Investing is about defining your long-term and short-term financial goals and backing it up with money so as to achieve those goals.
Here are four investment options investors should consider so as to achieve their most important goals.
1. Insurance plan
Taking an insurance plan to provide for goals of the family like:
- Financial cover against loss of life, which makes sure your family can support itself in your absence
- Child’s education
- Child’s marriage
- Buying a house
Individuals must aim at taking insurance to achieve such objectives. While most individuals set aside money towards these objectives on an ad-hoc basis, they usually find themselves falling short in the final analysis.
One way to plan more effectively for the goals is to opt for insurance plan that guarantees a specific amount at the end of a pre-determined period. This way you know what you can expect and meet your goals more efficiently.
Individuals can opt for traditional insurance plans or market-linked plans / ULIPs depending on their goals and risk appetite.
They can use riders to enhance the effectiveness of the life insurance policy. A rider is an add-on to the primary policy, which offers benefits over and above the policy subject to certain conditions.
Life insurance plans offer tax benefits under Section 80C. The maximum deduction that can be claimed is Rs 1.5 lakhs. Redemption proceeds are tax-free under Section 10(D).
2. Pension plan
Pension is another form of life insurance. A pension plan is structured to generate regular post-retirement income enabling individuals to lead a financially secure post-retirement life.
Pension plans, also called retirement plans, help individuals build a retirement corpus through regular and systematic savings. On maturity, the corpus is invested for generating regular income, which is referred to as pension or annuity
The maximum deduction that can be claimed is Rs 1 lakh to avail of tax benefit under Section 80CCC (sub-section under Section 80C). On maturity 1/3rd of the accumulated amount is tax free with the balance 2/3rd treated as income and taxed at the marginal tax rate. The amount is tax free upon death of beneficiary.
3. Tax-saving mutual funds
Tax-saving mutual funds or equity-linked saving schemes (ELSS) invest in stockmarkets and are well-suited for investors with medium to high risk appetite. They are geared to meet long-term goals of investors, thanks in large part to the equity component.
Objectives like planning for child’s education and retirement planning, for instance, could use the equity edge provided by tax-savings mutual funds.
A maximum deduction can be claimed on investments of Rs 1.5 lakhs to avail of tax benefit under Section 80C. Redemption proceeds are tax-free on maturity/death under Section 10(D).
4. Liquid funds
Investors can consider liquid funds to park money for a period as little as one day to as much as 90 days or even higher. Liquid funds invest in money market investments like call money among others. It is rare for liquid funds to see a dip in their net asset values (NAV)
For investment tenures running into months, there are short-term mutual funds. Like liquid funds, short-term debt funds are managed conservatively with the explicit aim of safeguarding capital and posting modest capital appreciation.
Investors can opt for the dividend option or the growth option. Dividend is taxed at nearly 30%. Capital gains are added to income and taxed at marginal rate of taxation. From a taxation point of view investors in the lower tax brackets are better off opting for the growth option while investors in the highest tax bracket can choose either option.
Liquid funds and short-term mutual funds are particularly useful for individuals setting up an emergency fund. The money is relatively safe and very liquid – two key features of an emergency.