Use debt instruments or fixed maturity plans. Going the equity way can be risky.
It is said we don’t plan to fail but fail to plan. But if the planning involves saving for specific goals, you cannot take chances.
If your goals are short-term — six months to two years away — a conservative approach is best suited. Stick to debt instruments as the duration is short, and as you cannot take a punt on equities. If the market turns volatile and you make losses, there isn’t sufficient time to recoup these.
Twenty two-year-old Yash Sawant plans to buy a laptop six months hence. Sawant recently started work and has not built a corpus yet. He is advised to opt for a sweep-in deposit to plan for his goal. It will be linked to his savings account. Typically, any amount over and above the double of his minimum average quarterly balance will be ‘swept into’ a fixed deposit in pre-specified multiples. The interest earned will be higher than the savings’ rate of 3.5 per cent. It may, however, be lower than a standalone deposit for the term.
Meanwhile, those such as research analyst, Levin D’souza, who is planning to sponsor his parents’ US trip next year, can look at fixed maturity plans (FMPs). These are close-ended debt funds with a fixed tenure and an alternative to fixed deposits (FDs). These are more tax-efficient as compared to FDs, especially if you invest in plans giving double indexation benefits. It means you can claim indexation benefits for two financial years, without being invested for the entire period.
With interest rates peaking, this is a good time to lock-in funds in FMPs. According to financial advisors, indicative returns from a one-year FMP are presently in the range of 9.7-9.8 per cent. Meanwhile, State Bank of India is giving returns at 8.25 per cent and HDFC Bank at eight per cent on a one year FD, according to their websites.
“In a rising interest rate scenario, you can even consider floater rate funds,” advises Gaurav Mashruwala, a certified financial planner.
However, if your goal is two years away, you could look at either FMPs or FDs. And, if you are willing to take some risk, you can consider a monthly income plan. It would invest up to 85 per cent in debt and have an equity exposure of 15 per cent. “Investors who are flexible, that is can withdraw funds plus/minus a few months after two years, can consider this option,” feels Kartik Jhaveri, director, Transcend Consulting.
For risk-averse investors, the Public Provident Fund (PPF) will do well, according to Malhar Majumdar, a certified financial planner. But there is a catch: you can only withdraw if your account has matured and has been held for over 15 years. Funds deposited in PPF will earn you a tax-free return of eight per cent annually. But first, you must apply for an extension of five years, which is allowed twice. In case your account hasn’t matured but crossed the six-year lock-in period, you can withdraw up to 50 per cent of the total funds.
Short-term goals are mostly consumption-related. Sumeet Vaid, founder and CEO, Ffreedom Financial Planners, therefore, suggests, “Consider these only after your emergency- and risk-planning are in place.” Emergency-planning means maintaining a sufficient balance in your account to meet three-six months’ expenses. And, risk-planning means insuring family and self adequately against any untoward instances.
Even if you have the funds and want to temporarily park these, Majumdar advises, “Take advantage of the stock market correction and invest the surplus in equities. You will benefit in the long-run when the market bounces back.” And, for immediate goals, start putting aside a specific amount monthly. Check if the amount saved is aligned with your goal. If not, you may either have to push your goal further or dip into your savings.
