), National Savings Certificate (NSC), and Sukanya Samriddhi Yojana (SSY), also offer tax-saving benefits under section 80C of the Income Tax Act since the returns from these schemes are entirely tax-exempt. Fixed-income instruments should be an integral part of every investor's portfolio to ensure security, mainly during times of economic volatility. So, let's take a look at some of the best fixed-income investments under the ambit of section 80C, where you can safely park your money.

Public Provident Fund (PPF)

PPF is a favorite mode of investment among the Indian middle-class. It’s considered to be a safe investment that offers an interest rate of 8%.

You may choose to invest a lump sum or make periodic contributions to your PPF account. You can claim a tax deduction for investments of up to Rs 1.5 lakh in a fiscal year under section 80C of the Income Tax Act. PPF is a safe investment avenue as the government reviews it. Currently, the investment, interest and maturity proceeds in PPF are entirely tax-free. New investors can buy this scheme either at a post office or any designated branch of a public sector bank that provides this facility. Also, there are a few private banks that offer the facility to invest in PPF.

Sukanya Samriddhi Yojana (SSY)

The current interest rate offered in SSY is 8.5 percent. You can make a contribution of up to Rs 1.5 lakh per account in a financial year under section 80C. However, there’s a catch. Sukanya Samriddhi Yojana is applicable only to the parents of a girl child. This scheme can be availed for a maximum of two daughters who are not more than ten years of age during the time of opening the account. In this scheme, you can claim a deduction for investments up to Rs 1.5 lakh only in a fiscal year according to section 80C of the Income Tax Act. There are no restrictions on the number of deposits that you can make either in a month or a financial year. The interest rate of SSY is linked with government bond yield and is subject to change every quarter as per the discretion of the government. You can utilize the maturity proceeds of this program for the education and wedding expenses of your daughter.

Voluntary Provident Fund (VPF)

The current interest rate offered by VPF schemes is 8.65%. You can contribute your entire basic salary and DA (dearness allowance) to this fund. However, you can only claim a standard tax deduction for investments up to Rs 1.5 lakh in a fiscal year under section 80C of the Income Tax Act. Hence, if you have already crossed your 80C limit through other investments or expenditures, such as EPF, PPF, ELSS, FDs, etc., then you won't be able to use the additional VPF contribution to save more tax amount.

If you’re wondering how VPF and EPF are different, then let’s help you understand. Unlike EPF, VPF facilitates the employees to voluntarily deposit beyond a fixed contribution limit in their PF accounts. However, in VPF, it is not necessary for the employer to make a matching contribution as it is mandatory in EPF. VPF also has lock-in conditions until retirement or resignation, whichever is earlier.

VPF is an excellent investment tool for saving tax under section 80C as it gives a tax-free return. Further, the gains are risk-free since the government guarantees them. VPF offers you the dual benefit of a tax saving scheme and a retirement planning scheme, and salaried employees should allocate a higher proportion of their salary to VPF for substantial tax-saving.

Senior Citizens' Saving Scheme (SCSS)

The current interest rate offered by SCSS is 8.7%. A maximum contribution of Rs 15 lakh is allowed in this scheme. As a senior citizen, you can claim a deduction for investments up to Rs 1.5 lakh in a fiscal year under section 80C. SCSS is a tax-saving instrument for people who are above the age of 60. However, if you have opted for voluntary retirement, you can start investing in SCSS even at the age of 58. On October 3, 2017, the Ministry of Finance announced that the minimum age limit for retired defense personnel is reduced to 50 years for investing in SCSS. This scheme has a lock-in period of five years. And, if you want to extend the tenure further, you can continue it for another three years. No partial withdrawal is allowed before the expiry of the lock-in period. However, in case of an emergency, you can prematurely close the account with a penalty levied on the withdrawal.

Tax-Saving Bank Fixed Deposits

The current interest rate offered in tax-saving bank Fixed Deposits (FD) is around 7-8.25%. The maximum amount that you can invest in this scheme is Rs 1.5 lakh, for which you can claim a deduction in a fiscal year under section 80C. The tax saving bank fixed deposits have a lock-in period of 5 years. This scheme is highly preferred for investments due to the assurance of capital preservation and returns as compared to equity investments in terms of tax-saving. It is convenient for the last minute tax savers, and the interest rates on this scheme are reviewed and changed periodically by the banks.

