Shruti, who is 35 years old, lives in Bengaluru and is a fiery business woman. She is also a mother of two kids. She oozes confidence when questioned on how she runs her business and how many risks she took to make her business successful.
But, ask her what kind of investments she makes using her income and she says “I stick to Fixed Deposits. Fixed Deposits give me security and stable returns as well.” She has been running her business for over a decade now and although she faces the risk of irregular income, Shruti is not ready to take risks with her investments in order to get better returns.
When asked about why she doesn’t invest in Mutual Funds she says, “I have no investments in Mutual Funds because I have no knowledge about how they work.”
Additional Reading: How To Meet Your Goals With Mutual Funds
Shruti isn’t alone in thinking this way. In India, there are several working women who refrain from investing in riskier instruments. This is mainly due to lack of knowledge of financial products and fear of losses.
There is also one other important reason why working women only look at ‘safe’ investments – Career breaks. Unlike men, women are forced to take career breaks at various stages in life, which means they face greater risks when it comes to disruption in their income.
All this gives women a sense of insecurity or fear, which leads them to take refuge in ‘safe’ financial investment decisions.
Sushma Iyer is the perfect example. Sushma, a 29-year-old, is a software professional in Chennai. She started working immediately after graduation and got married when she turned 24. She had to leave her job a year after her marriage since they relocated to another city.
She has recently landed a job and will be starting work next month. She has savings of over Rs. 6,00,000 from her earnings and is unwilling to put them in investments other than Fixed Deposits. Sushma says “Stocks and Mutual Funds are very risky. I don’t want to lose any money because I have just found a job.” Do you think Sushma is right?
Additional Reading: Estimate Mutual Fund Risk
She may be. However, putting all your money solely in fixed-income investments is not the right thing to do. Taking too little risk can be risky as well.
If you are overly cautious with your investments, you run the risk of inflation deflating your returns. This is especially true today. Bank Fixed Deposit rates have been recently slashed to 7%-8% and inflation still hovers at around 5%-6%. This means that you won’t really make any substantial returns if you invest only in Fixed Deposits.
Additional Reading: How To Beat Inflation With Some Solid Financial Planning
All Eggs In One Basket?
Let’s assume you invest in a Fixed Deposit and you earn interest of Rs. 100. A decade ago you could have purchased a movie ticket with that amount. Today, you probably won’t even get a tub of popcorn at the multiplex. That’s inflation for you!
So, what do you do? You need to either reduce your expenses (which can be very difficult, we know!) or invest in financial products that will give you returns that beat inflation. Does this mean investing in investments that come with a little more risk? Yes!
Additional Reading: Why You Should Not Take Inflation Lightly
It is important to understand that there is no such thing as a risk-free investment. All investments come with some amount of risk. This applies to even government issued securities.
Here’s a good example. The Sardar Sarovar Nigam (SSN) Bonds were issued by Sardar Sarovar Narmada Nigam Limited. This company is fully owned by the Gujarat Government. Issued in 1994, the SSN bonds promised a phenomenal return of 17%. These were Deep Discount Bonds issued at Rs. 3,600 and investors were supposed to get Rs. 1,11,000 after 20 years.
Unfortunately, none of the bond holders received that amount. This is because the company called back the bonds in 2008 due to their inability to pay the high interest. Investors are now looking to move the Supreme Court as the Gujarat High Court didn’t rule in favour of investors. So, the next time you think that an investment is ‘safe’, think again.
Additional Reading: 3 Step Guide For A Safer Investment
What are the other risks you have to contend with with ‘safe’ investments? Well, one of them is ‘reinvestment risk’. This is the risk you run when you are unable to reinvest the amount you receive on maturity in a financial product that yields a better return.
The following example can help you understand this better. Let us assume you invested in a 5 year Fixed Deposit at 11% 5 years ago, and it happens to be maturing today. Can you find a Fixed Deposit that will give you the same return today? No! This is ‘reinvestment risk’, and is precisely the reason why you must look at investments that can give you similar or better returns.
Equities have returned an average of over 15% per year over the past decade. Returns like this can ensure that you have a sizeable corpus for your goals. But, does this mean you should do away with fixed-income investments?
Of course not! Fixed-income investments should be an essential part of your portfolio, but you need to balance them out with the right amount of equity and other asset classes.
Often, women forget that fixed-income can include investments like Debt Mutual Funds. These Mutual Funds can give you better returns than Fixed Deposits. Slowly but surely, many women are realising that investing across asset classes pays.
