Saving Options- Which investment products are Better Option for you?

Saving Options…

An investor may plan short-term and long-term investments, according to his or her needs such as lifestyle need, living expenses need, children need, health care & insurance need. Investors can plan based on their needs, how much money is required to get desired goals in a specific time horizon. One can make a meaningful plan to fulfill his/her financial goals such as a child’s higher education, purchase of a house and other valuable assets, and planning for retirement etc.

Fixed deposits (FD):

Fixed deposit is a good option for pensioners who are under the tax bracket of 10% and 20%. Fixed deposits are not providing positive returns in long-run due to post-tax and post-inflation factors. Suppose you invest today in bank FDR with the rate of interest 8.25% per annum and you pay tax on highest slab i.e. 30.90%. Post tax, return after one year will be 5.70%. Assume that inflation rate is 8% per annum, then post inflation return will be negative by 2.3%. On the other hand, the actual value of assets will erode due to inflation and tax effect.

You should take into account the risk of inflation and interest rate (yield rate) while making an investment. It may help you in the distribution stage to meet your post retirement expense.

Public provident fund (PPF):

PPF is a 15-year investment scheme under the Exempt Exempt Exempt scheme (EEE) which an investor can invest a minimum amount of Rs. 500.00 and multiple of Rs100.00 therein up to Rs. 150000.00 maximum per annum (over a maximum of 12 installments per year) and avail the income tax exemption at the time of deposit, accrual of interest and withdrawal.In order to get interest for a full month one has to make a deposit in his/her PPF account between the 1st and 5th of the month. A PPF account has a lock-in period of a maximum of 15 years. At the end of 15 years, one can extend one’s subscription, in blocks of 5 years or else close the account.

You may make a list of your current wants & desired goals and also make a commitment to achieve it. What you have committed in life, you have to plan accordingly and invest them in regularly. For numerical example, you determined to create a corpus for your retirement over a period of 15 years without any risk, you can deposit Rs. 150,000/- (One lakh fifty thousands) at the beginning of the each year in Public provident fund (PPF) and after 15 years you can get the amount of Rs.45,94,801/- with an interest rate assuming of 8.5% per annum.

You take the benefit of the Income Tax Act every year under Section 80C and also avail the income tax exemption at the time of deposit of money, accrual of interest at every year and withdrawal of money from PPF.

For example, if you invest ₹ 12500/- per month on your 40th birthday, in 20 years’ time your total investment will be ₹ 30 lakhs. If that investment grew by an average of 7.9% a year, it would be worth ₹ 70.79 lakhs when you reach 60. However, if you started investing 10 years earlier, your ₹ 12,500/- per month would add to up to ₹ 45/- lakhs over 30 years. Assuming the same average annual growth of 7.9%, you would have ₹ 1.74 cores on your 60th birthday. The principal increase during ten years is 50% and the amount generated is more than double that you would have received on your 60th birthday.

The above amount is generated ₹ 1,12,375/- per month (7.75% interest in bank FDR), of your post retirement living expenses easily. It may not be sufficient to your post retirement expenses. You may choose other financial instruments in order to meet your post retirement expenses.

It is an excellent and secure investment in the retirement planning of an individual. In a retirement plan and a higher education plan for children, one must invest in a 15 year PPF account by planning for future expenditure in current lifestyle, keeping in view the factor of inflation.

“One should take the advantage of the product life cycle by investing in the right products.”

Equity Mutual Fund:

Mutual funds invest in capital instruments such as shares, debentures, bonds, Govt. Securities, commodities, and other short-term securities which include treasury bills, commercial papers, promissory notes and certificate of deposit. A mutual fund is diversified your money into different Assets. You can invest, gold, debt, equity through a mutual fund. It is very liquid and less risky than Equity, as fund units are professionally managed. It is highly operational transparent, suitable for investors to achieve the financial target through systematic investment plan (SIP).

Price of bonds, government securities and non-convertible debentures carry an interest rate or coupon rate, which move inversely to market interest rates. This means if interest rates fall, prices of these bonds in the secondary market rise and thus the value of assets appreciate in addition to coupon rate. Those who are investing the debt mutual fund over the long term will gain the benefit of rate cuts.

Mutual funds help an investor to create a good portfolio mix due to its various categories of fund such as: large-cap funds, multi-cap funds, mid-cap funds, hybrid funds and debt mutual funds. Equity funds have a greater risk of capital loss in comparison to hybrid/ diversified funds. One can invest a fixed amount in a mutual fund regularly, such as daily fortnightly, monthly and quarterly in SIP.

For example, if someone makes SIP per month only for Rs.10000 in diversified equity mutual at the age of 40 and after 240 months he/she will get Rs.131.63 lakhs assuming a rate of return 14% per annum. The above amount is sufficient to generate Rs.85, 011/- per month (7.75% interest in bank FDR), of your post retirement living expenses easily. The above corpus can be achieved only by discipline approaches irrespective of market volatility.

Investment through SIP ensures discipline investment, regardless of the volatility of the market movement. This helps an investor average the cost through market cycles and create a big corpus to achieve his or her goal without taking too much risk in the long run.

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