May 9, 2021

Factors to Consider Before Choosing a Savings Investment Plan

Investment Plan

Investment Plan

Offline/Online Mutual Funds and Deposits are the popular investment tools that enable an investor to grow his savings easily. Both of these vary in their investment needs and you need to choose wisely where you can invest. 

Fixed Deposits are the safest investment tool offered by banks for both long-term and short-term. They have a fixed return rate as per decided by the government and remain unaffected by growing inflation in the market. Investment in FDs enjoys tax exemption while FD returns are taxable under Section 80C of the Income Tax Act. The invested amount in FDs cannot be withdrawn before the maturity period, otherwise, banks charge a penalty on the investor. FDs also give substantial returns if opened for a long term tenure.

Mutual funds investments are market-based without any fixed return rate. They provide greater return rates than FDs in the long-term money-saving plan and are affected by market inflation. It is having greater risk factors. Investments can be sold without depreciating the fund corpus within a short time. Thus mutual funds possess higher liquidity than FDs. Long-term mutual funds generally return a maximum of 18%. For mid-term mutual funds, it is 14% while for short-term it is up to 8-10%.

Things you need to consider while making investment plans.

Choosing the best saving plan is dependent on the risk-taking capacity of the investor and the investment corpus. Consider the following factors before investing –

  • Fix your financial goals – You need to sit down and think what is the actual objective of investing. If you just think of keeping your money safe then you can invest in FDs. They will act as a regular income source. But for higher profits or growth in capital, you need to invest in mutual funds. Then you must look into how much money you can contribute initially to the investment and also consider your monthly investments. You can invest according to your affordability. Don’t try to overdo things or you may face problem in the long run.
  • Know your Risk tolerance – If you are investing money then you must know the risks associated with the investment facilities. To grow your savings the two instruments are FDs and Mutual Funds. The return rate of FDs is decided by the government and hence are fixed. The amount you get from the bank is not affected by market inflation and thus is risk-free. But for mutual funds, it is just the opposite scenario. The return rate is not fixed and it changes according to the market fluctuations. Generally, Mutual Funds offer higher returns than FDs but you need to have risk tolerance.
  • Consider your Age – Age is a major factor in making investments. At a younger age, you generally have fewer responsibilities and large risk-taking capacity but as you grow older things changes and you are less capable to face risks. Thus it is always suggested to invest in savings investment plans at your younger age and enjoy the benefits at your golden years.
  • Liquidity – This decides how early and in what conditions you can withdraw the cash. For FDs, you cannot withdraw cash anytime you desire. They have a lock-in period during which withdrawal of money will lead you to suffer penalties. Only after the maturity period, you can obtain the cash. But for Mutual funds, you can sell your investment within a short period and it doesn’t make you suffer from any penalties.
  • Tenure – See if you are investing for a long-term financial goal or a short-term. Generally, it is best to invest in mutual funds if you are having a long-term financial goal while investing in FDs for short-term goals.
  • Diversify your investment portfolio – Don’t restrict yourself in a single investment portfolio. To increase your capital you have to take higher risks. Diversification manages the balance between risks and returns. Spread your money across several investment products, a loss in one will be balanced with a higher profit from another. You earn higher returns and your risk factor decreases.
  • Tax Deduction – Before investing, look into the taxation levied on the plans under Section 80C, Income Tax Act. While investing in FDs you can get a tax deduction up to Rs. 1.5 lakh but during return, the taxes are charged on the interest amount. But if you are investing in balanced or equity funds for over a year, the tax levied is zero. In case of debt funds, you can sell after completing the three years lock-in period and the taxes levied will be negligible. You get greater chances of making huge profits from your interests.
  • Emergency Fund – You must have an emergency fund before investing. In case of any emergencies occur you can withdraw from that fund without touching the investment. In case you are avoiding to create an emergency fund then invest in products that possess high liquidity.
  • Terms and Conditions – You must have proper knowledge about all the terms and conditions of the investment plan. Especially look into the inclusions and exclusions. Find out if there are any hidden charges. Consider taking suggestions from a trusted professional to avoid being exploited by the service provider in the future.

Consider all the above factors and then decide on your savings plan. Know your age, affordability, tenure, and terms for the plans you want to invest in. If you are young then don’t be afraid of taking risks. With higher risks comes higher capital growth.