Investment options to consider when saving for a longer term
Saving and investment are habits that you should inculcate right from your first job. It always makes sense to think ahead. If you start early, it will help you build a sizeable corpus for future. When thinking about investments, always think about long-term as the returns are stable and more risk-free. The most appropriate way to go about this is to take a diversified approach i.e. to invest in a variety of instruments such as mutual funds and fixed deposits every month.
Before you start investing though, assess your risk-taking capability. Returns from your investment portfolio will depend upon the amount the risk you are willing to take. Ask yourself, what is your investment timeline? What are your financial goals? How much money do you see yourself settled with at retirement? Once you have definite answers to all these questions, it will be easier for you to take a wise decision with respect to your investments.
Here are three investment options which are suitable for the long-term:
Fixed deposits: Fixed deposits are the safest and the most popular option when it comes to traditional long-term investment. You deposit a lump sum amount with the bank for a fixed tenure, and you get an annual interest on that. Yes, it's that simple. Institutions such as IDFC Bank offer 7.25 per cent interest on fixed deposits for less than two years. But when thinking long term it makes sense to put your money in a fixed deposit for more than two years.
On fixed deposits of more than two years, IDFC Bank offers upto 8 per cent interest. Can't get better, can it? If you start really early, at the end of maturity, you can use this money to fund your kid's higher education, their wedding or even go on your dream vacation or maybe use it as a down payment to buy a house.
Mutual funds: Not always do we have lump sum cash in hand that we can put them in fixed deposits. Especially for salaried professionals, money comes periodically every month so it's best to have an investment option where you can put money in bits every month. This gives you the freedom to carry on with your usual EMIs and other household and day-to-day expenses. So, you can invest a portion of your salary in mutual funds. The return on mutual funds, in the long run, tends to be much higher than fixed deposits, because the former is market linked. It all depends on your ability to take the risk though, and the longer you are invested, the higher and more stable is your return.
Mutual funds houses are known to have delivered a three-year return of 24 per cent. But that is historical data. One can expect equity MFs to deliver returns that are higher than inflation over the long-term i.e. 5 to 10 years. Mutual funds prove to be a safe haven especially for those who do not have much understanding of stock markets, and hence do not want to directly invest in stocks. Mutual funds are nothing but trusts that collect money from those who share a common investment goal. Mutual fund investments are managed by experienced professionals, who monitor and select suitable investments - equities, bonds, and other securities - from time to time.
Mutual funds are broadly of two types - debt and equity. Debt funds are considered relatively safer but the returns are comparable to bank FDs. Equity funds are riskier with much higher returns. What's more? If you stay invested in equity mutual funds for more than 12 months, you incur a small long-term capital gain tax when you sell. And then, there is Equity Linked Savings Scheme (ELSS) which is a tax-saving instrument under Section 80C of the Income Tax Act. They have a lock-in period of three years, which is nothing if you are game to go long term. All mutual funds are registered with Securities and Exchange Board of India (SEBI) so your money is in safe hands.
Public Provident Fund (PPF): Much like mutual funds, you do not need lump sum cash to invest in PPF that till date continues to be one of the most trustworthy investment options. You can put in money bit by bit every month, and the returns generated here are tax-free. The principal invested can be claimed as a deduction under Section 80C of the Income Tax Act. Interest given on PPF is currently 8 per cent. The lock-in period is 15 years.
PPF is quite like a recurring deposit but the difference is that there is no specific sum that you have to invest every month. In fact, if you suddenly have lump sum cash from somewhere, you can even deposit that into your PPF account, there is no restriction to that. The maximum amount that you can deposit as PPF in a year is Rs.1.5 lakh.