Wondering how you should invest your savings for ensuring long-term or short-term growth? You should definitely take a deeper look into short-term and long-term investment definitions and what they essentially entail before zeroing in on the right mix of both types of instruments for creating future wealth, meeting financial objectives, spreading out risks and building future security for yourself and your family.
Short-term investment options are those with durations lower than 5 years on an average. Short-term goals are mostly set for achieving things which will occur in the future. The objectives for investors here will always be returns and safety for the capital invested. The usual investment period for short-term plans is lower than 12 months as per approximate estimates. Here are some options worth considering in this regard:
- Savings accounts- Savings bank accounts ensure proper liquidity for the short-term although the interest rates are not that high, varying between 3.5-4% on an average.
- Liquid Funds- These are mutual funds investing in short-term government certificates along with securities of deposits. You may exit or enter these investments anytime you wish since they are completely secure. Try limiting the possibility of putting in emergency funds for these investments since redemption will require a few days. You can get returns between 4-7% after taxes on an average if you invest in liquid funds. You can consolidate these funds for keeping your money parked for even a day to even 90 days and more. These funds do not always witness any drop in their net asset values (NAV). You may choose growth (reinvesting) or dividend options (taxed at close to 30%).
- Short-Term Funds- These funds make investments in securities maturing within 1-3 years. The funds are slightly risky and taxation is similar to other debt funds. Banks usually have deposits starting from 7 days and investors looking to park funds may choose FDs with matching durations. Short-term funds are suitable for investing across a few months. They are conservatively managed with the aim to protect capital and gain a modest appreciation of capital at the same time.
- RDs- RDs or recurring deposits are secured investments and are ideal for people who wish to invest a lump sum or every month. You can choose bank or post office recurring deposits for tenures between 6 months and 10 years. Interest that you get will be taxable.
- NSC- National Savings Certificate offers an investment option for 5 years. You can get tax deductions under Section 80C as well.
- Arbitrage funds- These are also called equity mutual funds and have higher tax efficiency if you hold onto your investment for more than 1 year. They offer returns close to 8% after taxes.
- FMPs- Fixed Maturity Plans- These plans come with 5-year lock-in periods and function in a similar manner as bank FDs. They have greater tax efficiency and returns are mostly superior in comparison to regular FDs.
Best long term investment options
Long-term investment options are those for 3-5 years and more in usual cases. Here are some of the best options for you to check out:
- PPF and EPF- PPF (Public Provident Fund) offers good interest rates and is a good long-term investment with Section 80C tax deductions and fully exempted interest income and maturity proceeds alike. PPF offers a great way to accumulate money for the future, particularly for those with a lower appetite for risks. Contributions to EPF (Employee Provident Fund) are also eligible to get tax benefits. Maximum investment of Rs. 1.5 lakh is allowed annually. PPF investments mature after 15 years and withdrawals may be made post 6 years although it cannot surpass 50% of the balance at the close of the 4th year or immediate preceding fiscal, whichever is less.
- Mutual Funds- Long-term investments may be deployed in mutual funds across equities and bonds for getting higher returns although the risks are comparatively higher. There are various types of funds where you can invest via SIPs or systematic investment plans.
- Stock Investments- Stock investments are another long-term option although there is no guarantee for getting returns. You may allocate a smaller part of your portfolio initially for stock investments, depending upon your appetite for risks.
- Bonds- You may consider investments in Government bonds which have decent rates of interest or inflation-indexed bonds where rates will be based upon inflation.
- Gold- This is a popular investment option in India, spanning options like Gold ETFs, gold bars, gold deposit schemes and gold mutual funds among many others.
- ULIPs- ULIPs are unit-linked insurance plans which invest in equity and debt markets. They may offer great returns on long term investments, particularly in equities and debt. The NAV may fluctuate periodically although they also come with insurance coverage and tax benefits up to Rs. 1.5 lakh under Section 80C. The redemption amount will be free from taxes under Section 10 (D) as well.
- Equity Funds- You may consider investing in ELSS (equity-linked saving scheme) which has deductions allowed up to Rs. 1.5 lakh under Section 80C or other equity funds which are diversified with a solid track record. Tax benefits are also available under Section 10 (D) on the redemption amount.
These are some of the short and long-term investment options that you can take a look at. It is advisable to allocate and earmark every investment option against a particular objective. List down your short-term objectives and then choose the short-term investments that are suitable for meeting these goals. Work out your monthly investment amount accordingly. Thereafter, list down long-term goals including buying a house, retirement, buying a car, child’s higher education and so on. Pit a long-term investment or multiple investments, depending upon your financial position and requirements.