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long term investment and short term investment options

Long Term Vs. Short Term Equity Investments

For a salaried or working individual, it is very important to invest to get capital growth on their money. Investing in a timely manner plays a key role in accomplishing that objective as it ensures that your hard earned income is accumulated periodically for good returns and a more fruitful utilization when required.

At present, there are numerous investment opportunities available and each one of them is suited to a separate investment profile as well as saving capabilities.

Based on time-frames, investments can generally be classified into two types: –

Short Term Investments(3 months-5 years)

As the name suggests, these are investments that can be made in the short term with considerable appreciation of your money in mind. Some of the prominent short-term opportunities are:

  • Bank Fixed Deposits

    Considered conventional and very safe, Fixed Deposits is a good option if you have fixed and guaranteed short term returns in mind. With a lock-in period of 1-3 years, different banks offer returns ranging from 6-9.5% annually.

  • Non-convertible Debentures/Corporate Deposits (NCDs)

Unlike Fixed Deposits, there is a need for a better financial understanding and having a risk taking appetite while investing in NCDs owing to uncertainty in returns. With that said, the prospective returns are higher than Fixed Deposits and the lock-in terms can be as low as 6 months.

Fixed Maturity Plans (FMP) – With no constraint in the lock-in period, you can invest in FMPs from 3 months to 5 years. These are investment schemes floated by mutual funds and are closed-ended. The assets that a fund households in its investment portfolio for such schemes have similar maturity periods which can give you decent returns with less exposure to market risks. An additional benefit from the tax saving angle is the indexation benefit that you get in FMPs. Click here to read more on Fixed Maturity Plan

  • Short Term and Ultra Short Term Mutual Funds

    The investment portfolio in this type of mutual funds is predominantly in fixed deposits and other short term investment assets. Lock-in term is the standard 1-3 years with returns of up to 8%.

Long Term Investments(Beyond 5 years)

Long-term investments play a crucial role in the bigger scheme of things wherein you might need accumulated amounts; for e.g. for education or buying property. Therefore, it is imperative for you to have a cohesive know-how of the kind of investment option that you are opting for. Here’s an overview of the most common long-term investment options: –

  • Employee Provident Fund/Public Provident Fund

Provident or pension fund is a savings scheme offered by a company to an employee in which a small portion of the employee’s monthly salary is deducted and diverted into his Provident Fund which can be withdrawn by an employee on retirement. Apart from this, an employee can also put up to 1 Lakh a year in Public Provident Fund.

 For self-employed individuals, Public Provident Fund is the universal option.

With an interest rate of 8.75% for EPF and 8.7% for PPF for Financial Year 2013-14 , EPF/PPF presents not only a good savings and tax rebate tool, it is also a sensible retirement planning investment.

  • National Savings Certificate

    An offering by the Post Offices in India, it is one of the traditional investment tools and highly preferred by senior citizens and those who are looking to invest small amounts for longer lock-in periods. You can invest anywhere from 100/- to 1.2 Lakhs with a 6-year maturity term. The annual interest rate on NSC’s is 8% and not subject to market fluctuations. Also, the interest is not tax-free at the time of payment at maturity.

You can purchase physical NSC’s in denominations of 100, 500, 1000, 5000 and 10,000 and some post offices also have the option of offering them in a Demat form.

  • Bonds– Bonds are debt instruments issued by companies and the Government to fund their functional and infrastructural needs as well as fund development initiatives. The inherent risk involved is lesser than equity investments. A good example of a Bond as a long term investment option is the Indian Government 10 Year Bond which is currently giving an interest rate of 8.86% since January 2014.Read more on basics of tax saving bonds
  • Real Estate – Investment in real estate is a very smart investment option as the appreciation in the value of real estate has been very encouraging in the recent years. As an investment option, it represents good growth and is also a substantial asset to have for the later phase of life.
  • Equity Shares – Investment in a company/equity entitles you to shares as well as voting rights as a shareholder but this long term investment is a calculated risk. Looking at it from a hypothetical perspective, a company that you invest in might flourish ensuring a high return on equity or might fold up resulting in a major loss. Simply put, it is a long-term single entity investment option that is entirely dependent on a company’s profitability.
  • Mutual Funds – The inclination towards mutual funds investments in India is low at the moment and a major reason behind it is the lack of awareness amongst the masses. Mutual Funds are subject to market risks but with investment in a very diverse asset portfolio and professional fund management of your investment, returns on mutual fund investments are favorable more often than not. Know more about the types of mutual funds.

Attaining a Balance

As an investor, it is important to achieve a balance in the ratio in which you make short-term and long-term investments. A good understanding of the available options as well as realistically determining your financial needs in the next few years can really help you to allocate your money in short-term and long-term investment options sensibly. That way, you will have sufficient capital for your short-term needs as well as steady growth on your capital in the long term.

Use the income tax calculator and know how much you can save on various investments.

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