Welcome to your Journey of Creating Wealth
The key to achieving your wealth creation goals is to empower yourself with the right knowledge and its use. Creating wealth for the long-term can be simple when an expert holds your hand through the process.
Given your life stage, your life’s and financial goals may vary. From higher education to a wedding, child’s expenses to retirement, planning investments for each stage is important.
A common question that often arises is Where do I invest money?
NSE is happy to guide in you in the journey of investing safely. We are here to answer queries related to making the most of the financial market. Our aim is to empower you with knowledge so that you too can become a confident investor.
Ideally, a major portion of your income should go towards savings. The money you earn is partly spent and the rest saved for meeting future expenses. But these savings are not idle and can actually make money for you. Nowadays, one has multiple ways of investing in some of the best investment options and plans available in the market. Investment plans are a way to park your savings so that they may give you financial gains in the future.
Why should you invest?
Investing is a sure way to let your money grow and reap returns over time. Apart from this reason, let’s explore various reasons why you should look at more investment avenues:
- Your otherwise idle funds can reap returns for you.
- You can invest in different products to fulfil a future life goal.
- They are a provision to secure an uncertain future.
Inflation is another important reason to secure your financial future. Inflation causes money to lose value. Inflation is the rate at which cost of living rises making it expensive to buy goods and services to meet your daily needs. This is because with inflation, a value of 100 rupees today will not buy the same amount of a goods or a service in the future, as it does currently, or as it did in the past.
Imagine the following scenario:
Inflation Rate Per Year
If we consider a 6% inflation rate per year for the next 20 years, what Rs 100 can buy in 2018 will cost Rs 321 in 2038. This is why it is important to consider inflation while planning long-term investment.
Furthermore, an investment’s ‘real’ rate of return, the return after inflation, must be considered. The return on investments should be above the inflation rate to ensure that the investment does not decrease in value. That is why it is important to first explore the best investment options available for you.
The three golden rules for all investors are:
- Invest early.
- Invest regularly.
- Invest for the long term.
Creating wealth, and getting returns on investment, takes time and patience. Ideally, start investing as young as possible. But it’s also never late to begin this journey. By investing early, you give your investments a lot of time to bear fruit. The power of compounding works in the favour of long-term funds and grows them. This happens when the principal is accumulated, and interest and/or dividend is earned on it, year after year.
Investing money in the right plans can get tricky. We have defined 12 important factors that you should consider before investing:
- Get written documents explaining the investment.
- Read and understand the documents.
- Verify the legitimacy of the investment.
- Find out the costs and benefits associated with it.
- Assess its risk-return profile.
- Be aware of the liquidity and safety aspects of the investment.
- Ascertain if it is appropriate for your specific goals.
- Compare its details with other investment opportunities.
- Examine if an investment fits your current or future portfolio.
- Deal only through an authorised intermediary.
- Clarify your doubts with the intermediary and invest only if you are comfortable. Refuse to invest if you are not convinced.
- Explore other options should something go wrong. Invest only when you are completely satisfied.
What are the best investment options available to you?
There is some kind of investment plan for everyone. Today, there are various types of investment options that answer the question, “Where should I invest my money?” You may invest in:
- Physical assets such as real estate, gold or jewellery, commodities, etc.
- Financial assets such as fixed deposits with banks, small saving instruments with post offices, insurance, provident or pension funds, instruments in the securities market such as shares, bonds, debentures, mutual funds, etc.
Let’s break down each of the above types of investments and note their pros and cons.
In India, “buy gold” is often advised when investment options are discussed. Investment in physical gold is the easiest form of parking your savings. Conventional wisdom says that over the long term, gold as an investment does appreciate and give higher returns. Furthermore, gold can be converted into jewellery for personal use and be easily mortgaged for loans, if the need may arise.
Gold prices depend on macro-economic factors. There is a possibility of encountering less transparency in terms of its quality while buying and selling physical gold. Gold carries high risk of theft; storing and maintaining it may also be expensive. There is no tax advantage on gold investment. Moreover no regular income can be earned with gold.
As one of the three necessities of life, there is low instability with investment in property. The market price of a property increases gradually making it a steady choice of investment. Its value can be increased through renovation and repairs. Mortgaging property is easy and it can generate regular income through rent.
Income tax benefit <to check >
You may need to invest a large amount of your savings to purchase a property. The transaction cost is high on account of stamp duty and registration charges. The cost of maintaining a property is high. If an emergency were to arise, it may be difficult to sell a property immediately.
