Well-known value investor Benjamin Graham once said, “The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioural discipline that are likely to get you where you want to go”.
Nothing can describe the concept of investing in a better way than this. However, when it comes to investing, investors are always in a dilemma as to the selection of the best investment plan. With so many investment avenues available, it is important that the investors know their investment goals before they begin. Let’s understand what are the points you should keep in mind while selecting the best investment plan, followed by some of the best investment avenues that deserve a place in your portfolio.
Investment plans require a systematic approach. Various factors drive investment plans. Most noticeable among them are the multiple financial goals that you may have. Financial goals have timelines, and investment plans must be aligned with them. Investment plans also need to be aligned to cash outflows, such as payment of rents, utility bills, and short-term obligations due to borrowings.
Multiple factors need to be considered while you evaluate the best investment options. Investment plans are typically evaluated on return, risk, tax, and liquidity parameters. However, investment plans are not just about multiplying wealth and selecting suitable investment options but also about teaching a habit of investment.
Let us understand the various aspects of investment plans in multiple contexts.
High return is a relative term. However, returns sufficiently higher than risk-free returns can be considered high. Risk-free return is earned by investing in government securities. Below are examples of some of the best investment schemes with high returns:
a) Mutual Funds, specifically those investing in mid- and small-cap: While equity mutual funds generally have high return potential, it is mid- and small-cap funds that generate a much higher return. Understanding that the high expected return of mid and small-cap funds comes with increased risk is essential. If you are investing with a time horizon of 4-5 years, then mutual funds are some of the best investment plans for 5 years.
It is pertinent to note that schemes of various mutual funds comprising large-cap stocks also have the potential to generate high returns. An investor can create a good mix of large-cap, mid-cap, and small-cap funds to create a high potential return.
b) Direct Equity Investment: Direct equity investment has been a preferred choice for generating a high return. However, this can be riskier than mutual fund investment. Selecting companies, which have the potential to generate a high return, can be challenging as it requires an understanding of various financial and non-financial parameters. However, investors can select companies based on critical parameters such as consistent profitability, significant market share in goods or services offered, management capabilities, and sound track record of corporate governance.
c) Equity-linked Savings Scheme (ELSS): Mutual fund investment in ELSS comes with dual benefits. First,these plans can generate a high return and investment of up to Rs 1.5 lakhs; also, these schemes qualify for tax deduction under section 80C. However, there is a three-year lock-in, meaning money invested cannot be withdrawn for 3 years.
There are many plans available for short-term investment. These plans can meet investment requirements of 1 to 3 years. Some of these investment plans are as follows:
Liquid Plans: These plans invest in money market instruments maturing within 90 days. Returns generated by these plans are comparable to savings accounts and range between 3% to 4%.
Low-duration Funds: The low-duration funds invest in securities based on duration. Typically, they target securities with a duration of 6-12 months. These are also considered one of the best investment plans for 1 year.
Recurring Deposits: These deposits can be opened for 12 to 120 months. You must deposit a fixed amount of money each month in regular deposits. They offer a fixed rate of returns. With increasing interest rates, they have become an attractive investment option.
Fixed Maturity Plan: Fixed maturity plans are close-ended mutual funds that invest in fixed-income instruments with corresponding maturities. Fixed maturity plans come with a maturity period ranging between 1month and 5 years.
Arbitrage Funds: These funds are suitable for investment for 1 to 3 years. They make money by exploiting price differences of the same assets in two different markets.
Apart from those mentioned above, there are many other investment options, such as treasury bills, money market funds, direct investment in short-term bonds, etc., where investors can park their money for a short term. These are some of the best investment plans for 3 years.
“Never depend on a single income. Make investment to create a second source”. These words by Warren Buffet underline the need for a second income source through investments. Let us look at some of the best investment plans for monthly income:
a) Corporate Fixed Deposits with monthly income: Non-banking finance companies raise deposits from investors and offer the option of monthly interest. Bajaj Finance, HDFC, etc., are examples of such companies. The amount and tenor of investment ranges differ from one company to another.
b) Monthly Income Plan of Mutual Funds: These are debt-oriented hybrid mutual funds that typically give a fixed return every month. Returns usually are not very high but potentially can be higher than Post Office Monthly Income Scheme (POMIS).
c) Systematic Withdrawal Plans (SWPs): As the name suggests, SWPs are meant to help withdraw your investments in mutual funds at predetermined intervals. To benefit from these plans, you must first build a good corpus.
d) Post Office Monthly Income Scheme (MIS): Investment in the monthly income scheme can be made in multiples of Rs. 1000. Maximum investment limit is INR 4.5 lakh in a single account and Rs. 9 lakhs in a joint account. Interest rates are determined periodically. The current interest rate is 6.6% per annum.
Mid-cap companies are 101st – 250th companies in terms of full market capitalisation in India, as per SEBI definition. Market capitalisation means the number of shares issued by a company multiplied by its share price. Small-cap companies rank 251st and beyond. Mid-cap and small-cap funds must invest at least 65% of total funds in these companies.
Mutual fund ELSS invests at least 80% in stocks as per ELSS, 2005, notified by the Ministry of Finance. Funds created under ELSS have a lock-in period of 3 years.
Liquidity means how fast you can convert an asset into cash in a cost-effective manner.
These funds generate returns by using the strategy of simultaneously buying and selling securities in different markets to take advantage of different prices.