Festive gift for the future

Spending is the main theme for most families during this time of the year. But doing it wisely will help in the long run.

During this time of the year, many salaried employees receive a major amount as bonus or ex-gratia or performance incentive. The period also coincides with the festival season. Most people spend this amount on purchases like a car, white goods, jewellery, etc, as it is considered auspicious to buy such items in this period. Some spend lavishly on gifts to near and dear or for religious rituals. Some spend on extravagant vacations. No doubt, people derive much satisfaction by spending the amounts instantaneously. For such people, it is advisable they save some amount for rainy days. It is necessary to secure your financial future.

Rather than spending on items such as cars, white goods, jewellery and so on, a person can make investments like buying a gold ETF, taking an insurance policy, prepaying a home loan, buying a long-term bond or fixed deposit, investing in NSC/KVP, etc. The investments discussed here are mostly of a long-term nature, helping in steady income. Gold has been included as it is an important assets in all households.
 

IN BRIEF

• Besides spending in goodies, keep an eye on financial products as well
• Invest in long-term instruments such as gold ETF, bonds, NSC/KVP, etc
• Can also buy insurance and prepay loans
• Proper financial planning during festivities will help improve cash flows and reduce interest costs

We refer in more detail to some of these:
Gold ETF: A gold ETF is an exchange-traded fund which can be bought or sold on the exchange. A gold ETF is such a fund that aims to track the price of gold. They are traded on the major stock exchanges. If you buy any of these units, you benefit from the movement in the value of the gold. As the price of the underlying asset, that is, gold, changes, so does the value of the units. The units you buy through the fund are backed by real gold.

A gold ETF gives investors access to the low dealing costs and maximum gold prices available through leading international markets. Investing in gold this way can be done through a normal brokerage account. It is held in a demat account.

These are the returns given by a gold ETF : 

Period	Annualised return(%)
1 year	21
3 years	25

As compared to jewellery, a gold ETF scores, as it has high liquidity. Also, unlike jewellery, the question of adulteration does not arise. You don't lose on making charges and it does not require proper storage as physical gold does.

Bonds: Corporate bonds are issued by public sector undertakings and private corporations for a wide range of tenors but normally up to 15 years. The current interest rate on these bonds is 8-9.5 per cent per annum. The advantages of investing in bonds are relative safety, assured returns, regular income and stability to your investment portfolio. Long-term bonds should form part of the investments of every individual’s portfolio. They help you to earn a steady source of income, year-on-year. The disadvantages are the risk of default or credit and low returns that sometimes do not even beat inflation.

Post Office savings: The long-term instruments in post office savings are National Savings Certificates and Krishi Vikas Patras. NSCs can be purchased from any post office or directly through an authorised agent in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000. There is no upper limit. The rate of interest is eight per cent and is compounded half-yearly. The amount is received on maturity, which is six years.

A KVP is also a fixed income financial product offered by the Post Office. It is a fixed income instrument that offers to double the investment in eight years and seven months. The rate of interest is 8.4 per cent, compounded annually. They are sold in denominations of Rs 100, Rs 500, Rs 1,000, Rs 5,000 and Rs 10,000.

The advantage here is safety, guaranteed returns and exemption of the principal amount up to Rs 1 lakh under section 80C. The disadvantage is that interest is taxable, which makes the effective rate of return low.

Insurance: Insurance cannot be categorised as an investment but is an important aspect of financial planning in terms of risk coverage. Insurance, nowadays, is no longer restricted to the traditional term plans or whole life policies. The opening of the insurance sector in the past decade has brought with it companies offering a variety of choices, with a range of plan features. This could be a plain life cover, a pension plan with regular streams of income or a money-back policy for family commitments.

Insurance helps you to provide financial support for family in case of your unfortunate demise. It is also an investment tool to save money for your children’s education, marriage or your retirement. The pitfall of insurance is very low return. If you take term insurance, you may not get the premium amount paid if you survive the policy period.

Prepayment of loans: Another financial planning tool that can be useful is prepayment of loans obtained for housing, vehicles, etc, from the lump sum received. This will help you in improving your cash inflows and reduce interest expenses.

In sum, by making an investment, a person postpones consumption for the future. It will help in financial security and to have an additional stream of income. The idea is not to do away totally with spending during festival times. The point to be considered is to plan your finances well, so that you are able to celebrate for many years to come!

The author is a freelance writer