Investment Plans

What is an Investment Plan?

The term investment plan refers to any financial instrument that is designed to help grow wealth over a specified time. Investment plans come in various forms, with some being government offerings (such as a Post Office Scheme), and others being financial products created by banking systems (such as mutual funds).

As the idea behind an investment plan is to help grow wealth, the plan itself is often designed in a systematic manner. It requires consistent investments (which, depending on the nature of the plan, can vary from a one-time investment, to a monthly investment) over a set period of time during which the wealth grows. All investment plans grow wealth by accumulating interest. In some plans, there is a simple interest formula applied, while others may offer compounding interest.

It is also important to understand that investment plans come with their own varying degree of risk. The term risk refers to the volatility a plan is subject to - high-risk means the probability of losses is greater, while low risk means the probability of losses is lower. At the same time, the amount of wealth one can grow is also associated with the risk.

For example: Amisha has decided to invest in a high-risk blue-chip mutual fund for 10 years. This fund pools resources in the equity market, which means that even though it is high-risk, she stands to grow a lot of wealth due to the high interest rate associated with the fund. This is a risk that Amisha is willing to take, as she would like to place a down payment on her dream home in 10 years. She pays a premium of ₹10,000 every month to make her dreams come true.

Features of Investment Plans To Evaluate Before Investment
Though investment plans come in all forms, there are a few features that are common across all plans that must be evaluated before investing:
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Area of Investment:
Typically, any investment plan works by pooling the investor’s fund into specific assets to increase capital. In a broad sense, there are three main areas of investment: equity market, debt market, and hybrid. The equity market is generally associated with stocks while the debt market is associated with bonds. As a result, the former is considered to be high-risk while the latter is low-risk. Understanding where the investment plan invests funds can help you mitigate risks.
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Past Performance:
Evaluating the past performance of any investment plan can help you understand two things - whether the plan is reliable and what kinds of returns you can expect. Of course, it is also important that past performance does not always guarantee future performance, so make investments wisely!
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Fund House:
Investing in plans offered by reputed names is always a better idea than taking a chance on an unknown entity, especially if you are a first-time investor. Depending on the type of investment you are making, it is also essential to evaluate features such as the claim-settlement ratio, hassle-free customer service, the ability to pay premiums online, and so on.
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Premium Amount:
The premium investors pay can sometimes include fund management fees. Even if this is a minimal amount, it is essential to know how much you are paying for these services.
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Transparency:
Investors pouring their hard-earned money in a fund are well within their rights to know how the money is being invested, how the fund has performed at any given stage, and so on. Any investment plan that does not offer transparency can be a source of discomfort.

Benefits of Investment Plans

Investment plans offer a broad range of benefits such as:

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Wealth Creation:
The primary benefit of any investment plan is that it facilitates wealth creation. Whether investors choose a short term plan (such as one that only requires a 5-year investment) or a long term plan (one that requires 10 years and above), the idea is to be able to grow the principal amount to meet certain goals. For instance, paying for your child’s marriage, travelling abroad, and so on.
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Retirement Savings:
Many investment plans are aimed towards creating a corpus for one’s retirement. Such plans are known as retirement plans. These can be invested in at any given point in your life (provided you meet the eligibility criteria), and can be used to make sure your golden years are stress-free.
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Tax Saving:
Almost every investment plan can be used to claim savings on taxes under Section 80C and 80D of the Income Tax Act. Depending on your investment, you can enjoy tax savings of up to ₹1,50,000.
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Risk Coverage:
One of the goals of investing is to mitigate risks in the future. Certain investment plans are designed to mitigate specific risks (for instance, a ULIP helps mitigate death risk and ensures your family is secure, while also building your wealth). These can be used to your advantage by planning carefully.
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Liquidity:
Investment plans are assets that can be liquified upon maturity. Some investment plans also allow the option of early liquidation. In other cases, investment plans can be used as a mortgageable asset for loans.
Types of Investment Plans Based on Term Period
Investment plans can be broken down into the following types:
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Long Term Investment Plan:
A long term investment plan is designed to help investors meet significant life goals. As a result, these plans often have a minimum investment period of 10 years, so that the principal amount has ample time to grow into a sizable amount. Such plans are often associated with higher-risk and they promise high-returns. A few examples of long term investment plans in India are:
  • Mutual Funds
  • Fixed Deposits (FD)
  • Public Provident Fund (PPF)
  • National Pension System (NPS)
  • Unit Linked Investment Plans (ULIPs)
  • Government Sponsored Investment Plans (such as bonds, senior citizen savings scheme, post office scheme, etc)
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Short Term Investment Plan:
A short term investment plan is designed to help investors meet their short-term goals (such as buying a car, going on a holiday, and so on). As a result, these plans do not typically have a term of more than 3-5 years, depending on the investment plan itself. These plans do not generally have high-risks, however, many do not mitigate the risk of inflation either. This is why they are suited for short-term goals, and not longer life goals on the horizon. A few examples of short term investment plans in India are:
  • Savings accounts
  • Liquid funds
  • Fixed maturity plans
  • Arbitrage funds
  • National Savings Certificate (NSC)
  • Short term funds
  • Recurring Deposits (RD)