National Saving Certificate (NSC)

The current interest rate offered in NSC is 8%. There is no cap on the amount of investment that you can make in NSCs. However, you can only claim a deduction of Rs 1.5 lakh during investment declaration. Currently, National Savings Certificate is available for five-year subscriptions only. The interest rate is reviewed every quarter by the government and modified accordingly. Although interest earned from National Saving Certificate is taxable, the interest amount is considered re-invested (except in the last year of tenure) as it is not paid back to the investor until the maturity of the instrument. Hence, the re-invested interest component also qualifies for deduction under Section 80C of the income tax act. The interest earned in the final year of the tenure is not considered re-invested and is paid back to the investor for that year along with the principal and accrued interest in the previous years.

80C Investment Options - What More?

Most of you are aware of Section 80C and the investments you can make under the section. mymoneykarma now gives you eight tax-saving investments above 80C. This will free up your hard earned money for fulfilling your wishes.

What is Section 80C?

Section 80C is the most renowned section of the Indian Income Tax Act. There are numerous tax saving options under 80C, such as ELSS and PPF. While investing under 80C is very popular, we bring you tax-hacks other than Section 80C.

NPS

The National Pension System was launched by the Indian government in 2009. The NPS offers a tax deduction for investments made up to Rs. 50,000, in addition to the deduction of 1.5 lakh rupees available under Section 80C. Your returns, however, depend on the asset class you have chosen. Usually, it is advisable to select a high-risk instrument like government debt.

Rajiv Gandhi Equity Savings Scheme (Section 80CG)

This is another scheme available for tax-saving. Under this, you can invest up to Rs 50,000 in approved stocks. But this scheme is available for you only if you are a first-time investor. This scheme was introduced under the UPA regime and has not been promoted aggressively. A supposed overhaul of the project hasn't come through yet.

Interest on Education Loan (Section 80E)

You can claim the interests you pay on the active education loans you possess, if you have any. The deduction can be only on the interest repayment part, not on the principal of the education loan. That means only the interest repayment is available for a tax deduction while filing an income tax return.

This deduction is available for saving above Rs. 1,50,000, and there is no maximum limit on claiming deduction under 80E. Parents can take up this tax-saving option on behalf of their children, as children are not taxed. It is not a popular scheme, and not many are aware of it.

House Rent Allowance (Section 80GG)

If you are staying in a rented apartment or house and paying rent, you can claim the amount as a tax deduction under Sec 80GG of the Income Tax Act. The amount of the deduction is based on the city that you are residing in. In case you have queries, it is best to talk to the HR department on the exact tax benefits that you would get. This is a significant tax hack that you should take note of.

Home Loans (Section 80EEE)

An additional deduction of Rs 50,000 on home loan interest can be claimed under Sec 80EE of the Income Tax Act. This option is however not a very popular one.

Health Insurance (Section 80D)

You should take a health insurance policy, which would not only take care of your medical expenses but also enable you to save tax. The current IT norms allow a deduction of up to Rs 25,000 in the case of ordinary citizens and Rs 30,000 in case of senior citizens. So, you can go ahead and take a good health insurance policy.

This is a tax hack that you can utilize apart from the usual 80C benefits. The Sec 80D benefits also include the gains on expenses incurred towards preventive health check-ups.

Donations (Section 80G)

Section 80G of the income tax law provides tax benefits on the amount donated to NGOs. So, you can be generous to the causes you believe in, to your heart's content. However, the deductions can be made if you are donating by cash or draft only. The limit of the deduction can be either 50% or 100%.

You have to claim this deduction when you file your tax returns and quote your PAN to the institution you donated. If you are unsure about the cause you want to support, there is an exhaustive list of institutions and establishments that you can donate to.

Medical Treatment (Section 80DDB)

For certain specific diseases, Income Tax Act offers tax benefits to you under section 80DDB from expenses incurred by you for the treatment of said diseases or ailments. This tax-saving option is not only for the people filing tax returns but also for dependents of such people. However, this tax benefit is not available for Non-Resident Indians.