Five years is a special period of investment. Long enough to weather the storms of the market but short enough to have a plan around a defined timeline, and not open-ended growth. A 5 year investment plan is dependent on the level of risk that you are willing to take over the time period along with whatever the investment objective is; whether it's a down payment, child's education or simply a wealth building plan.
A lot of investors play it safe and stick to investing in FDs to enjoy better growth, or they play too risky and invest in volatile assets which may not be retrieved in time. The right monthly investment plan for 5 years or lump sum approach is typically on a spectrum somewhere between these two extremes; still retaining growth potential but not long enough to cover all market cycles.
Best Investment Plan for 5 Years in India
If you're looking for the best investment strategy for the next 5 years while enjoying a good return, here are a few that you should consider, as well as some more stable ideas for balance.
1.Equity Mutual Funds SIP
SIP in equity mutual funds gives you the opportunity to gain steady exposure to the stock market via monthly investments over a 5-year period, without needing to invest a significant amount of money at once.
Strengths
Market timing is lessened in the case of rupee cost averaging.
Investment and diversification made by professionals.
Disciplined, habit-forming approach to investing.
Risks
No guarantee for returns and based on the movement of the market.
There could be short term volatility at the end of the 5 year horizon.
Best For Investors wishing to gain equity exposure over a 5 year time period, not a lump sum. Expected Returns Typically 10 to 12 percent per year for 5 years, but depends on market conditions. Index Funds SIP is following a benchmark index such as Nifty 50 or Sensex with an equity exposure at a very low cost with regular monthly investment. Strengths Lower expenses than actively managed funds. A non-aggressive approach in which buying and selling positions are taken only in line with the market sentiment. Easy to comprehend & monitor. Risks No protection on periodic market declines. There are no opportunities to outperform the index; only a limit on the return. Best For Passive, long term equity investors looking for low cost investments over 5 years. Expected Returns Typically falls in the range of 10 – 12 % per year, consistent with the long-term performance of the tracked index. They hold a mixture of large cap, mid cap and small cap stocks but there is no fixed allocation, which means that the fund manager can change allocation according to market opportunities. Strengths Investing in a mix of market caps. Flexibility of funds managers to adjust to market shifts. Opportunity for growth in segments. Risks Flexibility of the fund manager in adapting to the changing market condition. Opportunity for expansion in markets. The fund manager's 'allocation' calls are a large part of the story for Risk Performance. May have a higher volatility than large cap focused funds. Best for Investors who are comfortable with a moderate amount of risk, and who are looking for growth that is diversified. Expected Returns 10 to 13 % per annum over 5 years (Generally Called 10 to 13 % a year). These funds have a mixture of higher growth mid cap companies with established large cap companies, looking to achieve a balance between stability and growth. Strengths Blends a mix of big and medium cap stocks for stability. Diversification of two Market Segments. More middle-of-the-road than a mid cap or small cap fund. Risks Mid cap allocation will be more volatile than pure large cap allocation. Within the 5 years, there is still significant volatility in returns for shorter time frames. Best For Investors who want to have a balance between the safety of large cap stocks and the growth potential of mid cap stocks. Expected returns 10 to 13 per cent per year at the most depending on the market. Balanced Advantage Funds automatically adjust their proportion of equity and debt investments according to where the markets are trading, with a focus on minimising volatility and maximising participation in growth. Strengths Dynamic allocation is used to manage the risk during market corrections. Higher stability than pure equity funds. It is good for investors not interested in doing their own asset allocation. Risks Returns can be less during the periods of strong bull markets when compared to pure equity funds. The performance will be determined by the allocation model of the fund manager. Best For Investors looking for equity exposure with some protection against volatility in the market over a 5 year time horizon. Expected returns Range from 9 to 11 percent a year. Invests mainly in Equities (usually about 65% to 80% stocks and 20% to 35% debt) with the objective to gain in value with moderate downside protection. Strengths Higher equity weighting than a balanced fund, but some protection in the form of debt exposure. Multi-Asset funds that