Types of Investment Plans Based on Premium Payment Frequency

Investment plans can also be categorised based on the way premiums are paid:

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Monthly Investment Plan
A monthly investment plan is one that requires the investors to pay their premiums on a monthly basis. Such plans are considered to be more affordable, as the premium amount is split across 12 months. Depending on the plan itself, these are also sometimes called Systematic Investment Plans, or SIPs. Any type of investment plan can be a monthly investment plan, as most plans offer the option to pay premiums on a monthly basis.
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One Time Investment Plan
A one time investment plan requires the investor to pay the premium just once, in a lump sum amount. A fixed deposit is an example of a one-time investment plan, where you would normally pay the desired amount once, and then let the wealth grow through interest accumulation. Index funds and certain mutual funds are also examples of one time investment plans.

5 Popular Investment Options in India

The idea of investment plans is not new in India, and, as a result, over time, investors have identified a few types of investment plans that are generally preferred. These plans are used to diversify the investment portfolio (the act of investment in multiple instruments to reduce risk), and are trusted instruments of growing wealth. Some of the most preferred plans in India are:

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Public Provident Fund (PPF):
This is one of the most popular investment plans in India due to the low-risk associated with it. This long-term investment plan is typically used to save money for retirement, or to meet any long-term life goals.
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Mutual Funds:
Mutual funds are another form of long-term investment plans that are highly sought-after, as investors can find mutual funds with varying degrees of associated risk. Such funds are known for offering a high yield, which is why investors who want to grow their wealth quickly invest in this.
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Government Bonds:
With a low risk, and a typical return of 7.7% in 10 years, Government Bonds are also a highly preferred option amongst investors in India. The surety that comes with it being associated with the government gives many investors peace of mind.
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Fixed Deposit (FD):
FDs are, without a doubt, one of the easiest investment plans for beginners, and are good options for saving for emergencies. Different banks offer different interest rates, however, since these are low-risk investments, many investors like having at least one FD in their kitty. The biggest benefit of FDs is their easy-liquidity, making it convenient for investors who must meet unexpected expenses quickly.
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Retirement Plans:
All investors want to enjoy a stress-free retirement, which is why many investors in India start choosing retirement plans as early as in their 30s. Such plans grow wealth that can be used as regular income after retirement, securing one’s future.
How to Choose the Right Investment Plan?
With a plethora of investment plans offered in the market, it can be challenging for investors to choose the right plan for their needs. It is important to evaluate certain factors before selecting any plan. These factors are:
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Number of Dependents:
Whether an investor has a small family, or a large one, the number of dependents plays a significant role in choosing the right investment policy. Breadwinners with large families must choose long-term funds as a priority, while those in dual-income, smaller households can choose to invest in multiple short-term funds with a few long-term plans in the mix. This is because a breadwinner in a large family may want to mitigate death risk first (which might require multiple investments, depending on how large the family is). On the other hand, an earner in a multiple-income household may want to meet certain short-term goals first, along with mitigating death risk.
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Investment Goals:
Different investment plans are designed to meet different types of goals. This is why understanding your investment goals is of paramount importance. If you want to put a down payment on a flat, a long-term investment plan might be the right option. On the other hand, if you want to purchase a car for your family, a short term investment plan might be the right option.
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Current and Future Liabilities:
In financial terms, a liability can be defined as any instance that leads to financial loss. For instance, as exciting as your child’s wedding may be for you, it is a financial liability that drains lakhs and lakhs of rupees. Planning for such liabilities (both currently faced and those predicted in the future) can help you pick the right investment plan.
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Debt:
In a similar vein to liabilities, debts must also be considered when planning investments. Current debts (such as credit card interest, student loans, home loans, and so on) must be paid off quickly to ensure wealth creation. Choosing funds that can help you do that would be in your best interest.
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Premium Amount:
Though all investors would like to invest in multiple instruments, the premium amount can often prevent that from happening. Thus, understanding how much each investment plan costs you, what its benefits are, and what its risks are can help you decide if a plan is appropriate for you.

