You must have heard the idiom – Penny penny makes many. Same phrase can be applied to investment which will earn you good returns. Regular investment for long term in a high return and/or guaranteed product, even for a small amount can create excellent amount of wealth for you.
Although many investors believe in short term gains over long term but any financial advisor you approach will always recommend to focus on long term investment. This is because the wealth created helps in securing financial future of you and your family.
In this article we will consider an example of investing 2000 every month and the estimated returns.
Now there are two types of investment products and we’ll explore both:
- High risk: Mutual funds, direct equity, & ELSS. These investments do not guarantee returns, however returns are very high compared to the below mentioned no risk products.
- Zero risk: PPF, Sukanya Samriddhi, FD, NPS, APY, endowment/money back insurance policies, recurring deposit
Mutual fund: For investors who do not have technical knowledge of equities/bonds etc. should opt for mutual fund route. These funds are managed by expert fund managers. Your only role is to invest and track the returns at a regular interval. Where to invest and when to exit is decided by the fund manager. In the last 5 years, mutual fund investment has given a return of over 15% which has beaten all other investment products available in the market. So if you invest Rs. 2000 per month (Rs. 24, 000 per year, total of Rs. 1, 20,000) for a period of 5 years in a top performing fund, the return would be nearly Rs. 1, 80,000. If the same amount is invested for a period of 10 years, the estimated returns would be above Rs. 5, 50, 000.
Direct Equity: This form of investment is recommended only for individuals with excellent knowledge of equities and having enough time to track the markets on a daily basis. In the last 20 years, Sensex has given 9 times return. So a monthly investment of Rs. 2000 for let’s say 10 years in a top performing stock can give you an excellent return. Condition is that you buy stock/s, at favorable amount and sell when it is at a peak. For e.g. if you buy 1000 shares @ Rs. 24 each and sell all of it @Rs. 30 each, then your profit will be nearly Rs. 5998 i.e a profit of 24.99%.
Equity Linked Savings Scheme (ELSS): This variant of mutual fund also carries risks as the money is majorly invested in equities and moreover it has a lock-in period of 3 years. The past performance of ELSS funds has given average return of 15%-25%. So if someone invests Rs. 1000 in a top performing tax saver ELSS fund (Rs. 72, 000), the estimated returns would be greater than 85000, which is nearly a 18% increase.
There are other high risk products which we will not cover in this article as the returns from them are low compared to the above mentioned products in addition to the high risks involved. These products are corporate fixed deposits, ULIPs and gold. Real estate is also one of the high return on investment product after mutual fund/equity. However, investor needs to put in lakhs of rupees as an initial investment in order to get good return and is certainly not possible for a poor income earning individual. Read more on Pradhan Mantri Awas Yojana, a government scheme which offers housing to poor earners.
Next we’ll look into zero risk investment products and calculate returns for invested sum of Rs. 2000 every month for a fixed period as per the products standard tenure.
Sukanya Samriddhi Yojana: This has turned out to be the best investment product which was launched in the year 2015. The product carries absolutely no risk and the returns too are significant. Remember that, investor can invest in SSY only if he/she has a girl child. Read more on detailed features of SSY. This scheme is not applicable for someone having a boy. The interest rates are revised every year and for FY 2016-2017 the interest offered is 8.6% compounded annually. If someone invests Rs. 2000 every month (i.e. 24, 000/Year) for a period of 14 years, then the returns after 21 years which is the maturity period will be Rs. 11.73 Lacs.
Bank Fixed Deposit: This zero risk product offers guaranteed returns and has been a preferred by investors over savings account interest. Every bank offers varying interest rates but the average is between 6%-8%. If someone puts in Rs. 1, 20,000 in FD account for a period of 5 years, then the maturity value would be around Rs. 1.75 Lacs assuming 7.5% interest rate offered.
Public Provident Fund: When you ask your parents, the most recommended product carrying no risk at all, then the answer will be PPF. Investment of Rs. 3, 60,000 (i.e. Rs.2000/month) for a standard lock-in period of 15 years will give a return amount of 7.1 Lakh @8.1% interest rate.
Savings Bank Account: Banks in India offers interest rate of 4%-6% for the money kept in a regular savings account. So Rs. 24, 000 deposited for a period of 1 year will give return of Rs. 24, 960; assuming interest rate of 4%. And when kept for 3 years, the maturity amount will be Rs. 26, 660. So as you can see compared to bank FD, savings account offers very less returns.
National Savings Certificate: This small savings scheme offers deposits in the range of Rs. 100, 500, 5000 and 10000. So you can purchase 4 certificates of Rs. 500 each i.e. Rs. 2000. The maturity amount will be Rs. 3032 @ interest rate of 8.5% for a 5 year tenure.
Recurring Deposit: Another preferred product especially by investors who do not want to take risk. If you want to develop a habit of savings then recurring deposit is worth recommended. A monthly installment made for Rs. 2000 for 12 months will give a return of nearly Rs. 25,000. assuming annual interest rate of 7%. Investors can open RD account in any nationalized/private sector bank such as SBI, Axis, ICICI, HDFC, Bank of India, and others. Depending on the tenure banks offer varying rates but are in the range of 7%-8%.
There are other zero risk products such as money back policies, pension plans and others. But their main objective is to cover life.
Here’s the table showing returns generated after investing Rs. 2000 per month in the above mentioned products. It is assumed that investor does not withdraw money prematurely or miss any periodic payment. Interest rates are assumed depending on the past performance or the standard rates offered for the respective product.
|Investment Product||Interest/Growth % Assumed||Total Invested Amount (Rs. 2000 per Month)||Tenure (in Years)||Maturity Amount||Risk Involved|
|Mutual Fund||15%||2,40,000||5||5.5 Lakh||Yes
|Direct Equity||25% (This is profit %)||24,000||NA||30,000||Yes|
|Equity Linked Savings Scheme (ELSS)||18%||72,000||3||85,000||Yes|
|Sukanya Samriddhi Yojana||8.60%||3,36,000||14||11.73 Lakh||No|
|National Savings Certificate||8.50%||2000||5||3032||No|
|Public Provident Fund||8.10%||3,60,000||15||7.1 Lakh||No|
|Bank Fixed Deposit||7.50%||1,20,000||5||1.75 Lakh||No|
So as you can see Indian investment market is flooded with range of products. And investing in best product keeping in mind the financial goal should be your prime focus.