Traditional investment advice still points to options such as life insurance, gold, and real estate. Every investment option has its pros and cons. However, it’s absolutely imperative the instrument you have chosen is in harmony with your investment objective. If not, you may fail to meet your objective.
For example, you need to create a corpus of Rs. 1 crore for your retirement. To achieve this large goal, you need a set of investment instruments that provide above-average returns and are tax-efficient. Mutual funds are well-suited for such a target. But if you picked endowment insurance plans (that have low returns) and fixed deposits (which provide post-tax returns of around 5% as of today), you will not be able to reach your target in a desirable time-frame.
Here are five thoughts to help you make the best investment and insurance choices.
For Long Term Wealth, Think Equity Mutual Funds
Equity Mutual Funds are one of the best ways to create wealth in the long term in a tax-efficient manner. They have delivered long-term returns that beat other traditional avenues such as fixed deposits, endowment plans, and government-backed small savings schemes. In the 10 years ending June 2017, the equity mutual fund category as a whole had delivered annualised returns of 11.56%*. Some of the best-performing equity funds have delivered even 20-30% per annum in recent years despite pockets of volatility. Rs. 5000 invested every month in a mutual fund scheme providing a CAGR of 12% can create a corpus of Rs. 23.2 lakh in 10 years or Rs. 1 crore lakh in 20 years. What’s more, earnings from equity investments held for one year or longer automatically become tax-free. One of the great thing about mutual fund investing is that you can start investing in minutes by registering yourself online.
Save Your Cash, Buy Term Insurance
You must invest and insure separately. For life cover, buy a term insuranceplan which affords you a large cover for low costs. For example, a Bangalore-based 30-year-old salaried male earning Rs. 500,000 a year with no tobacco habit can buy a 20-year life cover of Rs. 1 crore for annual premium costs starting Rs. 6511. This frees up your savings to be directed to pure investment options such as mutual funds and PPF, where you have the potential of earning much higher returns while also saving tax.
PPF is one of the best investment avenues for those with a low risk appetite. What’s more, all your returns from your PPF investments are tax-free, something you get in very few debt investment options. With current returns of 7.8% per annum, it also provides benefits such as tax savings under Section 80 C and loan against your PPF account. Since this is a government-backed scheme, your capital is at no risk, and your returns are assured.
Real Estate Returns Are Hard To Quantify
Property should be bought first to secure a roof over your head. As an investment avenue, you must thoroughly examine risks and possibility of long-term gains. As a property owner, you must not only pay a large entry price, you will also pay heavy charges towards home loan interest, registration, stamp duty, maintenance, repairs, furnishing and upkeep. These charges increase the cost of investment significantly.Selling the property isn’t easy either, especially since the real estate market has been subdued in recent years.If you find the ownership costs and risks overwhelming, you may be better off micro-investing through mutual funds, which are easy to enter and exit.
Be Smart About Gold Buying
Gold has traditionally been a great investment avenue. However, it has lost its sheen in recent years. Returns have remained flat over the last five-six years. If you’re looking to wear your gold, it may be worth your while. However, you don’t actually need to buy physical gold if your intention is to invest in the yellow metal. You can buy gold ETFs, gold mutual funds, or even the Sovereign Gold Bond which offers interest earnings in addition to the possibility of capital gains. These smart options save you from the hassles of checking the metal’s purity or of having to store it safely.
Wealth creation, investment planning, and tax-savings are critical aspects of money management. These should not be left for the final days of the financial year. Often, people dither till the last week of March which is when they spring into action and buy a life insurance policy without giving it a lot of thought. Anyone doing so would struggle to meaningfully insure their own life or to create wealth in the long term. Therefore, take stock of your money now. Set yourself meaningful money goals, and then find the best instrument for achieving them.
(The author is CEO of Bank Bazaar)
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