Saving for major financial goals has never been more vital in today’s volatile environment. This includes not just considering your aspirations, but also the requirements of individuals you care about. Given that our earnings may be restricted, it is critical to plan how to make the most of what we have. This is where a good investing strategy comes in, allowing your money to increase over time and creating a financial cushion for the future.
Choosing the best savings plan from the various alternatives available necessitates careful consideration. Here are some important variables to consider –
Risk tolerance and affordability
Determine how much you can invest realistically, whether in bulk sums or smaller, monthly payments. Failure to stick to your investing strategy might result in a gap in your savings goal. Your comfort level with risk is also significant. Market-linked investments, for example, may provide larger returns but are more volatile. It is essential to balance the risk and cost when zeroing in on an investing strategy.
Suppose you earn Rs 1 lakh monthly. After deducting your home expenses, you can leave away Rs 10,000 every month for investments. If you are risk averse, you may choose to consider classic products such as PPF or National Savings Certificates (NSC). However, if you are willing to tolerate some market volatility in exchange for possibly better profits, you may look into equities mutual funds or ULIPs.
Define your goals
Every investment should be goal-oriented. Whether it is for education, marriage, retirement, or other life events, having clear objectives gives your investment strategy direction. Aligning your investing options with these goals is critical to selecting the best solution.
Assume you are an Indian investor with two main goals: saving for your child’s further education at a renowned university such as IIT or IIM in 15 years and planning for your retirement in 25 years. Given a 15-year time horizon, you can choose a balanced approach that includes a mix of stock mutual funds and safer debt instruments such as fixed deposits or the Public Provident Fund (PPF). Starting with a more aggressive strategy (such as investing in diverse equities funds) and gradually transitioning to safer channels (such as the Senior Citizens’ Savings Scheme) as retirement approaches would be excellent.
Liquidity
Long-term savings plans sometimes feature long terms and lock-in periods. It’s critical to learn these details, especially if you’ll need money in an emergency. Partial withdrawal may offer a financial safety net while keeping your goals on pace.
If you invest in a five-year NSC, you will be compelled to pay a penalty if you withdraw before the fund matures. On the other hand, if you invest in a liquid fund, you may be able to withdraw your money fast, but you may have to pay a small exit fee.
Understand conditions
Familiarise yourself with your savings plan’s individual terms, restrictions, and lingo. Understanding any costs and projected returns, as well as the type of deductions from the maturity amount, are all part of this. Making smart decisions requires being informed.
When factoring in ULIP, it is essential to know distinct expenses such as fund management, premium allocation, and other charges. Keep note of the lock-in, surrender fees and partial withdrawal conditions. This info will permit you to make an informed decision regarding whether a ULIP is an excellent fit for your risk profile and financial objectives.
Tax benefits
Seek for items that offer tax advantages, such as Section 80C of the Income Tax Act deductions. These can reduce your tax liability by lowering your taxable income. Even though tax incentives are beneficial, your investing plan shouldn’t be centered primarily on them.
You can claim a tax credit under Section 80C for investments made via the Equity-Linked Savings Scheme (ELSS) up to Rs 1.50 lakhs annually. This might result in a significant reduction in your taxable income. However, keep in mind that, while ELSS provides tax benefits and possibly large profits, it has a three-year lock-in term and is related to stock market performance.
Inflation and its impact
In India, where living expenses and educational costs are on the rise, inflation is an important consideration. Let’s imagine you are setting aside money for your child’s education, which at this point might cost up to Rs 20 lakhs. If we assume a 6% annual inflation rate, this expense may double over the course of 15 years. Your investing strategy should thus strive to outpace inflation, which increases the appeal of choices like stocks and mutual funds as they have a longer track record of providing larger long-term returns.
Preparing for retirement
Though vitally necessary, retirement planning is frequently disregarded in the early years of life. Investing in the National Pension System (NPS), for example, can be wise. The government backed NPS retirement savings scheme provides alternatives for debt and equity investments. Let’s say that at thirty years old, you begin contributing Rs 5,000 per month to NPS. With compounding’s power and NPS’s comparatively lower cost structure, you might have a sizable corpus by the time you retire at age 60.
Protection from insurance
Having sufficient insurance coverage is just as important as investing for future objectives. For example, if you’re the primary provider for your family, having a term insurance plan is crucial to their financial stability. In the event of an unanticipated catastrophe, a term insurance plan with an appropriate sum insured (e.g., Rs 1 crore) guarantees that your home loan and your child’s education won’t be jeopardised.
Choosing the right long-term savings plan
The perfect investing strategy fits your objectives and your budget. You may choose the best savings plan by taking these important variables into account. Recall that the objective is to ensure your family’s financial stability and to meet important life expenses, such as your children’s marriages or a happy retirement. Investments and insurance are essential for a secure and contented existence.
Certain insurance policies combine investing and protection features to help you reach your financial objectives and provide a financial safety net for your loved ones. Don’t, however, stop at choosing an insurance-investment plan; instead, evaluate many suppliers to determine which one best suits your requirements. Additionally, be sure to estimate the monthly investible amount using tools like the ULIPs return calculator, SIP calculator, FD calculator, and others.