Additional Reading: Diversify Your Portfolio With Style
Take the case of Sumana Shekhar. Sumana runs a business while her husband is a research professional. Sumana has always believed in investing across asset classes. So, she has invested in stocks, Mutual Funds, real estate as well as Fixed Deposits.
Says Sumana, “We invest lump sums as well as on a monthly basis. We usually try to split the amounts invested in a variety of ways. We also move them around whenever we feel that there is a need to enhance returns.” Sumana has the right strategy. This is the best way to ensure that your money is always invested in instruments that give you the maximum returns.
Another smart investor is Jenny who is a school teacher. As the mother of school-going kids, Jenny likes to play it safe when it comes to investments. However, she isn’t averse to taking risks, since she knows the effect inflation can have on one’s investments.
So, even though Jenny invests in Recurring Deposits, Fixed Deposits and National Savings Certificates (NSC), she also invests in Mutual Funds. She has even devised an investment strategy. Says Jenny, “I save money through my Recurring Deposits for a set period and invest the maturity amounts in Mutual Funds.”
This solves two problems. The problem of saving as well as the problem of investing. She does both with the right instruments. This way, she earns returns while saving with Recurring Deposits and gains a subsequent lump sum to invest in Mutual Funds that give better returns.
But always remember, it is extremely important to gather as much knowledge as you can before investing in riskier financial products.
Additional Reading: How Women Invest Differently Than Men
The Power Of Knowledge
Knowledge is extremely crucial when you are choosing to make investments. This is especially true for investments involving high risks. Often, due to a lack of time, working women tend to rely on advice from others when it comes to investing.
Doctor Kadambari, 34, says, “Since my money was just lying in my savings account, I thought I could put it to good use based on what my relationship manager said. I am sure I will get good returns now that I have invested the money. I never asked any questions. They know all about investments.”
While relationship managers and financial advisors can certainly give you sound advice, you also need to do a little research of your own and understand where your money is being invested, and find out whether there are any risks involved.
One advantage working women seem to have over homemakers is that they are forced to make compulsory investments (like the Employee Provident Fund (EPF) for example). Since they also need to make investments in order to save on tax, it helps them learn more about investments.
Learning about different investment options will help you assess how suitable the investment is to your risk profile, financial situation and goals. It will also help you make informed decisions so that you can maximise returns over the long-term.
Additional Reading: Investment Options For Everyone
Fending For Yourself
Financial literacy is essential for making smart investment decisions, but should women have different financial goals as compared to their spouses? Maybe! Even though having common financial goals is perfectly alright, women should have their own goals as well and ensure that there are investments in their name. Here are a few examples that will help you understand this well.
Manasa, 68, is a homemaker in Mangalore. She had left all investment decisions to her husband who has invested in several Fixed Deposits, bonds and post office schemes. However, he failed to put down Manasa’s name as a nominee for the investments.
Her husband has since passed away, but because he didn’t put down Manasa as a nominee she is now running from pillar to post to get money from the investments, which, technically, belong to her. This is precisely the reason why you should know what investments have been made in your name, when they will mature and whether all the nominations have been done. This way, in case of an emergency, you know exactly where that money is.
Here is another example of a younger woman. Purvi, 27, is a services professional in Delhi. She was very determined when it came to savings and had diligently saved a huge amount, which she transferred to her husband’s name. He made investments in his name and told her that they were doing well. A year later, Purvi found out that her husband had sold many of the investments to fund his gambling addiction. If the investments had remained in her name, her husband couldn’t have touched them without her permission.
So, ensure that you have investments in your name or in the joint name of you and your husband. It is also important that you be the nominee on all investments that are not in your name. You can have your husband as nominee for investments that are in your name. The best way to invest is to link them to your goals. Plan for these goals as an individual.
Additional Reading: Seven Financial Goals Every Couple Must Set
Here’s how you can invest for different goals.
Marriage (Long-Term Goal) – Ideally you should start saving for your marriage as soon as you start earning. Gone are the days when only parents spent for weddings. Now children are making equal contributions. You could consider bank and corporate Fixed Deposits, National Savings Certificate (NSC) and Mutual Funds. If your goal is more than 3 years away, you can invest in Equity Mutual Funds.
Child Birth (Medium-Term Goal) – You should start saving for this as soon as you get married. If not, start at least 2 years before you plan on having kids. You could consider bank Recurring Deposit (RD), post office Monthly Income Scheme (MIS), or Debt Mutual Funds to save a good amount to reach your goal. Equity investments, however, may be a bit risky in this case.
Additional Reading: Debt Mutual Funds VS Fixed Deposits
Vacation (Short-Term Goal) – Even though you can start saving years in advance for your vacation, people usually only start saving 3 months in advance. Ideally, you should start saving for a vacation 6 months to a year before you take it. Liquid Mutual Funds, Recurring Deposits, and Bank Fixed Deposits are the best options. You can consider ultra-short-term and short-term Mutual Funds as well.
