Introduction:
At times, you might find yourself with extra money left over after covering your monthly expenses, but deciding where to allocate it can be challenging.
Making thoughtful investment decisions with this surplus can pave the way to achieving both immediate financial needs and long-term dreams. Key considerations, such as building an emergency fund, planning for short-term objectives, or working toward future aspirations, can guide your choices.
For instance, if you have ₹10,000 left at the end of the month, you might choose to split it into ₹5,000 for an emergency fund and ₹5,000 into a mutual fund aligned with your long-term goals.
Preparing for Unexpected Financial Needs
Before diving into investments, it’s crucial to safeguard yourself against unforeseen circumstances. Establishing an emergency fund ensures you’re financially ready to handle crises like job loss, medical emergencies, or unexpected repairs, such as a car breakdown.
A robust emergency fund should ideally cover 6 to 9 months of your essential expenses, providing peace of mind during turbulent times.
Here are two practical tools to build your emergency fund:
- Liquid Funds: Liquid funds are a category of debt funds that invest in short-term money market instruments like treasury bills or commercial papers. These funds provide easy access to your money when needed and involve minimal risk, making them a secure choice for emergency reserves.
- Flexi Deposits: Flexi deposits are a hybrid financial product offered by banks, combining the flexibility of a savings account with the higher returns of a fixed deposit. They allow partial withdrawals without penalties, making them a reliable option for emergencies.
Once your emergency fund is in place, you can confidently shift focus toward investing for significant goals like retirement, education, or travel aspirations.
Investing for Short-Term Goals
When planning for short-term objectives like a dream vacation, a car’s down payment, or a gadget upgrade, opt for investments that prioritise liquidity and safety. Here are three effective options tailored for short-term savings:
- Short-Term Fixed Deposits (FDs): These are fixed deposit plans with tenures ranging from a few months to 1-2 years. They offer guaranteed returns and are low-risk, making them a popular choice for immediate financial needs. While their interest rates are higher than savings accounts, they may fall short of long-term FD returns.
Example: Deposit ₹50,000 in a 1-year FD at 6% interest. At the end of the term, you’ll earn approximately ₹3,000 as interest.
- Recurring Deposits (RDs): Perfect for those who wish to save gradually, recurring deposits let you invest a fixed amount monthly over a set period. They promote disciplined saving and provide assured returns.
Example: Save ₹5,000 monthly in an RD for 1 year at 5.5% interest. By the end of the year, you’ll accumulate about ₹61,800, including interest.
- Short-Term Mutual Funds: These funds invest in debt instruments with short maturities, often delivering better returns than traditional savings. They suit goals spanning 1-3 years and offer reasonable liquidity with moderate risk.
Example: Invest ₹1 lakh in a short-term debt fund for 2 years with an average return of 7%. Your investment could grow to approximately ₹1.14 lakh.
Choosing the right option depends on your financial goals, risk tolerance, and investment timeline.
Plan Ahead for Long-Term Financial Milestones
Long-term financial goals typically span a horizon of five years or more, such as funding your child’s education or building a retirement corpus. For these objectives, equity mutual funds can be a valuable option. These funds invest in the stock market and have the potential to deliver significant returns over the long term, making them suitable for individuals willing to take higher risks.
Within equity mutual funds, you can explore different categories based on your risk appetite:
- Large-cap funds: These invest in well-established companies and offer relatively stable returns.
- Mid-cap and multi-cap funds: These invest in medium-sized or a mix of companies, offering higher growth potential with increased volatility.
Apart from equity funds, there are reliable alternatives for long-term goals, especially retirement planning:
- National Pension Scheme (NPS): This government-backed plan allows you to create a diversified retirement corpus by investing in equity, government securities, and corporate bonds.
- Public Provident Fund (PPF): A low-risk debt instrument with a government-fixed interest rate, ideal for steady, long-term savings.
Key Takeaway: Ensure your portfolio strikes a balance between equity and debt instruments to manage risk effectively while aligning with your financial goals.
Spread Your Investments and Stay Balanced
To minimise risk and achieve steady growth, spread your investments across various asset classes like stocks, bonds, gold, real estate, and more. Diversify within industries too, so that if one sector underperforms, others can balance it out.
Regularly assess your portfolio to ensure it aligns with your goals. For instance, if the equity market rallies and your stock investments grow disproportionately, consider rebalancing by shifting some funds to safer options like debt instruments.
When you have surplus funds, focus on essentials first. Build an emergency fund and allocate money for critical goals like retirement or your children’s education before splurging on non-essential aspirations like luxury trips.
In conclusion, investing your monthly surplus savings is a powerful step towards financial independence. By diversifying across multiple asset classes like mutual funds, fixed deposits, stocks, and gold, you can balance risk and reward effectively. Prioritise your financial goals and start small if needed—consistency and discipline will yield compounding benefits over time. Make your surplus savings work harder for you and secure a brighter future.
Related Posts
Disclaimer Note: The securities quoted, if any, are for illustration only and are not recommendatory. This article is for education purposes only and shall not be considered as a recommendation or investment advice by Equentis – Research & Ranking. We will not be liable for any losses that may occur. Investments in the securities market are subject to market risks. Read all the related documents carefully before investing. Registration granted by SEBI, membership of BASL & the certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.
FAQ
What is the best investment option for low-risk investors?
For low-risk investors, fixed deposits and debt mutual funds are ideal. They offer stable returns without the volatility associated with equity markets.
How much of my surplus savings should go into risky investments like stocks?
Allocate 10-20% of your surplus savings to risky investments, depending on your risk appetite and financial goals. Diversify across blue-chip stocks and ETFs for better security.
Can I invest in gold with a small monthly surplus?
Yes, you can invest in digital gold or Sovereign Gold Bonds (SGBs) starting from as little as ₹1,000, making it accessible for small investors.
I’m Archana R. Chettiar, an experienced content creator with
an affinity for writing on personal finance and other financial content. I
love to write on equity investing, retirement, managing money, and more.
