Ask Us: on investments

A. There are a number of investment options that you can consider beyond your EPF and LIC policy. If you are considering investments for a 15-year horizon, you can either invest in instruments with a shorter term and reinvest the proceeds on maturity or choose vehicles that you can hold for 15 years.

If you prefer a safe investment with fixed returns, the Public Provident Fund, which is a retirement savings vehicle with a 15-year term, may be your ideal choice. You can open a PPF account with any post office branch or leading bank and make regular investments in the account. The interest on the PPF, which is declared every quarter, usually tends to be much higher than that on bank deposits and is also tax-free. The interest is credited to your balance every year and compounds until you seek to withdraw the money. You can also open an NPS account where you can make monthly investments towards retirement in market-linked instruments such as shares and bonds.

For shorter horizons, you can consider the 5-year National Savings Certificate (NSC) where your interest compounds until maturity, or the Kisan Vikas Patra which doubles your money in 10 years and four months, too. You can also consider parking your periodic surpluses in the Government of India’s 7-year floating rate savings bonds where the interest rate offered is 35 basis points above the NSC and is announced every half year. The only ‘minus’ for these bonds is that the interest is paid out to you, requiring you to reinvest it. Cumulative term deposits with banks or leading NBFCs, which accrue fixed interest every year, is another option, though less safe than post office schemes.

If you don’t mind volatility in your returns in the short run and are sure you won’t be needing your money within the next 5-7 years, you can invest in hybrid or index equity funds through monthly instalments (called Systematic Investment Plans or SIPs). While such funds offer anytime liquidity, their returns can be quite volatile depending on how bond and stock markets move. This entitles you to dividends from the company and share-price appreciation, if any, when you sell the share. With both mutual funds and shares, you can hold on for as long as you like, but also exit if you should need the money at any time. You face the risk of loss in your capital over shorter time frames, but if you hold on for more than 7 years, they can generate inflation-beating returns that are better than fixed deposits or bonds.

Before making a start on these investments which require you to lock in your money for long periods though, do build up a bank deposit equal to about 6-9 months’ worth of your living expenses, as an emergency fund. Do buy a health insurance plan, so that your savings aren’t dented badly by a medical emergency.

A. There are three things to keep in mind as you begin your investing journey. One, to invest effectively and to stick to your planned course on investments, it would be good to write down your key financial goals and the timelines over which you would like to achieve them. For example, you may plan to travel, buy a vehicle or pursue higher education within the next three years, marry or buy a home over 5 to 7 years, nurture dreams of becoming wealthy or retiring early 10-20 years hence. If you have family members for whom you’d like to do something, include those objectives in your goals too. Mapping out your goals is important because they lend purpose to your savings and investments and helps you to choose investment vehicles that fit your goal and investment horizon.

For goals up to 5 years, bank and NBFC deposits can be a good option. So can short-term debt, PSU and banking debt mutual funds. For 5 to 7-year goals, small savings schemes like NSC and GOI floating rate savings bonds would be a good bet.

You can also consider hybrid mutual funds. For goals that are 7 years plus, Public Provident Fund, NPS and index mutual funds playing on the Nifty50 or Nifty Next50 would make for good choices.

Two, before you start making the above investments, estimate your likely monthly living expenses and build a fund equal to 6-9 months’ worth of those expenses from your initial savings. It can help you tide over illness, job loss or other emergencies that require quick money.

In addition, do buy a health insurance policy of ₹5-10 lakh to cover hospitalisation expenses. If you have parents or siblings dependent on you, get a term- insurance policy so that their financial interests are taken care of in the event of an unfortunate event happening to you.

Three, get into the habit of saving before spending each month. Signing up for investment products that put your investments on autopilot, by channelling money out of your salary account at the beginning of each month, can help you get into a regular savings habit. Recurring deposits and Systematic Investment Plans of mutual funds are two good ways to do this. Strive to save a minimum 15-20% of your monthly pay towards investments.