Where should you invest money?

Suppose you have a Lakh to invest. Your choices are as follows:

1. A bank account will give you 4-5%, which translates to Rs. 104,000 in a year, Rs. 1.21 lakhs in 5 years and Rs. 1.48 lakhs in 10 years. These are guaranteed returns. You will not make any less or any more than this amount.

2. You can invest in National Savings Certificates (NSC). NSC have lock ins for five years at least, and will give you approximately 8.5% per year. Your money will grow to approximately Rs. 1.5 Lakhs in 5 years and Rs. 2.4 Lakhs in ten years. These are government guaranteed returns. You will not make any less or any more than this amount.

3. Debt Mutual Funds have zero lock ins, which means you can invest and withdrawe money at any time. They give about 8.5% per year, and their returns attract very low tax after three years of holding. Your money will grow to approximately Rs. 1.5 Lakhs in 5 years and Rs. 2.4 Lakhs in ten years. Returns are NOT guaranteed.

4. Equity Mutual funds have zero lock ins and very high volatility. In a SINGLE year Rs. 1 Lakh may grow to Rs. 3 Lakhs, or it may fall to Rs. 50,000. What actually happens only time will tell. This calculation is based on the historical performance of these products. On an average, however, Mutual Funds should give you 15% to 17%, the best will give you 23%. In ten years, your money should grow to Rs. 4 Lakhs (at 15% returns) upto Rs. 4.8 Lakhs at 17% returns. If markets do very well, and you make 23% returns, you would make close to Rs. 8 Lakhs. Quite a few funds have actually given such returns in the last 10 years. Returns are Tax free after a year of holding and returns are NOT guaranteed.

So:

For money you need within a year use Bank Accounts and FDs

For Money you need between 1 to 3 years use Debt Mutual Funds

For money you need more than 5 years in the future, use Equity Mutual funds.