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Best Investment Plans for 5 Years
The market is flooded with investment plans, and choosing the right one can be a daunting task. Many options are structured based on tenure. People often prefer short-term investment products that can offer decent returns within a short span. A short-term investment typically refers to an investment made for a tenure of 6 months to 5 years. However, returns are comparatively lower for 6-month, 1-year, and 3-year plans, making 5-year plans a preferred choice for many.
The presence of multiple short-term investment options makes it difficult to choose. Here, you can explore various types of investment plans for 5 years to help you choose one that aligns with your requirements.
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Types of Investment Plans for 5 Years
Before investing in any short-term plan, it’s crucial to have a thorough understanding of all available Investment Plans for 5 years. This knowledge will not only help you choose wisely but also assist you in understanding your investments better.
Below are some of the best investment plans for 5 years:
Savings Account
A savings account is one of the safest ways to secure your money and earn returns. Most people save money in their bank accounts for liquidity rather than high earnings. In such cases, you can expect returns of around 4% to 7% from your savings account. Some banks, like Kotak and Yes Bank, offer around 6% to 7%.
However, it is important to understand that as per Section 80TTA of the Income Tax Act, an individual or HUF can claim a deduction of up to ₹10,000 on interest earned from a savings account. Any interest income exceeding ₹10,000 is considered "Income from Other Sources" and taxed according to your income tax slab. There is no TDS on such earned interest, and the Section 80TTA deduction is separate from the Section 80C limit of ₹1,50,000.
Liquid Funds
Liquid funds are a type of mutual fund that primarily invests in short-term government securities and certificates of deposit. These are generally considered a secure way of investing. They offer flexibility, allowing you to enter and exit whenever you want, and typically do not have an exit load. Avoid putting your entire emergency fund into liquid funds, as redemption can sometimes take up to 2 days. Additionally, ATM cards associated with some liquid funds may have withdrawal limits.
You can expect around 4% to 7% post-tax returns. They offer peace of mind as they invest in short-maturity (4-91 days) securities. Typically, the underlying securities have high credit ratings (e.g., AAA), resulting in minimal default risk.
The taxation of liquid funds is similar to other debt funds. If your holding period is less than 3 years, returns are taxed as per your income tax slab. If held for more than 3 years, returns are taxed at 20% (+cess) with indexation benefits.
Fixed Maturity Plans (FMPs)
FMPs typically have a minimum lock-in period of 3 years. These are popular debt funds, suitable if you know exactly when you’ll need the money. Consider them similar to FDs, but they are often more tax-efficient. These funds are generally less exposed to interest rate risk because they typically hold securities that mature either before or at the same time as the fund’s maturity.
Arbitrage Funds
Arbitrage funds are a type of equity-oriented mutual fund. If held for more than 1 year, they are considered more tax-efficient. They can offer around 8% post-tax returns.
Bank FDs or Postal Term Deposits
Most people are familiar with this investment option. If you have internet banking, you can book them online as well. This offers ease of management, and redemption typically provides immediate cash in your account. Returns from FDs are taxable as per your income tax slab (for both normal and tax-saving FDs). You can deposit for tenures ranging from 7 days to 10 years.
For Post Office Term Deposits, the service might sometimes be slower. However, they are considered a secure and safe investment. Avoid corporate FDs if you are looking for long-term safety, as they carry higher risk.
Recurring Deposits (RDs)
Recurring Deposits (RDs) are a secure and safe investment option. They are ideal for individuals who prefer monthly investments over a lump sum. You can choose between Bank RDs or Postal RDs. Banks typically offer RDs with tenures ranging from 6 months to a maximum of 10 years. Interest received on RDs is taxable as per your income tax slab.
5-Year National Savings Certificate (NSC)
National Savings Certificates (NSC) allow you to invest for 5 years, provided your financial goal aligns with this tenure. You can claim deductions under Section 80C. However, the interest earned on NSC is taxable.
Monthly Income Schemes (MIPs)
If you are looking for a regular fixed monthly income, consider Postal Monthly Income Schemes (MIPs). Typically, these funds invest around 10% to 20% of their portfolio in equity and the remainder in debt instruments (often of higher duration). This combination makes them slightly riskier than pure debt funds.
Why Choose Investment Plans for 5 Years?
A 5-year investment plan allows individuals to manage their accumulated corpus safely. Here are some advantages of investing in the best 5-year investment plans mentioned above:
- Flexibility: Flexibility is a key advantage of short-term investments. It offers investors the option to adjust their investments at specific intervals. The invested amount is not tied up as it would be in long-term investments, allowing investors to reinvest returns into other options.
- Diversification: Flexibility also contributes to diversification. Typically, the investment amount in short-term options is smaller compared to long-term investments. This allows investors to allocate the remaining amount to other investment options. Short-term investments help build a diversified portfolio, ensuring not all capital is directed to a single option.
- Risk: Diversification helps investors hedge risk. As the amount is spread across various asset classes, the associated risk also spreads. Lower returns in one investment can be offset by decent returns in others.
