Many of us are saving some amount of money every month or in a year. This saved money we want to invest in best suitable investment schemes where we will get best returns. Many investment options are available starting from bank saving accounts, fixed deposits, post office schemes, SIP and Equities etc. Many of us are not clear about where to invest and how much amount to invest.
We should know on which basis we should do the investments and should consider few factors before making any investment decision.
1. Safety of Investment
We should understand that earning money is a big task and after earning if we loose money just to get more return then it will directly hit our financial condition. In present investment market you will get returns from 3% to 8% in secured investment options, 8-12% in medium secured options and 12%+ in risk options like equities etc.
Other than secured options you don’t have any control on your money & returns once you invested. In front of you, your money will increase or decrease and you do not have any control as it will be govern by some other factors/ group of people. Like if you are investing in equities/ shares then your money will increase and sometime decrease. In case of decrease you cannot do anything except to loose your hard earn money. So it’s very important in present market scenario your investment should be safe if returns are little less also it should be fine.
2. Money for emergency
We need money to run our daily expenses and to take care of liabilities for future expenses. So it is important that part of the saved money should be invested in such a way that it can be any time accessible in case of emergency like in saving account, fixed deposit etc where any time money can be withdrawn.
So how much money is required for emergency fund ?
In present market scenario the job / earing opportunities are very limited so we should minimum keep at least money equivalent to 9 month of your expenses. For example if your monthly expense is 40k per month then you need 40k X 9 months = Rs 3.60 Lakhs minimum in case of emergency. This amount should be kept in any investment option where money can be withdraw any time. Saving account, bank fixed deposit schemes are the best investment tools where you will get reasonable returns of 6-7% per annum and same time you can withdraw you money any time by paying minor interest penalty which will only recovered from interest earned.
It is always advisable that this emergency fund should not be invested in any long term lock in period plan, medium secured options and risk investment options.
3. Money for Security
The emergency fund can take care for 9 months of the expenses and further you can save to build fund which can create your longer security.
So what should be the minimum and what maximum should be kept for security fund ?
For security fund we should minimum keep money equivalent to 3 years of expenses and maximum keep money equivalent to 5 years of expenses.
Minimum : If your monthly expense is 40k per month then you need 40k X 3 Years X 12 months = Rs 14.40 Lakhs. This much minimum you required for security fund.
Maximum : If your monthly expense is 40k per month then you need 40k X 5 Years X 12 months = Rs 24 Lakhs. This much maximum you required for your security fund.
It is always advisable that this security fund should not be invested in any long term lock in period plan and should be kept in any secured or medium secured options where any time money can be withdraw.
4. Investment for good returns
While investing, our priority should always get best return on investments. Only just for our safety we need minimum amount equivalent 9 month of monthly expenses and maximum amount equivalent to 5 years of your monthly expenses. Even this fund should be invested in such a way that it should be reasonable secured, fetch good returns and any time money can be withdrawn.
Other than this fund rest can be invested in long term lock in investment schemes where returns are at higher side. This long term investments are fetching very good returns due to compounding effect.
So how we decide minimum or maximum fund we can invest for security and rest can invest in long term lock in investment options to get higher returns.
This will depend upon how you are investing money. In present investment market very few investment schemes are having lock in period starting from 3 years and most of the schemes are having lock-in-period starting from 5 years where returns are at higher side due to compounding effect. So if you are investing in 3 years lock schemes then you should keep money equivalent to 3 years of your monthly expense for your security and rest you can invest in lock in plans. But if you are investing in 5 years lock schemes then you should keep money equivalent to 5 years of your monthly expense for your security and rest you can invest in lock in plans.
To understand better if you have rupees 35 lakhs for investment and your monthly expenses per month is 40k, the investment required for security and investment to be made for lock-in plans.
Scenario – I : If you prefer to invest in 3 year lock in options then you should minimum keep at least money equivalent to 3 years of your expenses i.e 40k X 3 Years X 12months = Rs 14.40 Lakhs for security fund and rest Rs 20.6 Lakhs ( 35 Lakhs – 14.40 Lakhs = 20.60 Lakhs ) can be invested in long term lock-in period schemes.
Scenario – II : If you prefer to invest in mostly 5 year lock in options then you should minimum keep at least money equivalent to 5 years of your expenses i.e 40k X 5 Years X 12months = Rs 24 Lakhs and rest Rs 11 Lakhs ( 35 Lakhs – 24 Lakhs = 11 Lakhs ) can be invested in long term lock-in period schemes.
This arrangement is to help to secure us for longer run and same time earn good returns on your investments.
5. Small saving can make big difference
Getting returns on investment are very difficult in present market condition as interest rate are at lower levels as compare to previous years. So if you invest small amount regularly in long term investment plans of 15-20-25-30 years you can create good corpus for your future needs. You can create big corpus from small savings by regular saving only. The small regular saving will create big corpus.
How small saving Works for you ?
Public Provident fund ( PPF ) a government of India operated savings and investment scheme is the best tool to multiply your money where your money is almost secured, returns are reasonable and interest is tax free. A PPF account matures in 15 years which can be further extended in blocks of 5 years each. You can extend the tenure within one year of maturity. You can deposit a minimum of Rs. 500 in a financial year, and a maximum of Rs. 1,50,000 per financial year. You can also choose to deposit the money as a lump sum or in instalments, which must not exceed the limit of 12 instalments per financial year.
If you invest Rs 12500/- every month between 1-5 day of the month in your PPF account and your spouse PPF account ( altogether Rs 25,000/- per month ) till 25-30 years considering average interest rate 7.9% then you will get big corpus in 25 -30 years.
In 25 years
After maturity of your PPF account = Rs 1.14 Cr
After maturity of spouse PPF account = Rs 1.14 Cr
Total After maturity = Rs 2.28 Cr
In 30 years
After maturity of your PPF account = Rs 1.77 Cr
After maturity of spouse PPF account = Rs 1.77 Cr
Total After maturity = Rs 3.54 Cr
This is just power of compounding due to that small saving can create big corpus in 25-30 years
So if you want to invest your money in right way then you can consider all the factors and can start saving first for emergency fund, then for you security and finally for investment to fetch higher returns.
If we take care of these factors very well then we can
- Secure our hard earn money
- Secure our emergency needs
- Secure unbelievable returns in longer run
- In later age can fulfil all our liabilities including kids higher education, marriage.
- Live stress free life.
- Enjoy our time.
- Enjoy with saved money & its returns.