The Debt Story
Parents always warn us not to be in Debt. “Better to go Hungry to bed than to wake up in Debt” is what our dads would say in a stern tone. But why?
It has a simple reason! The word Debt is often referred to as borrowings such as a car loan, home loan or credit card loans. It reminds of the hunting calls from the credit card companies.
But, these are conventional thoughts.
As for the newer ideology… DEBT means products with “ RETURNS”.
The usual feeling that comes with “Investing” is “Fear”. They are normally two sides of the same coin, to most investors. But like Warren Buffett says
“Risk comes from not knowing what you’re doing.”
Knowledge is what you require to make your first move in investing in Debt Instruments. The finance part, you will eventually figure it out once you are familiar with Debt and stop fearing it.
Here are few Debt Instruments and also a set of alternatives that will help you in your course of investing:
1.Savings Bank Account: Savings account is a necessity, not an instrument anymore. They encourage savings, are highly safe with their moderate interest rates and are flexible when it comes to withdrawing your money when you need it.
2. Bank Fixed Deposit: These are the most trusted funds because they give moderate yet periodic returns with Average interest rate of 4%-7 %. You get your principal amount back once your term is over. All this with zero risks. This fund is essentially useful when you want to park your money aside for an Emergency. One of the easiest ways to invest is to opt for smaller Fixed Deposits so that you don’t lose the entire interest on your deposit when you have to break it for an Emergency.
3.Provident Funds: If you are employed then Provident fund is your pie. Provident fund is the accumulated amount one gets on retiring from his/her job. The accumulated amount is the contributions one makes during the employment period.
Public Provident Fund: This instrument is provided by the Central Government to employees who are self-employed and those at the unorganized sector. These are long term savings scheme that provides income security at your old age. This investment is famous for guaranteed returns, tax benefits, withdrawals after lock-in periods and is voluntary. Both Provident Funds and Public Provident Funds are definite items in your investment list as they secure your life after retirement.
4.Recurring Deposit: When you hear Recurring Deposit, remember SAVINGS. Recurring Deposit is quite similar to fixed Deposits. The difference is that in the recurring deposit you deposit a fixed sum every month in a recurring deposit account for a fixed tenure and you earn interest on these deposits, thereby you practice the habit of saving.
Warning Bell: The usual jazz that brokers give when they sell schemes is “Higher Returns”. Ever wondered how, say, for example, Real Estate manages to provide high-interest rate. The trick is, Higher Returns is a sugar coating for the Hidden Risks. An easy thumb rule is to keep the Interest on Bank FD as your benchmark. Any scheme providing an Interest rate higher than that a Bank FD, will have the factor of higher Risk. However, there is a way to earn higher returns with Debt too with the help of Debt Mutual Funds.