Fixed deposit interest rates are predetermined. Fixed deposits can be locked for specified periods of time to ensure that your money is safeguarded and you gain reasonable returns. They can be easily converted to savings.
While fixed deposits guarantee returns, the amount they yield is usually lower than other short-term investments. You may be charged if you withdraw your fixed deposit before it matures or you may get a lower fixed deposit interest rate on the amount. Fixed deposit interest is taxable.
Investment in a stock market can yield relatively higher returns; it is also highly liquid. You can begin with as little as Rs 1000. Your money is handled by professional fund managers who are well versed with share market investment avenues. You can enjoy efficient post tax returns on investment. Tax is exempt for long-term capital gains over one year.
Short-term investment in the share market is highly risky as there is a high volatility. It may be difficult to pick the right stocks.
A stock market is a public market where a company’s stock is traded among investors who want to buy and sell it. The goal of a share market is to facilitate the exchange of securities between buyers and sellers (at a mutually acceptable price) and reduce the risks of investing.
The stock market, or equity, enables investors to increase their income without the high risk of entering a business that usually comes with high overheads and start-up costs. In a stock market, shares of companies that are publicly owned can be bought and sold on stock exchanges. Most public companies make use of their local stock exchanges as a platform to publicly list their company for capital gains.
Trading in a stock market can be a win-win for companies that want to raise capital and for investors, who want to increase their income without taking resource-intensive risks.
Let’s explore the two types of stock markets that exist in India.
The primary market is where securities are initially created. This is an open stock market where a company’s shares are offered and sold for the first time. The company issuing the shares directly sells them here. Precedence as a primary listed company lends credibility to a company thus opening doors to investors who may be interested in investing. The primary market is dominated by the large investment institutes such as investment banks, hedge funds, etc.
Selling and buying of shares that are already owned by investors is the typical idea of this market. In the secondary market, investors trade in stocks themselves. Furthermore, the company previously selling the stock is not a direct participant in the transaction. Note that stocks of a company are also sold on the primary market as that is where they are initially issued from.
Shares may be issued by a company to raise money for future projects or if one of its owners has chosen to dilute their stake in the company. These shares are purchased by investors who believe they can reap future profit that the company may make. Profit can be made in the form of dividends or capital gain when the stock price of the share increases and the investor sells.
Let’s use an example to help you understand how shares work.
Ajay is the founder of Ajay Textiles, a garment business in Mumbai, India.
He has established his business and has a steady clientele. But to grow across India, he needs Rs 1 crore of capital.Ajay narrowed down to two options to raise these funds: borrow money from a bank at a high interest rate or raise it from friends and family. He finally goes for the latter option. He convinces his closest friends, Mahesh, Rahul and Vikas, to invest, after presenting a detailed business plan to them. They find it a great business opportunity and agreed to invest Rs 50 lakhs, Rs 30 lakhs, and Rs 20 lakhs, respectively. However, he didn’t want to cause a strain on his relationships and so, he came up with a plan. He decided that each person would be made partner in the business based on the amount they contributed.
He made them shareholders of his company.
Thus, Ajay raised interest-free capital and his friends got a share of ownership.
A few months later, Mahesh urgently needed his share of the investment back because he has a personal emergency. But because Ajay’s business expansion plans were still in motion, he was not in a position to repay Mahesh. During this period, another friend of Ajay’s, Ramesh, had taken keen interest in his business. He offered to buy out Mahesh’s share for Rs 55 lakh. Mahesh readily agreed to the offer; so the three shareholders in Ajay’s company were Ramesh, Rahul, and Vikas. Ajay expanded his business and shared profits with his shareholders. His plan created a win-win situation for everyone involved. Ajay, the owner of the business, did not need to pay back the money or make interest payments along the way. The other partners eventually had hope to believe that the shares they bought would someday be worth more than what they had paid for them.
The above example relates to how stock markets actually work. But you may wonder that if investments in the stock market are so fruitful, why don’t we all simply invest in stocks?
The truth is that there is no guarantee of returns in the stock market. Some listed companies may declare dividends while others may not. There is no obligation on the part of the company to pay out dividends. You can profit from a stock when the price appreciates, but if the company goes bankrupt, your stock may be worth nothing.
The motto for investing in the stock market remains: the higher the risk, the higher the return on investment.
Step 1:- For becoming a capital market investor
- The first requirement is a PAN Card. This is mandatory for all investors.
- The other requirements are a bank account and a demat account. The demat account is normally linked to a bank account in order to facilitate paying in and out of funds and securities.
- The next step is to select a SEBI Registered broker and fill a KYC form and enter into a broker-client agreement.
