When it comes to investment, the most recommended suggestion across the globe is long term. This is because any amount invested for a short period will naturally earn low return, unless you invest in a product which gives unexpected return, which is impossible. And such a product does not exist.
There are two types of investors, one who are ready to invest in high risk products expecting good return, and the ones who want to play safe bet and want to earn guaranteed returns, though less. In the latter category, normally small to medium class individuals fit with limited money to invest.
Let’s consider an example of an individual, who wishes to invest 5000 per month. We’ll consider various investment options for him categorized as high risk and zero risk.
We’ll start with high return on investment products:
- Equity market or mutual fund: Sensex has given an annualized return of over 16%-17% between 2006-2015. So a monthly investment of 5000 for 10 years (i.e. a total investment of Rs. 6,00,000), would give a return of nearly 12 lakhs. If the same amount is invested for 20 years, the return amount will be nearly 50 lakh. For this calculation, 12% interest is taken into considering keeping the fact in mind that previous growth rate may or may not be possible. Such a big return is possible because of compounding in which you earn returns over the gains. So either you directly invest in stocks by doing your own research or through equity mutual fund schemes, which is managed by expert fund managers. Although equities are considered to be very risky but considering the returns in the past 10-15 years, you can expect such excellent returns when money is invested in best stocks/managed to top fund house. Fund houses also offer monthly schemes providing regular income and capital growth. Normally the money collected is invested in government bonds, equities and debt instruments. And these are less risky compared to equities or equity mutual funds.
- Invest in Gold: You can also invest 5000 per month in gold investment schemes run by various jewelers. Normally such schemes require an individual to invest certain amount for 11 months and for the 12th month, jeweler will put money equal money from his side. So your total accumulated money will be Rs. 60, 000 (55, 000 + 5000). This money can then be used for purchasing gold but only from the same jeweler. Most importantly there is no cashback after maturity and purchasing gold is mandatory. But when gold rates are on peak, you can sell the purchased gold at the same jeweler at book good profit.
Zero risk products:
- Public Provident Fund: PPF is the most preferred investment product giving a return of nearly 8.7%. If you invest Rs. 5000 per month, for a period of 10 years (i.e. a total investment of Rs. 6, 00, 000) the maturity value would be Rs. 9,40,979. PPF works on compounding and the interest rate are declared by the Indian government in March every year. In order to invest in PPF, individuals need to contact post office and banks (public and private). Note: For 2016-2017, interest rates have been reduced to 8.1%.
- Sukanya Samriddhi Account: This saving scheme was launched with an objective of securing the future of girl child. Natural parent or legal guardian can open account in post office or bank and deposit a minimum of Rs. 1000 every year/month. If you invest Rs. 5000 every month, for 14 years the maturity amount will be a whopping Rs. 30,78,920 assuming the interest rate of 9.2% applicable for the financial year 2015-2016. Even though you have to invest for 14 years, the account matures on completion of 21 years. Check out maturity value for various deposits in SSY.
- Recurring Deposit: It is another best option to invest especially when the amount is small. Continuing with our example of investing 5000 per month, the return after 10 years would be Rs. 9,18,110 assuming average interest rate of 8% offered by post office or most of the banks. Your total investment would be Rs. 6,00,000. The power of compounding plays a key here as you earn interest on interest.
So as you can see, how a small investment of Rs. 5000 every month will create good wealth when invested for long term. Compounding is a game changer especially for early investors who do regular deposits in either high risk or zero risk schemes as mentioned above. There are many other investment products in both these categories but the above listed ones have proven to be successful for many.