Massive wealth is generated through prudent long-term investing. It typically involves a timeframe of multiple decades.
You might wonder why it takes so much time. It is due to compounding. It always looks slow at the beginning, but your wealth grows exponentially at the tail end of the process. For example, Warren Buffet made 99% of his wealth after 52. Thus, experts suggest not breaking the investment corpus for a longer duration to reap the full benefits.
But, in reality, not everyone has the luxury to lock their entire investment fund for decades. We all have immediate needs that we must take care of within the next few months or a year from now.
Hence, this article will help you explore the best investment plans for a 1-year horizon in India.
6 of the Best Investment Plans for One Year
Below are the top 6 investment plans suitable for a one-year tenure.
1. Bank fixed deposits
Fixed Deposits (FDs) are a one-time investment plan that banks and other financial institutions offer. It allows you to invest a lump sum amount for a specific period in return for interest income.
1. 1. Tenure
Investment tenure for FDs ranges from seven days to 10 years.
1. 2. Returns
Currently, public sector banks offer an annual interest rate ranging from 6.1 to 6.3% for a tenure of one year. The interest rate rises by around 0.5% for senior citizens. The FD rates can change based on the ‘repo rates.’ The repo rate refers to the interest rate at which the Reserve Bank of India (RBI) lends money to the banks. RBI adjusts the repo rates to tackle inflation. During high inflationary periods, the repo rate increases. In such cases, the banks pass on this increase to the retail customers by increasing their borrowing rates. Thus, personal loans, home loans, and other forms of credit could become expensive. To offset this, there will be a corresponding increase in the rate of deposits (fixed and recurring), benefitting the retail customers.
1. 3. Risk
Bank FD is considered one of the safest investment options. Your deposit in a bank is insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme. The insurance covers your deposits up to INR 5 lakhs for both principal and interest. Hence, your FD would be safe even if the bank goes insolvent.
1. 4. Liquidity
You can withdraw your deposits and the interest amount upon maturity. Banks levy a penalty if you take the funds before maturity.
1. 5. Taxation
The interest income from FD is fully taxable. It is added to your total income and taxed as per your slab rates.
2. Recurring deposits
As the name suggests, Recurring Deposits (RD) allow people to invest in regular intervals to earn interest income.
2. 1. Tenure
You can invest in RD for a minimum of six months and renew it further up to ten years, in multiples of three months.
2. 2. Returns
Bank RDs offer interest rates almost similar to FDs.
2. 3. Risk
Deposit Insurance and Credit Guarantee Corporation (DICGC) offers up to INR 5 lakhs of insurance for bank deposits. It includes FD, RD, savings accounts, etc., covering principal and interest amounts.
2. 4. Liquidity
Typically, the minimum lock-in period for an RD account is three months. In case of withdrawal before this period, the investor will get back the deposited amount, not the interest payment. A premature withdrawal after three months attracts a 1% penalty over the interest rate by the bank.
2. 5. Taxation
Tax is levied on interest income. A TDS of 10% is deducted if the interest-earning is more than INR 10,000.
3. Post office term deposits
A Post Office Term Deposit is a fixed deposit that the Indian Postal Services offers. It is also referred to as the ‘Post Office Fixed Deposit.’
3. 1. Tenure
Investors can choose from any of these tenure options — 1, 2, 3, and 5 years.
3. 2. Returns
Currently, post office FDs offer 5.5 to 6.7% for a one-year tenure.
3. 3. Risk
The sovereign guarantee of the Government of India backs Post office FDs, making it one of the safest avenues for investment.
3. 4. Liquidity
Premature withdrawals are allowed after six months.
3. 5. Taxation
The interest income is taxed as per your income slab rates.
4. Debt mutual funds
Debt mutual funds are ideal for risk-averse investors looking for regular income. It allocates the money in fixed-income securities like government bonds, corporate bonds, commercial paper, etc. All these instruments have pre-determined interest rates, hence the term fixed-income securities.
4. 1. Tenure
Different debt funds are available for all maturity duration — from one day to 7+ years.
4. 2. Returns
The fund managers actively buy and sell these securities before maturity to maximize profit. The return potential depends on the investment tenure. Typically, debt funds offer a 7 to 9% annual return for an investment tenure of 3 to 12 months.
4. 3. Risk
Though debt mutual funds are less risky than equity funds, there are still some risks associated with debt funds.
- Liquidity Risk: It refers to the scenarios where the mutual fund house doesn’t have enough liquidity to meet redemption requests.
- Credit Risk: It is also called the default risk, where the issuer might default on the principal and interest payment.
- Interest Rate Risk: Interest rates usually fall during economic downturns and rise during economic growth. The debt fund’s unit price or Net Asset Value (NAV) falls when the interest rate rises and vice versa. The interest rate risk is higher for debt instruments with longer maturity periods as they are more susceptible to interest rate changes.
4. 4. Liquidity
Debt mutual funds are open-ended funds. It means the fund is always available for buying and selling, and there is no minimum lock-in period. Though this sounds like a favorable feature, it might become a problem when there are high levels of redemption pressure. Hence, SEBI has provided asset allocation rules to ensure open-ended debt funds have enough liquidity to absorb such pressure. As per SEBI, 10% of the total fund must be invested in government securities. This is irrespective of the asset class in which the fund was intended to invest.
4. 5. Taxation
Profits made within 36 months of purchase are called Short-Term Capital Gains or STCG. It is added to your taxable income and taxed as per your income tax slab. Profits made after 36 months are called Long-Term Capital Gains or LTCG. LTCG is taxed at 20% with indexation benefits. Indexation means the purchase price is adjusted to reflect the inflation rate.
5. Fixed maturity plans
A Fixed Maturity Plan (FMP) is a fixed-tenure, close-ended mutual fund scheme that invests in debt instruments that mature in line with the scheme’s tenure. A close-ended fund differs from an open-ended fund as it sells a fixed number of units through a one-time offering. The offering closes once the units are sold.
5. 1. Tenure
The tenure ranges from one month to five years.
5. 2. Returns
The FMP returns are almost similar to debt mutual funds. But there is minimal cost involved in managing the FMPs as there is no buying or selling of securities before maturity. This reduces the costs of the scheme, increasing the net returns.
5. 3. Risk
FMPs have minimal interest rate risks as fund managers hold the securities until maturity. Hence, the interest rate fluctuations don’t impact the fund. Also, FMPs typically invest in high-quality debt instruments minimizing the credit risks.
5. 4. Liquidity
The liquidity is low as there is a pre-defined lock-in period in FMPs. The primary reason for this rule is to ensure maximum returns during the stipulated tenure.
5. 5. Taxation
Taxation on FMP is similar to that of the debt funds.
6. Arbitrage mutual funds
These are hybrid funds that generate profit through arbitrage. Arbitrage means buying and selling the same underlying assets in different markets (spot and future markets) to exploit the price difference. Most arbitrage mutual funds are equity-oriented.
6. 1. Tenure
Arbitrage funds are unsuitable for a few days or weeks. Investors with an investment tenure of at least three months or longer can park their money in Arbitrage Mutual Funds.
6. 2. Returns
There is no guaranteed return in arbitrage funds. But in a volatile market, they can generate anywhere between 5 to 6%.
6. 3. Risk
The risk level associated with an arbitrage fund is similar to that of debt funds. It is ideal for investors who want to invest in equity but don’t want to face market risks. But, there could be instances when only a few arbitrage opportunities are available, reducing the return potential.
6. 4. Liquidity
The liquidity is high as these are open-ended funds. There is no minimum lock-in period as such.
6. 5. Taxation
Arbitrage funds are treated similarly to equity funds in taxation. You attract short-term capital gains if you stay invested for less than a year. If you are invested for more than a year, then you attract long-term capital gains tax.
What Are the Factors to Be Considered Before Making an Investment?
There are four critical elements to look into before starting your investment journey.
1. Risk-return ratio
Typically, low-risk or short-tenure instruments offer low returns and vice versa. Hence, investors should pick suitable financial products based on their risk profile. If you come across any low-risk, short-term plan promising great returns, it must be investigated thoroughly.
2. Liquidity
Financial products with low liquidity often have penalty charges during premature withdrawals. Hence, products with high liquidity are advantageous for investors for multiple reasons. Liquidity allows investors to switch to better alternatives if it offers higher returns than the existing investment. Also, liquid assets come in handy during emergencies.
3. Tax efficiency
Long-term investors get the best deal when it comes to taxation. But, if you want to invest for one year or less, you need to assess the short-term capital gain (STCG) tax. The STCG tax varies from product to product. For example, an arbitrage fund attracts an STCG tax of 15% if invested for less than one year. In the case of debt mutual funds, STCG tax applies to profits made within 36 months. It is taxed as per your income tax slab.
4. Diversification
A well-diversified portfolio comprises multiple asset classes with varying tenure periods (from short to long term). It helps reduce the risks and allows investors to handle immediate and future requirements.
We have already looked into the list of short-term investment plans. Some of the long-term options you need to be aware of include gold, NPS, direct equity, and cryptocurrencies. Speaking of cryptocurrencies, is it part of your investment portfolio? If not, check out Mudrex Coin Sets, an index fund-like product suitable for long-term wealth generation.
Conclusion
There is an adage saying, “Life is what happens when you are busy making other plans.”
While it’s good to be long-term focused, we can’t ignore our immediate needs.
Savvy investors don’t invest based on the risk-reward ratio alone. They also look at the time horizon. This approach helps them handle their short, medium, and long-term goals.
Though you might not create significant returns in a year, you can still put your money to good use.
FAQs
1. What does ‘Diversification’ mean?
Diversification is a risk management strategy that mixes a variety of asset classes within a portfolio. It is an attempt to limit exposure to any specific asset class. A well-diversified portfolio makes you less likely to experience sudden market shocks.
2. How can I double my wealth within five years?
Let’s do the math by using ‘The Rule of 72.’ It’s a basic rule of personal finance that shows you the growth rate required to double your wealth in a particular timeframe.
You divide the number 72 by the year you plan to double your money. If you aim to double your wealth in five years, 72/5 = 14.4% is the required CAGR. You need to pick asset classes that can deliver the expected CAGR of 14.4%.
3. What are the best possibilities for long-term investments in 2022?
Typically, long-term investments cater to goals you want to achieve in the next 7 to 10 years. These investment options are volatile but can deliver higher returns. These options include direct equity, equity mutual funds cryptocurrencies, etc.
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