The eternal question for anyone with a little (or a lot) of surplus money is ‘How do I invest this?”. The last few years have proven to be quite tricky when it comes to answering the questions. Real estate markets have plateaued out, gold prices have been flat, and share prices show no definite trend. This has made investing for the short term very difficult, and perhaps it is time to think on a longer horizon now, of at least 10-15 years, or what economists like to call the ‘long term’.
What are the best avenues to invest for the long-term, then? Let us look at five places to put your money that will hopefully leave you better off after 15 years than stuffing your money in a mattress and hoping the income-tax department does not raid you in that time.
1. Public Provident Fund (PPF)
This is the safest and one of the most attractive investment options in India at the moment. Any Indian is allowed to open a PPF account (most banks and post offices offer it), the rate of return is fixed by the government and tends to be .5% more than a long-term fixed deposit. Moreover the interest is exempt from tax and you can even claim tax exemption upto Rs 1,50,000 for your investment under section 80C. This makes it a no-brainer despite the fifteen year lock in period; the first claim for excess funds for long-term investing should be this very safe and tax-efficient option.
2. Mutual Funds
The power of the equity markets is in their ability to offer returns that can beat the fixed income markets by a long distance when the going is good, though they can fall well below it in the bad times. A sensible way to invest in the stock markets then is to do so through Mutual Funds, which take care of managing the investment and also offer flexibility in terms of amount to be invested. You still have to be careful where to invest, and it is best to diversify slightly among Funds and fund houses, but nonetheless this is an investment avenue that should be a part of your portfolio.
3. Direct equity purchase
For all the benefits of Mutual Funds, there is no reason not to entrust a certain portion of your finds into shares directly. This can take the form of investing through IPO’s or buying shares from the stock market, but here there is a need to exercise considerable caution. If you are able to invest in the right shares though, over the course of a decade and more it is very likely that the returns will outweigh the risk.
It is always a good idea to park a part of your investible funds into gold, though ideally never more than 10%. Also, investing through Gold Bonds floated by the Government of India or an exchange-traded Gold fund is a better idea than buying the metal directly in terms of carrying cost, unless you plan to use the metal for jewellery at some point. Gold is a good hedge against market fluctuations, typically providing a counterweight to stocks.
5. Corporate Fixed Deposits
Many companies raise money by offering ‘Corporate Fixed Deposits’. Though riskier than Bank FD’s, they typically offer a higher rate of interest, sometimes as much as 1 to 1.5% more. Keeping a small portion of your long-term funds in Corporate FD’s allows you to balance the higher return with higher risk. There is a chance of default here, but the higher return provides what is called in investment circles as a ‘kicker’ that can provide useful extra income.