The three-year period is a very uncomfortable time to invest. It's long enough that it would be a waste to park it all in a savings account, but short enough that you could get a rough patch at the worst possible time if you all but invest in it. A good best investment plan for 3 years is typically based on the amount of risk that you are comfortable with, which is why this guide categorizes the options into three groups: Conservative, Balanced and Growth focused – the mix you choose should depend on how comfortable you are rather than a “one size fits all” solution.
This includes nine choices in those three categories: safer choices are fixed deposits and government bonds, whereas the more adventurous are balanced advantage funds and a Nifty 50 fund. Your aim might be three months, not three years, so if you are looking for a short term investment plan then you could consider switching to a liquid fund or overnight funds instead of a long-term investment plan as the instrument choice varies significantly with time.
Best 3 Year Investment Plan in India:
Conservative
For those investors who are willing to settle for less in return for having their investment kept safe, a safe investment plan is appropriate.
1. FD (Fixed Deposit)
A Fixed Deposit for 3 years is one of the easiest investment options for those who wish for fixed returns.
You put a chunk of money into a bank with a fixed term and earn interest on the amount at a fixed interest rate. FDs can be beneficial when the investment has an expiry date as the maturity value does not fluctuate with the market on a daily basis.
Strengths
Fixed interest rate and maturity value.
No exposure to daily fluctuations in the equity or bond market.
The deposits made in banks are insured by DICGC as per its limit.
Risks Post tax returns may not be able to catch up with inflation. Withdrawing money too quickly may decrease the interest earned. Investment may need to be done at lower rates following the maturity. Best For Investors who have a medium to long-term investment horizon, can afford to have some limit on their NAV fluctuations, and are looking for debt exposure. Expected Returns This is typically in the range of 6.5 – 7.5 per cent per annum depending upon the tenure and bank you choose. A debt mutual fund that has an average duration of 1 to 3 years and fits into the three-year time frame. Strengths Duration relatively close to holding period of about 3 years, thereby minimising interest rate risk. Spreads funds over a variety of debts, not just one deposit. Risks However, the NAV may still go up and down as interest rates change. There is no guarantee that returns will be made as with an FD. Best For A conservative investor seeking some flexibility and diversification more than just one FD but still low risk. Expected Returns Annual return is in the range of 7 to 8 per cent. Government debt securities, which are available in many different lengths of time, including securities with a three-year time frame. Strengths With sovereign backing, there is a minimal risk of credit risk. Provides a steady and guaranteed interest income. Risks When the interest rates in the market go up, bond prices will go down. If the stock is sold before the maturity date, there could be a capital loss. Bonds with longer time to maturity may have more fluctuations in price. Best For Conservative investors looking for sovereign fixed income exposure, who are willing to hold the security until or near maturity. Expected Returns 7 to 7.5 percent a year on average. Balanced Advantage Funds move funds between equity and debt funds according to the investment principle that the scheme is pursuing. The fund will not have a fixed equity allocation, as this can be adjusted according to the asset-allocation model. Debt funds invest mostly in fixed-income securities like government securities, corporate bonds and money-market instruments. When investing for a three-year time horizon, investors need to keep a close eye on the fund's duration and credit quality, not just the highest-yielding debt fund in the past. Strengths Provides a low volatility floor and helps to buffer the rest of the portfolio. Dispersed among various issuers rather than focused on one instrument. Risks Returns are reasonable and volatile with interest rates. The credit risk will vary by the underlying assets of the fund. Best For An investor who would like a steady, less volatile segment in a three year time frame. Expected Returns Yields about 7-8 percent on an annual basis. A hybrid scheme which allocates equity and debt according to market valuations and tries to achieve some of the equity upside with the downside risk. Strengths Designed with dynamic risk management, without the need for your intervention to make the change in allocation. A smoother ride than a pure equity fund in general. Risks Returns are highly dependent on the fund manager's asset allocation decisions. Still can see short term swings in the time frame during the volatile periods. Best For An investor looking for a balanced approach with a level of protection against downside risk over three years of equity exposure. Expected Returns Generally in the 9-12 percent annual range, which is subject to market conditions. A Gold ETF offers traders exposure to gold prices without the need to buy and store the physical asset. In a three-year time