It’s not enough to just save money – it’s also important to invest it in the right manner so that it grows in value. Whether you’re saving up for a short-term, mid-term or long-term goal, it’s important to consider where you should put your money so that it can grow steadily but also be accessible to you when you need it the most.
Here are some of the popular instruments to consider putting your savings into.
Read How to start saving money if you haven’t started yet.
Instruments for Short-Term Savings
For short-term goals such as a vacation, it’s best to invest in instruments that offer liquidity and ease of withdrawal.
Savings accounts are one of the safest ways to store your money and is great for short-term needs because it’s liquid- meaning you can readily access cash via internet banking, ATM facilities or withdrawals.
However, keep in mind that you might need to maintain a minimum balance, as specified by your bank. If your account balance falls below the minimum, you might have to pay a penalty. The rate of interest for a savings account is the lowest among all investment options, with most banks offering between 3-6%. You can also get a tax exemption if the amount of interest you earn in a year is less than Rs. 10,000.
Recurring deposits encourage the habit of savings bit by bit over a period of time. You can start with as little as Rs. 500 up to Rs. 10,000 per month.
The rate of interest available on recurring deposits can vary between 6.75% to 7.25% per year. You can also choose to invest in variable recurring deposits, where the amount you invest each month differs based on what you can invest. However, if you do not deposit at least a minimum amount, you might be charged a penalty, depending on your bank.
Instruments for Mid-Term Savings
For mid-term goals such as saving for a down payment on a house, it’s best to choose flexible investment options that offer a good rate of interest that you can also partially withdraw from.
Fixed deposits are instruments of savings that allow you to lock-in money for a pre-determined period. This could be as short as a week up to a maximum period of 10 years. While the money is locked in during this period, you can take out a loan or overdraft against your FD if you really need to. However, remember that while you can withdraw your money completely, you might lose out on part of your interest.
The rate of interest is slightly higher than a savings account, with the maximum rate of interest being around 8% per year. You can choose to receive your interest on a monthly, quarterly or annual basis.
Unit Linked Insurance Plans (ULIPs)
Unit Linked Insurance Plans or ULIPs are offered by insurance companies and offer both insurance and investment in a single plan. When you invest in a ULIP, the insurance company uses a part of your premium for an insurance cover and invests the rest in debt or equity funds.
Since the rate of return on your investment will depend on how the fund performs in the market, it could vary. However, funds with low to moderate risk (debt and hybrid funds) yield at least 8% in returns while high-risk funds (equity funds) could yield as high as 26%.
It is best to invest for mid-, long-term goals in ULIPs as they have a minimum lock-in period of 5 years, post which you can withdraw your money. However, you can also let your money stay invested and grow in value for the entire term of the policy, which could range from 10-15 years.
The ULIP comes with triple exempt benefit i.e. you will be eligible to get tax benefits at all three stages- investments, earning and withdrawals. Certain ULIPs also allow you to switch between various debt/equity funds depending on the amount of risk you want to take.
Read Where can you find extra funds to save to maximise your savings.
Instruments for Long-Term Savings
For long-term financial goals such as retirement or planning for your child’s marriage, it’s best to invest in instruments that offer attractive rates of interest for long periods of time and offer tax benefits, but also allow you to make a partial withdrawal if you need it.
Employees’ Provident Fund (EPF)
The EPF or Employees’ Provident Fund is a government-established scheme where you can contribute 12% of your salary to the fund, which will be matched by your employer.
The rate of interest applicable differs every year- for 2020, it is fixed at 8.5%. While it is essentially meant to be a retirement fund, you can make withdrawals for certain situations such as education, marriage and purchasing a home.
While the contribution you make to your EPF is tax-deductible under Section 80C, the maturity amount is only tax-free after five years.
Public Provident Fund (PPF)
PPF or Public Provident Fund is another government-backed scheme that is offered by banks and post offices where you can invest anything from Rs. 500 to Rs. 1,50,000 a year. The contribution you make is tax-deductible under Section 80C and the maturity amount is also tax-free.
The rate of interest for PPF contributions at present is 7.1%. While there is a lock-in period of 15 years for PPF, you can withdraw your money partially after five years. This is a great investment option if you want a low-risk option to save up for long-term goals.
While all these savings instruments have their own benefits, it’s best to choose the right one based on when you want to achieve your financial goals.
Watch Old vs New: Effective ways to save money to learn more about saving!