Hello there,
I am 42-year-old working individual. I have at present 5 lakhs surplus to invest. Which instrument should I invest in? Pls note that I am not interested in FDs or stocks as I regularly invest in these instruments on a monthly basis. My investment horizon in 5-10 years.
Thanks.
Ans: Given your 5 lakh surplus and your 5-10 year investment horizon, you have several good options to consider, excluding FDs and stocks. Since you are already investing in these regularly, we can explore alternatives that offer better potential over the long term. Here's an in-depth look at the options available.
Mutual Funds (Active Funds)
Why Invest in Active Funds: Actively managed funds can be a good choice for your long-term horizon, given their potential to outperform the market over time. With a horizon of 5-10 years, you have time to weather market fluctuations and benefit from the expertise of fund managers.
Advantages:
Fund managers actively pick stocks to aim for better returns.
Diversification across sectors and industries reduces risks.
Historically, actively managed funds have the potential to outperform index funds in the long run, especially when market conditions are volatile.
Investment Approach: You can invest in a combination of equity-focused mutual funds (for growth) and hybrid funds (for stability). This blend provides potential for capital appreciation while maintaining a level of risk control.
Taxation: Equity mutual funds are subject to capital gains tax. Long-term capital gains (LTCG) above Rs 1.25 lakh are taxed at 12.5%. Short-term capital gains (STCG) are taxed at 20%.
Regular Funds vs. Direct Funds: It's advisable to invest through a professional platform or a Mutual Fund Distributor (MFD) with a Certified Financial Planner (CFP) credential. This ensures that you receive the proper advice, have access to expert fund selection, and are guided in managing your investments without the hassle of directly handling multiple funds.
Corporate Bonds and Debt Mutual Funds
Why Corporate Bonds or Debt Funds: Since you're not interested in FDs, you can look at high-quality corporate bonds or debt mutual funds as a fixed-income option. These can provide better returns than traditional FDs while maintaining safety, especially if you choose investment-grade bonds or debt funds with a proven track record.
Advantages:
Corporate bonds usually provide higher interest rates than government securities.
Debt mutual funds, if selected carefully, can offer attractive returns with moderate risk.
The regular income stream generated from these investments can also provide liquidity in case of emergencies.
Taxation: Debt mutual funds are subject to capital gains tax. Short-term capital gains (STCG) are taxed as per your income tax slab. Long-term capital gains (LTCG) are taxed at 20% with indexation benefits.
PPF (Public Provident Fund)
Why PPF: With your 5-10 year investment horizon, PPF is an excellent option to consider. It is one of the safest and most tax-efficient investment options in India.
Advantages:
Tax-free returns, as interest earned is exempt from tax.
The principal amount invested is also eligible for tax deduction under Section 80C.
PPF offers a fixed interest rate, providing you with certainty regarding your returns over the long term.
Considerations: The lock-in period of 15 years may seem long, but you can withdraw funds partially after 6 years in case of an emergency. PPF is ideal for conservative investors seeking tax savings and capital protection.
Taxation: The interest earned and withdrawals from PPF are tax-exempt.
Gold (Sovereign Gold Bonds or ETFs)
Why Invest in Gold: You already hold some physical gold. While physical gold is a good hedge against inflation, Sovereign Gold Bonds (SGBs) or Gold ETFs are a better alternative for long-term growth.
Advantages:
SGBs offer annual interest payments, unlike physical gold.
The returns on SGBs are taxable, but they are also capital gains-tax-free after holding for 8 years.
Gold has historically performed well as a store of value, especially in periods of high inflation or economic uncertainty.
Considerations: While gold provides diversification, it should not form the bulk of your portfolio. Its role is more as a hedge than a growth driver.
Taxation: The interest earned on SGBs is taxable. However, the capital gains from SGBs held for 8 years are exempt from tax.
Real Estate Investment Trusts (REITs)
Why REITs: Although real estate itself is not recommended for investment, Real Estate Investment Trusts (REITs) can be a good alternative for those seeking exposure to real estate without the drawbacks of property ownership.
Advantages:
REITs provide regular income through dividends, typically from rents collected by the underlying properties.
They offer exposure to real estate in a highly liquid, diversified manner.
Unlike physical real estate, REITs are more flexible and require less capital.
Considerations: While they offer diversification, REITs can be volatile and their returns depend heavily on the performance of the property market. It’s essential to choose REITs with strong property portfolios and consistent dividend payouts.
Final Insights
Diversification is Key: You already have significant exposure to FDs and stocks. To diversify further, consider a mix of mutual funds, debt funds, PPF, and gold. This will provide both growth potential and safety in the long term.
Focus on Long-Term: Given your 5-10 year horizon, aim for investments that compound over time. Equity mutual funds, in particular, will be the key growth driver in your portfolio.
Assess Regularly: Since you are making regular monthly investments, ensure that you review your portfolio periodically with a professional to ensure it's aligned with your goals.
By adopting these strategies, you should be well-positioned to grow your wealth and achieve your financial goals over the next decade.
Best Regards,
K. Ramalingam, MBA, CFP
Chief Financial Planner
www.holisticinvestment.in
https://www.youtube.com/@HolisticInvestment