frame, gold can serve as a diversification tool, since its movements are based on different factors that may not always be the same as those of stocks and bonds. Strengths Incorporates an asset unrelated to both the equity and the debt markets that can limit downside risk in both asset classes. Can be easily traded on exchange as if it were a stock. Risks There may be prolonged periods of no price change or a price decline. Does not yield any return like interest bearing investments do. Best For An investor with a balanced approach and who wishes to diversify against equity and debt market volatility over a period of three years. Expected Returns About 7 to 9 percent; these are variable in line with market cycles. Investors who don't mind some of the shorter term fluctuations for the greater growth of three years. A Nifty 50 Index Fund would strive to mirror the performance of the Nifty 50 Index. It gives investors a diversified exposure to 50 major companies that are listed on NSE instead of picking individual stocks. Strengths Minimal investment, wide access to India's largest and most famed companies. As always, historically a powerful long term wealth creator. Risks Equity is a relatively short time period, and in some three year periods, returns can fluctuate significantly, even being negative. No protection from downside during market corrections. Best For An investor who is growth oriented and has no aversion to the volatility of equities who desires to hold a core holding of the growth side of the portfolio at a minimum cost. Expected Returns About 10-12% a year over the long run; any particular three year period might be quite a bit higher or lower, but negative. This fund has a slightly different function in a growth plan, as it provides some counterbalancing nature when the allocation to Nifty 50 is higher. Strengths A buffer from severe declines in equity value as before in the same dynamic allocation. Balances the complete portfolio for a smooth ride and doesn't sacrifice growth completely. Risks Still returns are based on allocation decisions of the fund manager. May lag a pure equity fund in strong bull markets. Best For A growth focused investor looking for some protection from a heavier-than-normal equity portfolio. Expected Returns Yield Approximately 9-12% per year. In this case, debt funds allocation is smaller and primarily to ensure that the overall allocation of the portfolio is not so volatile but not the primary holding. Strengths Reduces overall dependence on equity-market performance. Can assist to reduce the volatility of the entire portfolio. Potential source of financing, and a slow equity deleveraging. Risks Modest returns compared with the equity portion of the portfolio. Slightly sensitive to interest rates. Best For A growth investor looking to have a small portion of their portfolio dedicated to stability and near term liquidity. Expected Returns 7-8% per year Investment Goal: Determine the specific purpose and necessities for the investment. When a fixed date is agreed on for a down payment on the house, a more conservative strategy is required than if the date may be delayed if markets aren't soaring. Risk Tolerance: Three years does not give time for an aggressive investment to bounce back from a significant correction. Evaluate the amount of temporary loss that is realistic without the financial goal being affected. Capital Safety: Decide on the significance of safeguarding the initial principal. A basic rule of investing is that if an investor is tied up with finances he should not have as much market risk as a person with flexible financial goals. Liquidity: Examine how easily it is to liquidate the investment. The amount of money you receive when you make your exit can be impacted by premature withdrawals, mutual fund exit charges and bond-market pricing. Investment Horizon: align the length of time of the investment with the time when the money is needed. There's no need for volatility when pursuing a goal that's three years in the future when you're willing to take a much longer duration risk. The primary key to selecting the right investment plan in India, for a period of 3 years, is to align the risk level with the investment objective. If stability of capital is important, conservative investors may consider FDs, Short Duration Funds and Government Bonds. Balanced investors can mix debt investments and a moderate amount of Gold ETF investments and a moderate amount of investment in Balanced Advantage Funds. For investors interested in growth, a Nifty 50 Index Funds, Balanced Advantage Funds and debt funds can be considered, but it is essential that these investors have a knowledge of the relatively short holding period for stocks to equity funds, of three years. There is no one right answer when it comes to the best investment strategy for 3 years. A good three-year portfolio should offer sufficient opportunity for growth to make investing worthwhile, but not so much risk as to make the goal of a financial objective appear unattainable in the event of a market correction. 2. Short Duration Fund
3. Government Bonds
Balanced
4. Debt Fund
5. Balanced Advantage Fund
6. Gold ETF
Growth-focused
7. Nifty 50 Index Fund
8. Balanced Advantage Fund
9. Debt Fund
3 Year Investment Plan: Comparison Table
Factors to Consider Before Choosing a 3 Year Investment Plan
Conclusion