Note that as you approach your goal, you should move your investments to safe avenues in order to protect your capital. You should start by selling off risky investments such as stocks and equity Mutual Funds. Ideally, for long-term goals, this should be done at least 1-2 years before your goal.
Remember that corporate bonds and deposits are also risky and you need to be out of them at least a year before your goal. You can shift your money from Balanced Mutual Funds and debt funds about 6 months before your goal. This way, you can protect your capital from the vagaries of the market while ensuring that the returns earned over the long-term remain safe.
Career Break – In case you are taking a career break, it is best not to close long-term investments such as your Public Provident Fund (PPF) account. But, what can you do during that time? Try withdrawing from short-term investments like Liquid Mutual Funds or bank Fixed Deposits when you need money.
You can even invest the amount made during your working years to create income that you can use during your career break. Here is one way to do that.
Keep 3 months of your salary in a Liquid Mutual Fund or Fixed Deposit. Out of the remaining balance, keep 50% in balanced funds while putting the rest in equity Mutual Funds or bonds, depending on how long your career break is going to be. This will ensure that you get income from them and also earn returns. Additionally, your capital is protected as well.
And don’t think that emergency funds are relevant only when you need to take a career break. You must have an emergency fund in place since emergencies can hit you at any point of time.
Additional Reading: How To Build An Emergency Fund
Here are more reasons why an emergency fund is important and how to use it.
While it is certainly important to build an emergency fund, you must make sure you use it only during ‘real’ emergencies. You could face tough times if you do otherwise.
Take the case Sreedevi, 28, who is a techie in Chennai. She is the breadwinner of the family and her parents are dependent on her. She had saved Rs. 1 lakh as an emergency fund in her savings account. But, in order to keep up with her peers, Sreedevi decided to use most of it to buy a plasma television for her home.
Unfortunately, her father fell ill and she needed Rs. 50,000 for hospital expenses. Unfortunately, she had only Rs. 30,000 left in her emergency fund, which prompted her to take a loan to meet the expenses. This is why you must always use emergency funds ONLY during contingencies.
Additional Reading: Emergency Funds To The Rescue
In case of emergency funds, remember that liquidity is top priority. Returns should take a back seat. This is because you should have quick access to the money at all times. You cannot invest in risky instruments such as stocks and equity Mutual Funds. The best investments to build an emergency fund are Fixed Deposits and debt funds.
If you are a single woman, it is best to have a substantially large emergency fund in place. You can invest in a Liquid Mutual Fund, which will provide you with an annual return of around 5%-6%. These funds invest in short-term debt instruments and hence are quite secure in nature. The most important advantage you have is that you can withdraw the funds at any time with no exit load. The money will get credited into your account within 2-3 days.
Savings Accounts may be adequate as well, but make sure you choose one wisely. Today, there are several banks that offer exclusive savings accounts for women. These accounts usually require a much lower minimum balance to be maintained. Some even come with added advantages such as a free personal accident insurance cover, a free Debit Card and discounts at retailers.
Some women-centric savings accounts offered by banks include ICICI bank’s Advantage Woman Savings Account and IDBI’s SuperShakti (Women’s) Account. Besides this, there are other banks that provide an interest of 6% per annum on savings bank accounts.
You can also use the amount for claiming a tax benefit. If you didn’t already know, income earned from your savings account is exempt from tax up to Rs 10,000 a year. In case both you and your husband are a working couple, you could split the responsibility of building an emergency fund by making two funds and investing separately in your respective savings accounts. This way, you can have a tax-free income of up to Rs. 20,000.
Are you a retired woman? Then investing in Fixed Deposits is a good option. Banks offer a higher interest rate for senior citizens. Do not venture into corporate deposits after retirement as they can be risky. And, apart from an emergency fund, you need to have a regular income during your retirement, especially if you have no pension.
There are a number of ways in which you can create such an income for yourself.
Create A Stream
Planning for your retirement may seem like an unnecessary hassle if you are still in your 20s and 30s. However, the bitter truth is that it is very essential. Even small amounts of money can add up over time and give you a big amount when you need it the most.
Moreover, for women, it becomes even more important to plan for retirement at an early stage. This is because women will encounter disruptions in earning a regular income when they take career breaks for events such as marriage, the birth of a child, and other family emergencies.
Due to this, they tend to lose a substantial chunk of their savings, which means that they contribute less towards their retirement.