invest in a variety of asset classes. Stable in comparison to pure equity funds historically. Risks Has meaningful volatility. There is no guarantee of returns and they are subject to both the equity and debt market performance. Best For Investors who want primarily equity exposure and a small portion in debt to take the edge off the volatility. Expected returns Usually between 10 to 12 percent per year. Equity Linked Savings Scheme (ELSS) are diversified equity mutual funds with a 3 year compulsory lock-in period and tax deduction under Section 80C. Strength Tax deduction is under Section 80C, subject to limits. The growth potential of equity securities over the investment horizon. Shortest lock in period of the tax saving instruments. Risks Market equates returns and there is no assurance. Funds are committed for at least 3 years, even if the investor decides to invest for 5. Best For Investors seeking both tax benefits combined with equity appreciation over a 5 year time frame. Expected returns On order of 10-12 per cent per annum, akin to diversified equity funds. These are Exchange Traded Funds that follow the Nifty 50 or Sensex index, and are traded on the stock exchanges as normal stocks, at a lower cost and providing an index level exposure. Strengths Low expense ratio. High transparency because holdings are in line with the indicator. Can be traded in the market like shares of stock. Risks To be able to invest, one needs a demat and trading account. Not protection at the downside in the markets. Best For Investors that wish to have direct access to a benchmark index, but don't mind a trading account, and aren't camera shy. Expected Returns These are generally in the range of 10-12% per annum and related to the underlying index. These Fixed Deposits are those that have a fixed interest rate for the entire term and some banks provide tax saving Fixed Deposits under Section 80C in this particular period. Strengths 100% predictable returns regardless of market movements, Strengths Fixed. Some scheduled banks offer protection of capital. Delegates will be familiar with the tax saving option available under Section 80C of FD. Risks There is no certainty that returns will be able to keep up with inflation over 5 years. Typical withdrawal will lower the net return. Best for Investors who value the security of their capital over the prospects of growth. Expected return 6.5-7.5 per cent per annum, depending on the bank. Investors can invest a fixed amount in a month by month for 5 years at a fixed rate of interest that is akin to an FD. Strengths Provides discipline in saving. Low risk and capital protection. Predictable maturity amount. Risks Less return than equity options. The early close is normally lower interest. Best for New investors or conservative investors who wish to stick to a disciplined monthly investing strategy over a 5 year time horizon with guaranteed returns. Expected returns 6.5-7% per annum; depends on the bank. If you have a fixed near term need (such as a down payment), then safer choices are appropriate, and if you want to build wealth over time, then, equity exposure can be included. Think about how much risk you are willing to take because equity linked options, such as SIPs and Flexi Cap funds, have more volatility as compared to FDs and RD. Also consider liquidity requirements as in case of the ELSS Funds the lock in period is 3 years; whereas for FDs the penalty of getting out of the FD is usually positioned. Consider taxation: Interest from the FDs and RDs would be taxed as per your income tax slab whereas equity fund gains would be taxed in a different way depending on the holding period. Set the expectations reasonable as investments in equity linked instruments can grow more but there are fluctuations in it year by year as compared with fixed income investments, if the investment plan is a monthly plan made for 5 years. There is no single best investment plan for 5 years, as every individual has their own goal, risk appetite and the requirement for getting guaranteed returns or if they can take a little of the volatility of the market. Equity-oriented investments like Flexi Cap Funds, Large & Mid Cap Funds or Index Funds SIP may be more suitable for investors seeking to maximize returns in their investment plans that are 5 years long. If security is the priority then Fixed Deposits and Recurring Deposits are proven and reliable options, albeit less lucrative. For some, it is appropriate to include some equity exposure at a 5-year horizon, but it may be prudent to include a pair of safe instruments to achieve the goal, depending on the importance of the goal and the amount of volatility that is tolerable.2.Index Funds SIP
3.Flexi Cap Funds
4.Large & Mid Cap Funds
5.Balanced Advantage Funds
6.Aggressive Hybrid Funds
7.ELSS (Equity Linked Saving Scheme) Funds
8.Nifty 50 ETF / Sensex ETF
9.Fixed Deposit
10.Recurring Deposits
Comparison Table: Investment plan for 5 years
Factors To Consider Before Choosing A Short Term Investment Plan
Conclusion