To compound wealth and meet goals, it is important not only to save but also to invest smartly. Investors may get overwhelmed by the enormity of financial planning and plethora of investment options at their disposal.
Hence, it could all boil down to the importance of making investment decisions which are in line with one’s goals. These goals can be categorised into the immediate future (short), medium-term and long-term. This will lead to clarity on two fronts: What am I saving for and what is the best strategy to save for specific goals?
It will keep you motivated to save and achieve the goal of financial independence.
Defining short, medium and long terms
Short-term is generally thought of as a one or two-year period in which you may have to take care of immediate expenses. It could be an iPhone that is about to launch a few months down the line, an upcoming holiday trip, a down payment for a new car or dental surgery.
Medium-term could mean a time horizon of three to ten years. The medium-term goals could be a loan you want to pay off, your wedding expenses or downpayment for a house. The time frame is longer, giving you enough time to invest in schemes that are relatively riskier. The differentiator here is that you can afford to ride out volatility due to the long-term time frame.
Long-term means beyond 10 years. This involves saving for your children’s education, your retirement or even your parents’ old age. This time frame will allow you to put aside a small amount of money regularly and weather volatility.
How to invest for different goals
By now you have a sense that investing for different time periods has a lot to do with your risk-taking ability. That risk-taking ability may differ from person-to-person, depending on their income and savings.
So, let’s take a look at how to invest for different goals:
Short-term
In the short term, it is prudent to keep your risk low. Hence, you can invest in money market funds, short-term duration funds, liquid funds and overnight funds to meet your goal.
Liquid mutual funds are debt funds, which invest in short-term debt instruments such as commercial papers and treasury bills. They offer higher returns than savings accounts and can be redeemed easily.
Medium-term
For medium-term goals, one can invest in equity-linked funds due to ability to withstand volatility and risks. If you have medium-term financial goals, you can consider the following investment options:
Equity Mutual Funds: Equity mutual funds invest in stocks and have the potential to offer relatively higher returns. These funds are suitable for investors with a moderate-to-high risk appetite and an investment horizon of three to five years.
Balanced Mutual Funds: Balanced mutual funds invest in a mix of equity and debt instruments. They aim to strike a balance between risks and returns. They are suitable for investors with a moderate risk appetite and an investment horizon of three to five years.
Long-term
For the long-term, several experts advise a 90% equity portfolio and 10% in gold or government securities. This is to maximise your returns over various market cycles. For moderate risk-taking investors, this ratio could be 70% equities and 30% debt.
Index Funds: Index funds track or replicate an underlying index like the Nifty50 or Sensex. They are suitable for investors who want to invest in the stock market but do not have the expertise to choose individual stocks.
Public Provident Fund (PPF): PPF is a government-backed investment option that offers guaranteed returns and tax benefits. It has a lock-in period of 15 years and is suitable for investors with a moderate risk appetite.
National Pension Scheme (NPS): NPS is a retirement-focused investment option that offers tax benefits and a range of investment options, including equity and debt. It is suitable for investors with a long-term investment horizon of 10-15 years.
Real Estate: Real estate is a long-term investment option that can provide regular rental income and appreciation over a long period of time. However, it requires a significant amount of capital.
Gold: Gold is a traditional investment option that provides a hedge against inflation and geopolitical uncertainty. Gold can be invested in physical form or can be purchased in the form of Sovereign Gold Bonds and Exchange Traded Funds (ETFs).
Download the Upstox App Today