Smart investing: Align your investments with your financial goals

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October 20, 2021 1:15 AM

Go for a judicious mix of investments across asset classes such as equity, debt and gold to achieve your financial goals

Investors who wish to create a tax-free corpus and also want stable returns should not miss out on Public Provident Fund (PPF) and gold.

As the stock market indicators Sensex and Nifty touch new highs on a daily basis, many investors are tempted to divert their surplus funds towards equity or equity-based mutual funds. It is, however, essential to direct one’s savings towards various goals which include children education, buying a home andtheir own retirement.
Investors should not allocate their investments in a skewed manner. They should have a judicious mix of investments across asset classes such as debt, gold, etc., in their portfolio. Let us look at some such asset classes in detail.

Investment goal and asset class
When investors wish to hold the investment for a reasonably longer holding period, say three to five years, investing in equity or through equity mutual funds fit the bill perfectly. For short to medium term i.e., between one to three years, it is good to choose debt or debt oriented funds. Investors who wish to create a tax-free corpus and also want stable returns should not miss out on Public Provident Fund (PPF) and gold.

Public Provident Fund (PPF)
It is a time-tested investment one must have as a part of meeting long-term goals like retirement. As PPF is long duration by nature (15 years), the impact of compounding tax free interest is significant especially in the later part of maturity. Currently, the interest rate offered stands at 7.1% per annum compounded annually. As both the principal and interest earned are backed by sovereign guarantee, it is one of the safest investments.

National Pension Scheme
NPS is a long-term, retirement focused investment product. The contribution made towards NPS goes into a mix of equity, corporate bonds, liquid funds, fixed deposits, government bonds among others. As an investor one can decide how much to contribute to equities through NPS. The advantage of investing in NPS is that on retirement, you can draw up to 60% as tax free from the corpus and the balance 40% is payable as annuity for the lifetime. Investing in NPS ensures that your investments are directed towards retirement and pension becomes payable.

Equity mutual funds
Investing in equity based mutual funds is the easiest option to get exposure in equity shares. As mentioned earlier, equity funds are the best investment vehicle to meet your long-term goals. Consider investing in equity mutual funds through systematic investment plan (SIP). Investing through SIP develops financial discipline and reduces the temptation to time the market. While investing in equity based mutual funds, go for a large cap fund along with exposure to mid-cap schemes too. Sectoral-based funds require frequent review and investors need to actively manage the same; so it is not best suited for amateur investors.

Sovereign Gold Bonds
The government of India launched a series of Sovereign Gold Bond (SGB) schemes for investors who wish to invest in gold. SGB provides an opportunity to earn interest as well as to own gold. The bonds have a tenure of eight years with an exit option from fifth year onwards. The interest rate on these bonds is 2.5% per annum payable biannually. As an investment, SGBs are much better than owning physical gold.

To conclude, before investing in any of these you should have an adequate emergency fund to turn to in case of any financial emergencies and then earmark disposable income towards investments that help you meet your goals without requiring to borrow from friends or avail loans.

The write is a professor of finance & accounting, IIM Tiruchirappalli

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