How To Plan For Retirement
Working Women – You can start your savings plan with your Employee Provident Fund (EPF). Most employers contribute at least 12% of your basic salary towards your EPF. However, did you know that you, as an employee, can contribute up to 100% of your salary towards EPF? Yes! So contribute as much as you can to your EPF.
This is the best tax-free retirement investment that you can make. Ideally, you should keep your basic salary higher in comparison to your total salary. This way you contribute more to your EPF.
Apart from EPF, you can also look at investing in the New Pension Scheme (NPS). This investment can also help you to build a retirement corpus. Note that NPS is tax-free on maturity up to 40%. You can use NPS to claim tax benefits under Section 80C of the Income Tax Act.
You can also claim additional tax benefits on your NPS investment under Section 80 CCD. Also, note that gratuity up to Rs. 10 lakhs is also exempt when it is payable on retirement.
Additional Reading: FAQs On The New Pension Scheme
Double Income – When both of you are working, ensure that your retirement funds are separate. This way the two of you can not only save more but save on tax as well.
Try investing in pension plans. When you invest in a pension plan ensure that the plan has an option where the surviving spouse will be entitled to receive the pension when the other is no more. However, taking out two pension plans might not be necessary. Instead, you can look at creating income streams after retirement to supplement the pension.
Homemaker – For a homemaker, it is not easy to save for retirement. Start by saving money from the monthly household budget or tell your husband that you want to save for retirement.
If you decide to save every month, look at a Recurring Deposit. Once you have a decent amount saved up, invest it in different avenues such as Fixed Deposits and bonds. You can even look at opening a PPF account where you need to invest only Rs. 500 a year to maintain the account, which can help you save up to Rs. 1.5 lakh a year.
Apart from building a good amount for your retirement, it is important that you invest that amount in the right instruments once you retire.
Retirement is a time to relax, pursue other activities and to spend time with the family. The last thing you need at this point in time is to worry about your finances. To avoid that, you will need to invest in the right avenues that will ensure peace of mind and steady returns.
One other thing that you need to ensure? Your income after retirement should always be more than your expenses. You need to start planning for this a few years before you actually retire.
Start by making an estimate of the amount of money you will have to spend each month. Ensure you include all expenses including medical expenses and pilgrimage expenses. This will help you choose the right schemes according to your risk bearing capacity and financial situation.
However, it is advisable to invest in secure products at this stage of life. Even though it is best to invest in less risky products, don’t shun equity investments till you turn 70 years old. This is because equity can give your returns a much-needed fillip. Choose products that can give you regular returns, either monthly or quarterly.
Here are some investments that can give you regular income:
Senior Citizen Savings Scheme (SCSS): This is an ideal investment for those who have retired. The current interest rate is 8.6% per annum and has a maximum investment limit of Rs. 15 lakhs. Even though the interest earned on your SCSS account is taxable, your investments are eligible for tax benefits of up to Rs. 1.5 lakh per year under Section 80C of the Income Tax Act.
If you are above 60 years of age, you can invest in this scheme. But, the biggest advantage is that interest is paid out on a quarterly basis. The lock-in period for your SCSS account is 5 years, which can be extended for a further 3 years.
You can also withdraw your money before maturity by paying a penalty. Note that Tax Deducted at Source (TDS) is applicable for SCSS accounts. You can, of course, avoid TDS using Form 15H if you don’t fall under the tax bracket.
Bank Fixed Deposits: At present, banks are offering interest rates of anywhere between 7% and 8% for both short-term as well as long-term deposits. You can choose to receive the interest income on a monthly, quarterly or half-yearly basis.
But remember, when you choose the interest payout option your return from the deposit will be lower. This is because you are not allowing the interest to compound and earn more interest. As you know, bank deposits are subject to TDS, which you can also avoid using Form 15H if you don’t come under the tax bracket.
Post office Monthly Income Scheme (MIS): This is an account where you invest an amount to receive a monthly income. Presently, the post office MIS offers interest at the rate of 7.8%. The maturity period will be five years for the principal. The maximum investment is pegged at Rs. 4.5 lakhs.
However, if you invest jointly with your spouse, you can put in a maximum of Rs. 9 lakhs. Note that there are no tax benefits with this investment. Also, the interest earned is taxable.
If you are willing to take a little bit of risk, there are other options such as the Monthly Income Plan (MIP). These are plans offered by Mutual Funds and can give far higher returns than the post office MIS and interest from bank deposits. MIPs invest mostly in debt instruments such as government securities and bonds and aim to provide you with a regular income.
It is best to choose instruments based on your lifestyle and risk appetite. This will help you get the right returns for a comfortable retirement.