Best Investment Plan for 1 Year
There are times when you foresee a major expenditure on the horizon. It could be a wedding in your family, or your car could be on its last legs. In such a scenario, you would want to keep your funds liquid. As the expenditure is not immediate, you would not want to keep the funds in a savings account and lose out on good returns. The need here is to find better investment options with a shorter maturity of around one year.
The best investment plan for 1 year has to maintain a balance between capital security and good returns. Equity-based instruments are not preferable as they are volatile and pose risks to the invested capital in the given time horizon. So before you select the plan suitable to your risk appetite and financial goals, let’s understand the best investment options for 1 year.
The five best investment plans for a 1 year horizon
Many fixed income instruments that pose minimum risk of capital losses have the potential of being the best investment plan for 1 year.
Debt Mutual Funds
These funds invest in a portfolio of debt instruments such as bonds, government securities, etc. They are less risky as compared to direct equity or equity mutual funds. These funds are usually very liquid, and you can redeem them anytime as per your needs.
Arbitrage Mutual Funds
These are hybrid instruments that invest in arbitrage opportunities to earn returns. Usually, they buy securities from the cash market at a low cost and then sell them in the futures markets at a higher price. The profit is earned from the price difference between the cash and future markets. They could also benefit from the price differential of the same security at different exchanges. For example, a stock could be trading for Rs 100 on BSE and Rs 101 on NSE. The arbitrage fund will buy at 100 and sell at 101 to earn a return of Re 1.
These funds earn good returns during periods of high volatility. Their risk profile is similar to debt funds as the exposure to equity is for a short duration. However, expense ratios might be high due to the high volume of transactions.
Ultra Short Duration Funds
These funds invest in securities with extremely short maturity periods of 3-6 months. They are debt funds with a portfolio consisting of money market or fixed income instruments such as T-bills, commercial papers and certificates of deposit. Due to exposure to fixed income instruments of high credit rating, ultra short duration funds are safe investments for one year. The shorter maturity periods allow the underlying securities to remain unaffected by market changes.
Money Market Funds
These funds invest in money market instruments of one-year maturity period, such as repurchase agreements, T-bills, commercial papers and certificates of deposit. These instruments have a strong credit rating that makes them nearly risk-free.
Bank Fixed Deposits
In India, all banks, NBFCs and Post Offices offer fixed deposits. The investor can deposit a lump sum amount in an account for a predetermined interest rate and fixed maturity. The maturity period ranges from seven days to 10 years. The interest payment is guaranteed and is higher than the interest paid on regular savings accounts. For senior citizens, the interest rate offered on FDs is usually higher by 0.25% to 0.65%.
Further, you have the flexibility to opt for monthly, quarterly, yearly, or cumulative payout of returns. As these deposits are not market-linked, there is nearly no risk of default. One can withdraw the money prematurely in case of an emergency. However, premature withdrawal might come with a penalty charged by the bank.
Who should invest in 1 year investment plan
The investment options for 1 year are excellent alternatives to keeping your funds in a savings account. If you seek high liquidity, you could opt for debt fund instruments like money market funds and ultra short duration funds. However, if your circumstances allow you to lock in the funds for a certain period, an FD would be the instrument of choice.
For guaranteed returns with the highest liquidity, you should opt for money market funds. You can invest in arbitrage mutual funds if you wish for equity exposure at minimal risks. As an investor, you can allot money in these funds through a monthly investment plan for 1 year instead of committing a lump sum.
Factors to be Considered Before Investing
You must consider the below factors before selecting your one year investment plan.
Generally, short-term investments carry lower risk than long-term investments, as their short maturity time leads to less exposure to market movements. However, within these instruments, the risk could vary. For example, debt mutual funds can be affected by interest rate movements, while an FD has a fixed rate of return. You must choose the right mix of investment plans for 1 year, matching your risk profile.
Creating a diversified portfolio is one of the major principles of investing. With short-term investments, your amount is not tied-up for long periods, so you are free to invest the returns to other alternatives.
Short-term investment instruments are highly liquid, allowing you to withdraw your money anytime. For example, in case of short-term debt funds, money gets credited to your account by t+1 day (transaction day + 1). However, these funds sometimes come with an exit load, which you must account for before investing. Similarly, FDs could be considered less liquid in case of penalties for premature withdrawal.
The capital gains from one year investment plans are taxed as per the income tax slab. For example, if your annual income is Rs 10,00,000, you come under the income tax slab of 20%. In that case, all your short-term capital gains will be taxed at 20%. So, if you invested a debt fund for one year and earned a return of Rs 10,000 on an investment of Rs. 1,00,000, you will have to pay 20% of Rs10,000 = Rs 2,000 as a tax on your returns. So, it is important to evaluate the tax efficiency before choosing an investment option.
To sum up, the best investment plan for 1 year for you is the one that meets your requirements of risk exposure, liquidity and post-tax returns. Minimising the risk of capital loss should be the objective when choosing a one-year investment plan, as there is no time for recovery in this horizon. Whether you should invest a lump sum or a monthly investment plan for 1 year, it depends on your choice and financial situation.
FAQs about Best Investment Plan for 1 Year
Who should invest in a one year investment plan?
People looking to invest a spare corpus for a short time to meet a major expenditure should opt for one year investment plans. You can learn more about these plans and the benefits in this article.
Why is equity not suitable for a one year investment?
Equity is volatile and does not guarantee capital security, especially for a shorter investment horizon. If you are looking at an expenditure at the end of one year, equity would not be a reliable choice to park your funds.
Is gold a good investment for one year?
While gold has usually given fair returns in the long term, it is subject to market-linked fluctuations, which does not make it an ideal investment option for a shorter duration like one year.
Can I save taxes using investment plans for 1 year?
No. Most tax benefits are given on long-term instruments to encourage retirement planning.
Can I opt for monthly investment plans in short term mutual funds?
Yes. Short-term funds form one of the most risk-balanced, liquid instruments for a monthly investment plan with a one year horizon.