- The broker then allocates a unique client ID, which acts as the identification.
- You are now ready to buy/sell securities.
Step 2:- For purchasing investment products
- Brokers: Brokers offer several services like purchase/sale of equity, debt and derivative products, mutual fund units, IPOs etc.
- Banks : Many banks offer facilities for purchase/sale of equity, debt and derivative products, mutual fund units, IPOs etc. physically as well as through their websites
- Mutual Funds: Almost all Mutual Funds facilitate online and physical buying/selling of mutual funds.
- Stock Exchanges: Close ended mutual funds are traded on stock exchanges and can be brought through brokers. Open ended mutual funds can also be bought/sold on the stock exchange platform.
Thank you for your interest in investing in India.
Foreign investors can access the Indian Capital Markets from various investment routes as illustrated below:
As per SEBI (Foreign Portfolio Investors) Regulations, 2019 notified and have come into force w.e.f. September 23, 2019,
- The Designated Depository Participants (DDP) provides FPI Registrations to the investors
- Access to investment in India is rationalised & harmonised
- KYC requirements harmonised in line with FPI regulations - Common Application Form
- Registration as FPI available under the following two categories based on the perceived risk
FPI Category I
FPI Category II
In the interests of investor convenience, we have invited KPMG to provide an overview of the FPI - Regulatory and Tax regime.
While every effort has been taken to make this overview relevant, we encourage you to take independent legal and tax advice before investing in India. Rules and regulations change, and while it is our intention to keep this overview updated, NSE and KPMG do not warrant the completeness and accuracy of this information.
Other useful links:
FPIs are allowed to trade in Equities (Capital Market), Equity Derivatives, Government Securities, Debt Instrument and Interest Rate Derivatives on the Exchange platform.
Investment limits for FII/sub-account for various instruments are given below:-
- The purchase of equity shares of each company by a single FPI or an investor group shall be below 10% of the total issued capital of the company.
- Aggregated Equity Investment Limit – The individual ceiling of below 10 percent by a single FPI or an investor group is subject to an overall investment ceiling for total FII investment of 24 percent of the total paid-up equity capital of a company (20 percent in the case of public sector banks) The overall ceiling of 24 percent can be raised up to the sectoral limit if the concerned company passes a resolution by its Board of Directors in the General Body Meeting. Exceptions to these limits apply to individual companies and sectors.
- FEMA prescribes the various foreign investment limits in listed Indian companies. These include the aggregate FPI limit, the aggregate NRI limit and the sectoral cap. As per SEBI Circular IMD/FPIC/CIR/P/2018/61 the data regarding foreign investment is collected by depositories from the listed companies. The same is available at https://www.nseindia.com/market-data/foreign-investment-limit
- FPIs can invest under the quota reserved for QIB (Qualified Institutional Buyers) in the IPOs within the overall limits for foreign investments as defined in the Equities segment
- Non-Resident Indians required to open bank account (NRE/NRO) with designated Bank and Demat Account with an NBFC to hold shares and execute buy/sell orders
- FPIs can bid under the non-retail quota with the overall ceilings as defined under the Equities segment
- Non-Resident Indians can bid under the Non-Institutional Investors Category; discount applicable to retail investors will not be extended under this category
The FPI position limits for various categories of products and client as per the table below:
FPI Category I
FPI Category II (other than FPIs in sub-category individuals, family
FPI Category II (Individuals, Family Offices, and Corporates)
Higher of INR 5 bn or 15% of the total OI in the market- on Index for Futures & Options separately. In addition, hedge positions permitted
Higher of INR 3 bn or 10% of the total OI in the market- on Index for Futures & Options separately
Higher of INR 1 bn or 5% of the total OI in the market- on Index for Futures & Options separately
20% of MWPL
10% of MWPL
5% of MWPL
Also, the details for contract specifications can be referred as follows:
In accordance with the revised Medium Term Framework (MTF) for FPI limits in Government securities issued vide RBI/2018-19/150 A.P.(DIR Series) Circular No. 18, the main features are:
- Revision of minimum residual maturity requirement
- FPIs are permitted to invest in Central Government securities (G-secs), including in Treasury Bills, and State Development Loans (SDLs) without any minimum residual maturity requirement, subject to the condition that short-term investments by an FPI under either category shall not exceed 30% of the total investment of that FPI in that category
- FPIs are permitted to invest in corporate bonds with minimum residual maturity of above one year, subject to the condition that short-term investments in corporate bonds by an FPI shall not exceed 30% of the total investment of that FPI in corporate bonds. These stipulations would not apply to investments in ‘Exempted Securities’ by FPIs.
