There's nothing called a best plan. Financial plannerAnil Rego explains the principle.
Prithvi Rao has a wish list: I want to invest Rs 20,000 in a mutual fund, and I have certain requirements from a mutual fund.
- My money should be safe.
- I need short-term benefits of Rs 4,000 to Rs 6,000 every six months or so.
- I want to be able to sell it at any point of time without making any loss.
- The fund shouldn't be very risky.
- I must get tax benefit under Section 80C.
There's a simple principle behind life: You can't have it all!
Now there's a simple principle behind finance: You can't have it all!
For instance: If you want low risk, you settle for low returns. If you want high returns, get ready to stomach some risk. If you want to withdraw when you please, say bye bye to tax benefits.
There is no such golden plan that can accommodate all these features at the same time.
You need to be realistic about the returns you could get. If you have high tolerance towards risk, you can expect returns in excess of 40 per cent per annum to get Rs 4,000 half-yearly. But the probability of making loss is high, especially in the short-term. As for getting tax benefit under Section 80C, you need to stay invested for at least 3 years.
Recommendation
Option I: Systematic investment plan (SIP) in Equity Linked Saving Scheme (ELSS). The ELSS will offer better returns in the long-term, while investing through SIP mode will help lower the risk for you.
Option II: In case you have dependants, you could look at ULIPs . This can be used in case you do not want to go in for a 100 per cent equity option like the ELSS fund. In ULIPs, you have the option of choosing a balanced fund with a combination of debt and equity exposure. Most ULIPs allow you to invest the lumpsum into a debt fund and you can use an automatic transfer option that moves a fixed amount every month into an equity fund.
However, ULIP is a long-term product and it would make financial sense if you would want to use it for over 7 years. Also, you will be required to pay yearly premiums for ULIPs. The charges too are considerably high and complicated to understand. Go for ULIPs only if you are comfortable with this option.
Option III: Invest in debt
If your want your investment to be safe, invest in five-year bank deposits or postal savings schemes that give tax benefits. The returns hover around 8-10 per cent (pre-tax) and your money remains safe.
Option IV: Forego tax benefits and get liquidity
If you forgoe tax benefits, then you can invest in a variety of instruments, like direct equities, mutual funds, bank deposits, bonds and so on. These will not have lock-ins.
Golden rule for equity investments: Investments in equity (irrespective of what avenue you choose to invest) requires time to grow, and on an average equities require 3 to 5 year to give you good returns.
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