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Best Investment Plans for 5 Years

dateKnowledge Centre Team dateJune 06, 2022 views134 Views
Investment Options for 5 Years

Investment plans for 5 years are a mainstay of your investment plan, at least in the first 15 years of your financial life. For example, consider the life of Ramesh…

Ramesh is a smart, 23-year-old gentleman who recently graduated in engineering from a reputed University down South in India. Ramesh hails from a typical, aspirational, middle-class Indian family. Ramesh wants to follow his dad’s advice on financial matters – ‘think 5-years ahead.’

So, now that he is earning a good income which exceeds his monthly expense, he starts looking for the best investment plans for 5-years.

If everything goes well he’ll have a car by 25, be married by 28 and probably become a parent before 35. His lifestyle, responsibilities and expenses are projected to increase multi-fold over the next 5-7 years.

Ramesh has good education and domain expertise, and his income is likely to grow. However, it may or may not keep pace with the steep rise in expenses because of the addition of new family members. With proper financial planning, investment plans for 5 years could help him channelise his savings to meet the future developments.

Also Read - How to Invest Money?

Why should you Buy an Investment Plan for 5 Years?

There are a few strong factors to influence your conviction to look at investment options that have a 5-year time horizon:

1. Wealth Creation:

Wealth creation should indeed fall under the longer-term scheme of things. But many asset classes such as ULIPs allow withdrawals after 5-years. Past performance of ULIP funds has shown that ULIPs can indeed beat inflation and grow wealth within 5 years.

2. Flexibility:

You invest in as many financial assets as you deem fit and still get reasonably good returns. In long-term investments such as real estate, a large chunk of your money is tied to a single asset class.

3. Spread your Risk:

Five-year investment options let you diversify your risk and invest smaller amounts across multiple options. Even if one of the investment decisions go wrong, you will make up for it elsewhere.

4. Liquidity:

Five-year period is relatively short for major wealth creation. However, this horizon gives you a perfect balance of investment growth plus liquidity. The money you invest will be available to you after just five years, and you can invest it further or use it for your goals.

Planning and prudent investment are key to ensuring Ramesh remains stress-free and enjoys these life-changing moments of becoming someone’s partner and parent. Looking at flexibility, spreading risk and eventually getting solid returns on investment should be high on Ramesh’s agenda. So, which financial investment options match Ramesh’s needs and criteria?

Types of Investment Plans for 5 Years

Five-year investment horizon, although, not very long, gives you a number of amazing investment options. Some of these options also offer tax-saving benefits. Here’s a list of the most popular 5-year investment options in India:

Mutual Funds National Savings Certificate (NSC)
Equity Linked Savings Scheme (ELSS) Fixed Maturity Plans (FMPs)
Unit Linked Insurance Plans (ULIPs) Bank & Post-Office Fixed Deposits

1. Mutual Funds

Mutual funds pool money from several sources and invest in equities. These funds are focused on specific industries or segments of companies and are managed by experienced fund managers. You can choose the type of fund depending on the risk appetite and targeted return.

If you are looking for more stable returns, you may explore mutual funds that invest in government securities, corporate debentures and bonds. Types of mutual fund investment options according to investment risk:

Equity Funds Debt Funds Hybrid Funds Liquid Funds
Asset Class: Primarily equity stocks

Fund types in declining risk order:
- Thematic Funds
- Sectoral Funds
- Active growth funds
- Mid-cap funds
- Blue-chip funds
- Index Funds
Asset Class: Long-term Fixed income securities

Fund types in declining risk order:
- Credit opportunities fund
- Dynamic bond funds
- Fixed Maturity Plans
- Gilt Funds
- Income Funds
Asset Class: Mix of equity debt and gold

Fund types in declining risk order:
- Aggressive hybrid funds
- Dynamic asset allocation fund
- Multi-asset allocation fund
- Equity savings fund
- Conservative hybrid funds
Asset Class: Money market securities & bonds maturing within a year

Fund types in declining risk order:
- Ultra-short term debt funds
- Ultra-short term debt funds

2. Equity Linked Savings Scheme (ELSS)

It is a type of equity mutual fund. Investment of up to Rs 1.5 lakhs in this fund qualifies for tax deduction under section 80C. The fund has a lock-in period of 3-years. The maturity value from the fund will become taxable as long-term capital gain exceeds Rs 1 lakh.

Reasons to Invest in a ELSS

3. Unit Linked Insurance Plan (ULIP)

ULIPs are life insurance plans with flexible and diversified investment options. ULIPs are phenomenal long-term investments because of equity allocation and tax-exempt status. Here are a few more unique features of ULIPs including Invest 4G ULIP from Canara HSBC Bank of Commerce Life Insurance:

a) 5-year lock-in period and minimum investment period
b) You can invest for a period of up to 99 years of age
c) Invest in a mix of equity and debt funds
d) Manage your equity allocation with automated strategies
e) Premium protection option for safeguarding important goals like child’s higher education
f) Systematic and milestone withdrawal options
g) Bonus additions for long-term investors

Premium Protection Option of Invest 4G

So, ULIPs have an insurance component as well as an investment component. In case of unfortunate demise of the policyholder, the nominee would receive the Sum Assured or else the policyholder would receive the fund value at the end of the policy term.

ULIPs permit partial withdrawals at specific milestones or for a certain number of times in a term. Amounts paid towards premium are deductible, from taxable income, under section 80C whereas all pay outs are exempt from tax under section 10(10D).

Also Read - How to Invest Money?

4. National Savings Certificate (NSC)

NSC is offered by the Post Office and is very similar to the tax-saving 5-year bank deposit. The rate of interest for an NSC is 6.8% which is a tad higher than the current rate of interest for bank deposits. The lock-in period is 5 years and the amount invested is deductible, from taxable income, under section 80C. Interest is compounded annually and this annual interest can also be deducted from taxable income. However, the interest amount receivable on maturity is taxable.

Learn more about National Savings Certificate.

5. Fixed Maturity Plan (FMP)

FMPs are close-ended mutual funds that have a number tied to both the tenure as well as the rate of interest. This class of investment is suited for people who want the safety net of a bank deposit but still yearn for higher returns. In the case of bank deposits, the interest earned is directly added to taxable income for tax computation whereas, in the case of FMPs of longer than 3-year tenures, the interest earned is considered as a long-term capital gain and taxed at 20% of the indexed value.

6. Bank and Post Office Fixed Deposit (FD)

Both bank and post office FDs give almost the same rates of interest. If one is highly risk-averse, FD is the right choice for investment. The interest rate hardly beats inflation but the person is assured that the money is in safe hands. Unless one is investing in the 5-year tax-saving FDs, you will not get any tax benefits for other FDs.

Ramesh is young and dreaming of a bright future with his yet-to-come family and hoping to have a brilliant career too. His focus should be on ensuring the family’s happiness at all times, implying that an insurance cover is a must. Investing in wealth-generating assets, at an early age, is important to fulfil his aspirations as it gives him a chance to build his wealth. At the same time, he can also consider some safer instruments to diversify his risks and overall benefit from different investments.

Check Out - Best Fixed Income Investment Options
Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

FAQs Related to 5-Year Investment Plans

You should allocate your savings to look after your short-term, mid-term and long-term goals. Short-term goals would usually fall within 3 years from now and have a smaller expected outflow.

Mid-term goals like a car purchase and home renovation fall between 5 years to 10 years from now, while long-term goals like retirement will take 20+ years. Since you are allocating to all three you are always investing in less than 3 years, 5 years, 10 years and 20 years plans.

Five-year investment plans allow you great flexibility while offering better returns as well as tax savings. With a 5-year horizon, you enjoy long-term capital gain benefits with debt funds and equity investments. This horizon also allows you to invest in tax-saving investments like – Tax-saving FDs, ULIPs, NSCs, ELSS, etc.

You should be a citizen of India and must have attained majority age (18 years+). You will also need a few compulsory documents to invest and avail all the benefits of 5-year investments:

PAN Card
Adhaar Card
Bank Account Passbook or Cheque
A Photo ID / Address Proof

With a 5-year investment horizon, you can invest in options with high risk as well as low risk. For example, gilt funds which invest in government securities and top-rated corporate bonds carry very low risk. Pure equity funds like ELSS or sectoral funds can also be a good investment option for 5 years. However, these investments have significant investment risks.

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