- The requirement that short-term investments shall not exceed 30% of total investment by an FPI in any category applies on an end-of-day basis. At the end of any day, all investments with residual maturity of up to one year will be reckoned for the 30% limit.
- Short-term investments by an FPI may exceed 30% of total investments, only if the short-term investments consist entirely of investments made on or before April 27, 2018; that is, short-term investments do not include any investment made after April 27, 2018.
- Revision of security-wise limit
The cap on aggregate FPI investments in any Central Government security, currently at 20% of the outstanding stock of that security, in terms of A.P. (DIR Series) Circular No. 19 dated October 6, 2015, stands revised to 30% of the outstanding stock of that security
- Single/Group investor-wise limits in corporate bonds
Investment by any FPI, including investments by related FPIs, shall not exceed 50% of any issue of a corporate bond. In case an FPI, including related FPIs, has invested in more than 50% of any single issue, it shall not make further investments in that issue until this stipulation is met
Investment by any FPI (including investments by related FPIs), in each of the three categories of debt, viz., G-secs, SDLs and corporate debt securities, shall be subject to the following concentration limits:
|Long Term FPIs
|15% of prevailing investment limit for that category
|10% of prevailing investment limit for that category
In India the currency markets are regulated by RBI and SEBI. FPIs were allowed to participate in exchange traded currency derivative segment to the extent of their Indian rupee exposure in India in 2014, via SEBI circular CIR/MRD/DP/20/2014.
The detail guidelines can be referred from the following links:
With reference to SEBI Circular no IMD/FPI&C/CIR/P/2019/124 dated November 05, 2019 and NSE circular NCL/CD/42617–
- FPIs may take long or short positions without having to establish existence of underlying exposure, upto a single limit of USD 100 million equivalent, across all currency pairs involving INR, put together, and combined across all the stock exchanges
- To take long positions in excess of USD 100 million in all contracts in FCY-INR pairs, FPIs shall be required to have an underlying exposure in Indian debt or equity securities, including units of equity/debt mutual funds
- FPIs shall ensure that their short positions at all stock exchanges across all contracts in FCY-INR pairs do not exceed USD 100 million
In March 2016, RBI has permitted recognised stock exchanges to offer cross-currency futures and option contracts in the EUR-USD, GBP-USD and USD-JPY currency pairs. RBI has also permitted recognised stock exchanges to offer currency option contracts in EUR-INR, GBP-INR and JPY-INR currency pairs, in addition to the existing USD-INR pair.
The FPI can take long positions beyond these limits in each of the currency pairs subject to having underlying exposure. These limits for Gross open position across all contracts are as follows:
|Category I & Category II (other than FPIs in sub-category individuals, family
|Higher of 15% of the total open interest or USD 100 million
|Higher of 15% of the total open interest or EUR 50 million
|Higher of 15% of the total open interest or GBP 50 million
|Higher of 15% of the total open interest or JPY 2000 million
|Category II (Individuals, Family Offices, and Corporates)
|Higher of 6% of total open interest or USD 10 million
|Higher of 6% of total open interest or EUR 5 million
|Higher of 6% of total open interest or GBP 5 million
|Higher of 6% of total open interest or JPY 200 million
The details of contract specifications can be referred from below links:
SEBI vide circular CIR/MRD/DRMNP/35/2013 dated December 05, 2013 permitted Stock Exchanges to launch cash settled Interest Rate Futures on 10-Year Government of India (GoI) Security. Subsequently via SEBI circular CIR/MRD/DRMNP/11/2015 SEBI permitted stock exchanges to introduce cash settled Interest Rate Futures on 6-Year and13year GoI Security.
- A limit of INR 5,000 crore on aggregate basis to FPIs for taking long position in Interest Rate Futures
- No FPI can acquire net long position in excess of INR 1,800 crore at any point of time
- The limits prescribed for investment by FPIs in Government Securities shall be exclusively available for investment in Government Securities and shall not be reckoned for the purpose of computing utilisation under above mentioned limit of INR 5,000 crore.
Other Links –
|8-11 years maturity bucket
|4-8 and 11-15-year maturity bucket
|Category I & Category II (other than FPIs in sub-category individuals, family offices, corporates)
|10% of Open Interest or INR 12 billion whichever is higher
|10% of Open Interest or INR 6 billion, whichever is higher
|Category II (Individuals, Family Offices, and Corporates)
|3% of Open Interest or INR 4 billion, whichever is higher
|3% of Open Interest or INR 2 billion, whichever is higher
The detailed contract specifications can be referred from the link as follows: