You earn an income, spend some of it and the rest remains in your bank account.
Investment-savvy individuals may have already put this excess cash to good use. Some may invest regularly through mutual fund Systematic Investment Plans (SIPs), while others may stick to the traditional approach of investing in recurring deposits (RDs) of the bank.
If you have been doing the above, and still have excess cash in your account, which works out to over 10% of your monthly income, you are not optimising your total savings.
Those of you have age on your side, now is the time to invest aggressively for your future.
Unfortunately, the number of investment choices is almost overwhelming. Your decisions will be based on a variety of factors, most notably how soon you will need your money.
Here’s how to deal with that money, with suggestions for short- and long-term investing.
High Liquidity (Less than a year)
Liquid Funds/Ultra Short Term: Those who wish to invest for a very short period, without facing any penalty on withdrawal, then liquid funds and Ultra Short Term Funds are better alternatives to keeping your money lying in a savings account. Such investments are preferable in cases where you want to have access to funds sooner, perhaps because you are saving for a home, car, education, or other big expense.
Short-Term (One Year to Three Years or Less)
Bank FDs: Banks Fixed Deposits top the list of savers when it comes to short-term investments. Little does one realise that such interest bearing deposits are not tax efficient. For those in the highest tax bracket, one has to shell out over 30% of the interest earned in taxes. The only respite offered is that the returns are fixed.
Corporate FDs/NCDs: Another alternative, albeit with marginally higher default risk is corporate fixed deposits. Corporate FDs and Non Convertible Debentures (NCDs) can earn you a higher return than most bank FDs. Post tax too, the returns are higher. A one percentage point in returns can increase your income by nearly Rs 7000, on an investment of Rs 2 lakh in three years.
Short-term Debt Funds: Another diversified route to invest in basket of securities such as corporate FDs, NCDs, commercial papers etc, is to invest in short-term debt funds. The ideal holding period for such investments is 1-3 years. Short term debt funds offer a yield higher than most bank FDs and you can withdraw the investments in most cases without a penalty. Hence, they offer a better liquidity than FDs.
Hybrid Mutual Funds: Some may not be satisfied with the low rate of return earned on fixed income investments, for them, hybrid mutual funds can give them the edge of equity. Under the hybrid fund category, there are several options, but Balanced Advantage Funds and Equity Savings Funds would be best suited for a three year period. A Balanced Advantage Fund can vary the unhedged equity exposure between 0-100%, while Equity Savings Funds limit the unhedged equity exposure to 25%. Such funds dynamically manage the assets based on the prevailing market environment. Hence, offer good risk-adjusted returns.
Individual Stocks: If you have a long investing time horizon, investing in shares of top-quality companies can help you generate substantial wealth. The key lies in finding companies with low or average valuations and consistent cash flows that indicate the potential for solid, steady growth.
Shares of large diversified companies can make great investments. For those who have a longer investment horizon, purchasing shares of smaller, more volatile companies can be quite profitable, but can come with additional risk.
Equity Mutual Funds: Selecting and maintaining a portfolio of stocks might not be your cup of tea. In such cases, you can save yourself the trouble of selecting stocks and instead pick equity mutual funds designed to match your investment goals.
With the regulator’s new categorisation norms, picking the right mutual fund for your investment goals is much easier. A well-managed fund can generate an average return of over 14 percent over the long term. Select funds that have a proven track record of performance, across market cycles.
Index Funds/Exchange-Trade Funds – Index Fund and ETFs invest in stocks in the same proportion as the underlying index. So a Nifty 50 Index Fund or ETF will aim to keep the weightage of stocks inline with the Nifty 50 constituents. Thus, you get the wealth creation potential of equities at a lower cost. However, as the portfolio is passively managed, the returns may end up lower than actively managed equity funds. If you are not sure of the right actively managed mutual fund, you can invest through SIP in an Index Fund.
To sum up
As the famous saying goes “A penny saved is a penny earned” it can do more if it invested. Thus, “A penny invested is worth more than a penny earned.” It is time to look beyond bank deposits and insurance products and open the door to multiple investment opportunities.
To invest in any of the above mentioned products, do get in touch with us on WMS@plindia.com. You can check with us on our latest recommendations or send us your portfolios for a free -no obligation review!