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When it comes to investment, people often get confused. With so many options available, it is difficult to select the right product. Well, the good news is that it is not as complex as it seems. We should always invest keeping the goal horizon in mind by which we need to meet the financial goal. Ask yourself by when you want to achieve this goal?
- Within the next 5 years
- After 5 years.
Short-term goals(Goal horizon < 5 years)
Invest in Debt funds
If the answer to the above question was the first one then it means that it is a short-term goal. Goals like saving for marriage 2 years later, buying a car next year or planning for a foreign trip this year all fall in this category. So, we should invest accordingly. Usually, when the goal horizon is less than 5 years, it is advisable to invest in debt mutual funds. These are low risk, highly stable products that offer a decent return over the short period. One can expect a moderate return of 7-8% per annum. Plus, the returns are tax-free if redeemed after the minimum holding period of 1 year.
Fixed & recurring deposits
One can also choose to invest in traditional low-risk products like bank FDs, recurring deposits. However, bear in mind that if the interest accrued in a financial year is more than Rs. 10,000 then it will be added to your taxable income and taxed accordingly.
Liquid funds
These are very low-risk products and offer average returns. But the advantage with them is that they are highly liquid. They can be compared to a savings account in terms of liquidity. These funds are ideal if you want to invest for a very short duration of 2-3 months. These investments can be redeemed instantly. Money for an emergency fund, monthly expenses, etc. can be kept here.
Long-term goals(Goal horizon >= 5 years)
Equity funds
If the goal can wait till the next 5 years then it is a long-term goal. In such cases, it is best to invest in products that offer high returns when held for a long period. Equity funds are ideal when one has an investment horizon of at least 7-10 years in mind. Over the short term, they can be highly volatile. But if one wants to best inflation over the long term and still grow wealth then this is the best option. On average, they can offer returns up to 11-12% in the long term and can easily beat inflation. You can choose to invest in equity funds for goals like child education, child marriage, buying a home, etc. The longer you hold the better it is. The money will use the power of compounding and grow exponentially.
While investing in equity funds, it is better to go for SIP rather than lump sum. Small amounts contributed regularly help to beat the volatility much better as compared to investing everything at one go. Keep increasing your investments by 10% every year if possible, or at least by 15% every two years.
ELSS funds
Invest in these funds while planning for long-term goals like retirement, buying a house and the like. Investing in a fixed income product like PPF will restrict the returns. With inflation hovering around 6%, the real rate of return is only 2-3% with PPF. Such low returns will prevent any major gains accruing over a long period of time.
ELSS actively invests in the equity markets, with a potential to earn higher returns than traditional savings options like PPF. In fact, if someone invests Rs. 1.5 lacs per annum in ELSS instead of PPF for 15 years, his investments in equity will grow to Rs. 61 lacs as against Rs. 29 lacs` in PPF.
Stocks
According to the legendary investor, Warren Buffet one should invest in only those stocks that one can hold for at least 10 years. Otherwise one should not hold it even for 2 minutes. Do thorough market research and identify value stocks that have long-term growth potential. Invest in them and hold onto them like your dear life for as long as you can. You will be pleasantly surprised at the end to see the rich dividends that it returns.