Investing regularly for long term gives guaranteed returns. This helps in safeguarding financial future of an individual. And for a family this is key for a secured future. However the question arises how much is the return on investment so that income generated beats inflation? And most importantly which investment product should a person invest in because markets are flooded with various investment products.
We will take an example of investing 1000 per month in various products and the expected returns out of each after a certain time period. We’ll divide the investment into two categories:
- Low risk, guaranteed returns
- High risk, high returns
We will start with low risk and guaranteed return investment products and how much return Rs. 1000 invested will give.
- PPF: This product is considered to be the best way to invest money for tax saving as well as guaranteed returns although it gives reasonable returns. If you invest Rs. 1000 every month for a period of let’s say 1 year (Note: 15 years is the lock-in period), then after 1 year the closing balance would be Rs. 13, 044. For this calculation, 8.7% interest is assumed. Every year PPF rates are revised by the government. The interest is compounded annually. If you continue investing Rs. 1000 per month until the maturity i.e. 15 years (i.e. a total of Rs. 1, 80,000) then when the scheme matures, you will get Rs. 3, 60,350. So you are actually getting double returns. You can contribute to PPF through post office and select public and private sector banks such as SBI and ICICI.
- Sukanya Samriddhi Yojana: The scheme launched in 2015 authorized by Ministry of Finance has evoked an excellent response. However this account can be opened only in the name of a girl child. Deposit of Rs. 1000 per month for a period of 14 years which is the investment period (total invested amount will be Rs. 1, 68, 000); would fetch an excellent return of Rs. 6, 15, 784 when the scheme matures on completion of 21 years. For this calculation, 9.2% interest is considered. Every year government revises the interest for this scheme. You can read in detail about the features of SSY here.
- NSC: National savings certificate fetches a return of 8.5% – 8.8% for term of 5 and 10 years respectively. So a Rs. 1000 invested for 5 years will give a return of Rs. 1, 516. And the same amount after 10 years will give return of Rs. 2, 299. Every year the interest rates are set by the government.
- Fixed deposits: This is another guaranteed return investment product offered by various banks in India and post office. Interest rate differs for each and is normally in the range of 7.5%-9.0%. A thousand rupee invested every month (total Rs. 12, 000) for a period of 1 year will give a return of Rs. 13, 020.
- Recurring deposit: Another preferred product especially by salaried lower income individuals. If you plan to save small amount every month then RD is best suited. A monthly installment made for Rs. 1000 will give a return of Rs 12, 530 assuming annual interest rate of 8%. Interested individual can open RD account with various banks such as SBI, ICICI, HDFC, Bank of India, and others. Depending on the tenure, each bank offers different interest rates but is in the range of 7.50%-8.50%.
There are many other secured products where you can invest every month. But the above listed ones are highly recommended. And higher the amount invested, higher would be returns.
Now we’ll discuss about high risk high return products. These are the best preferred by investors who are ready to take risk.
- Mutual funds: Depending on the fund house such as Axis, HDFC, DSP, ICICI, and category of the asset (e.g. equity, bond, etc), the returns would vary. So if your target is to earn a return of Rs. 50 Lakh and you plan to invest 1000 per month in SIP then you will have to continue investing this amount for 30 years. On the other hand if you invest higher amount let’s say Rs. 8, 000 then you will have to invest for 15 years in order to meet your return target. So as you can see, higher the invested amount consistently every month, faster you would reach your target. For above calculation, 15% annual RoI is considered. However the downside of mutual fund is that the returns are non-guaranteed. This is because they are linked to market conditions (national and international), economy, company earnings, weather and others which are not in control of anyone’s hand, and hence risky. Investments in MF are managed by fund managers of the respective fund houses.
- Equities: You can also directly invest or trade in stocks. However equity is considered to be most risky and the reasons remain the same as mentioned above for mutual funds. Rather than trading, investing in stock market is always recommended as equity market has outshined other investment products when done for a long term. So if you plan to invest 1000/month for long term e.g. 10 years i.e. a total amount Rs. 1, 20, 000 then you can expect return of Rs. 2,35, 000 – Rs. 2, 75, 000. Assuming equities have given an average growth of 12%-15% in India. However what stocks you invest in, holds a key. So always take help of market experts or brokerage house before investing. Or go through a SIP mode as mentioned in the above point.
- Gold: Many prominent jewellery house such as Tanishq, TBZ and others offer monthly gold investment schemes with an objective of making gold purchase easy. Investor needs to pay certain amount every month for a year or 11 months and after this, jeweler will put additional installments (1 or 2) and the final accumulated amount can then be used to purchase jewellery. So for e.g. you invest 1000 for 12 month i.e. a total Rs. 12, 000, then jeweler will credit another 1000 or 2000 from his side i.e. your total balance becomes Rs. 14, 000 and you can then buy gold worth this amount. The only cons of the scheme is buying gold is must. There are other conditions too such as you cannot buy another form of jewellery such as diamond, pearl etc. You have to buy only gold and that too from the same jeweler. This condition varies for each jeweler. There are different schemes on the similar line offered by jewelers. This scheme is risky because gold prices are fluctuating and at the time of maturity if the gold price is down then investor will lose. Moreover you cannot take cashback or purchase gold for only a fraction of the balance and also have to pay for making charges. Premature closure results in deduction from the accumulated money.
So best value for money when investment amount is small e.g. Rs. 1000, is to invest in low risk products. This is especially applicable for individual’s who do not want to take risk.