Tax Benefits of Different Investment Options

The following are the tax benefits¹ you can expect from different investments:

Investment Type

Tax benefits

Direct equity

Profits earned from direct equity investments are classified as LTCG (long term capital gains). In a single financial year, LTCG upto ₹1 lakh is exempted from tax.

Mutual funds

There are two tax rules associated with mutual funds, governed by whether the investor earns LTCG or STCG (short-term capital gains). STCG from equity MFs are taxed at 15%. LTCG from equity funds is taxed at 10%. (this is applicable if it exceeds ₹1 Lakh in a financial year. Otherwise, LTCG upto ₹1 Lakh is tax free).

STCG from debt mutual funds are taxed based on the tax slab associated with the investor. If the tax slab is 30%, the STCG tax would be 30%. LTCGs from debt funds are taxed at 20% along with indexation.

Also, applicable cess and surcharge are levied over and above the taxes.

Public Provident Fund

There is a tax deduction up to ₹1.5 lakh under Section 80C of the Income Tax Act. The maturity amount and interest are exempt from tax.

Employee Provident Fund

There is a tax deduction up to ₹1.5 lakh under Section 80C of the Income Tax Act.

National Pension System

There is a tax deduction up to ₹1.5 lakh under Section 80C of the Income Tax Act. Additionally, an extra deduction of up to ₹50,000 is application for contributions made by individual taxpayers towards NPS (as per subsection 1B)

Tax Saving Fixed deposits

There is a tax deduction up to ₹1.5 lakh under Section 80C of the Income Tax Act. They have a lock-in period of 5 years.

Pro Investment Tips That Will Help You Grow Wealth!
If you are just starting out your investment journey, keep in mind the following tips:
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Start your investment journey early:
Many investment plans offer compounding interest, which means that the more time you allow the fund to grow, the more your wealth will grow. Additionally, certain plans offer lower premiums to investors who are younger.
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Diversify your portfolio:
Diversifying one’s investment portfolio is a great way to mitigate risk. Should one investment plan offer a lower yield than expected, the other may offer a higher yield, thereby reducing any losses.
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Have a mix of short-term and long-term plans:
It is always better to have a mix of short-term and long-term plans in one’s portfolio. This can help investors easily hit different milestones in life without worrying about financial drain.
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Automate your payments:
If you are choosing a monthly premium payment method, it is always better to automate your payments. This ensures the required amount is paid on time.
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Understand your risk appetite:
Investors uncomfortable with high-risks and volatility should invest solely in low to medium risk funds to prevent unnecessary anxiety.

Documents Required For Investment Plans

The following documents are needed to invest in investment plans:

  • iconbullet Identity + Age proof: Such as your Aadhar Card, driver’s license, passport, etc.
  • iconbullet Address proof: Such as your Aadhar Card, driver’s license, passport, electricity bill, rent agreement, etc.
  • iconbullet PAN Card
  • iconbullet 2 passport size photographs
  • iconbullet Income proof: Such as your salary slips, bank statements, income tax returns, and so on.

FAQs on Investment Plans

  1. Not reading the policy document carefully
  2. Not understanding policy exclusions
  3. Not choosing policies based on goals
  4. Selecting a short term period for a long term policy (example, selecting a 5-year period for a mutual fund)
Different plans have varying criteria, however, some of the common ones are:
  1. Age: Minimum 18 years of age (unless you are looking at a child plan). Some plans, like retirement plans, have a maximum age of entry.
  2. Indian nationality (some plans are only open to Indian residents, while others are also open to NRIs)
  3. Ability to adhere to the premium payment terms and modes.
  1. Fixed Deposits
  2. Mutual Funds
  3. Retirement Plans
  4. PPFs
  5. Government Bonds
The term risk appetite refers to the amount of risk an investor is willing to take with their funds. A high-risk appetite means that they are willing to take a high degree of risk, while a low risk appetite means they are only willing to take a low amount of risk.
In general, the money pooled in by investors put towards the capital market by the company. When this grows, so does the investor’s funds.
The debt marketed is associated with investments in bonds. Due to this, it is more stable and considered a low-risk market.
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  • Disclaimer

    ¹ Tax benefits are subject to changes in tax laws. Kindly consult your financial advisor for more details.
    ADV/8/22-23/1073