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Benefits and Risk Factors of Investing in a Long-Term Savings Plan

Team Jar
October 27, 2022
Benefits and Risk Factors of Investing in a Long-Term Savings Plan

Are you contemplating which type of investment you should make? A long term savings plan can offer you many benefits – from tax deductions to high returns. Here is everything you should know about long term investments.

Investment decisions are one of the most critical decisions of your life.

They help you fulfil your long-term and short-term goals and protect you against unforeseen circumstances.

But, finding the best investment plan can be puzzling, especially for those who are new at it.

Primarily, there are two types of investments: short term and long term. Here, we'll discuss more long term savings plans.

Long term savings plans are those investments that you hold for more than 3 years.

These plans do not come with end dates and offer much higher returns than any other type of investment. 

For instance, merely ₹1,000 of monthly investment at a 15% interest rate can make you ₹32,84,074 in 25 years.

Sounds impressive, right? A long term savings plan can make this possible. But, before you start investing, there are a few things you should consider.

Attributes of A Long Term Savings Plan

The features of a savings plan depend on what plan you are choosing. But on a broader spectrum, most long term savings plans have the following attributes:

Duration

Being long term, these types of savings plans give you ample amount of time to study the market trends and make adjustments.

Thus, you do not have to worry about fluctuations in stock prices affecting your investments and focus on the growth prospects and capital gains instead.

Regular Premiums

In order to continue reaping the benefits of a long term savings plan, you need to pay premiums or invest regularly.

These payments will keep your plan active. Premiums can be paid on a per month, per quarter, or per year basis.

Death/Accident Benefits

Some long term savings plans like insurance offer you death or accident benefits.

It essentially means in the event of the untimely death or accident of the policyholder, the family gets the entire sum of the plan and the bonus.

Tax Benefits

Most long term savings plans come with tax benefits. You can save a lot of your hard-earned money with them from paying income tax. Therefore, these types of investments are so popular among investors.

If you are looking for ways to reduce your tax burden, check out our blog on smart tax-saving investment options.

Maturity Benefits

Some long term savings plans offer maturity benefits like bonuses or loyalty rewards.

In such cases, once the policyholder completes paying the premium for the entire term of the policy, he becomes eligible to get the sum assured along with some loyalty reward or bonus.

Types of Long Term Savings Plan

When we are talking about a long term savings plan, we are talking about the following:

  • Unit Linked Insurance Plan (ULIPs)

ULIPs offer the benefits of both insurance and investment. It is one of the most popular long term investment plans. It invests your money in both equity and debt markets. Thus, ULIPs offer decent returns to help you meet various life goals and insurance coverage. That's not all; under section u/s 80C of the Income Tax Act, 1961, ULIPs offer tax deductions of up to 1.50 Lakhs per year. ULIPs have a lock-in period of 5 years. 

  • Equity Fund

Equity funds or equity mutual funds invest your money in stock markets. By diversifying your investment in various companies across multiple industries, they give you significant returns. Furthermore, some equity funds offer tax deductions, such as ELSS (Equity Linked Savings Scheme). However, it has a lock-in period of 3 years. Therefore, equity mutual funds are perfect for meeting your future goals like retirement, purchasing a house, or your child's education.

  • Public Provident Fund (PPF)

PPF is among the most popular long term saving tools as it offers a complete tax deduction. It is a safe investment tool for planning your retirement. It can be unlocked only after your retirement.

  • Real Estate​

Real estate is another popular investment tool. It offers sustainable income in the long run as a dividend. But, some real estate has depreciating factors associated with it, such as apartments. Therefore, a great avenue to invest in real estate in Real Estate Investment Trusts (REIT).

  • National Pension Scheme (NPS)

Like PPF, NPS is a government scheme that helps people save toward retirement. It can be started as early as 18 years and redeemed after retirement. It is a great tax-saving tool.

  • National Savings Certificate (NSC)

It is a post office-based, government-sponsored fixed income scheme for those who do not prefer to take too much risk with their investment. It offers tax deductions of up to 1.5 Lakhs per year under section 80C of the Income Tax Act. You can invest a minimum of Rs 1,000 with no upper limit. It also has a lock-in period of 5 years.

  • Gold​​

Gold is a widely-preferred long term savings avenue for all Indians - be it in jewellery form or digital gold. It is extremely safe and offers decent returns despite inflation. If you want to know more about how you can easily invest in digital gold, check out MyJar.

  • Stocks

If invested and maintained correctly, stocks can offer immense returns. They are the representation of a company. Based on the performance, the best long term stocks can offer you returns up to 16%. So, do your homework properly before you decide which share to buy for long term.

Benefits Long Term Savings Plan Offer

The best savings plan offers many benefits to investors in the long term. It varies on what type of plan you are investing in.

However, overall, most long term savings plans offer the following benefits.

Growth With Compounding

One of the greatest benefits of investing in a long term savings plan is reaping the benefits of compound interest.

In simple words, compound interest allows you to reinvest your revenue. Sounds complicated? It'sIt's really not. Let us simplify:

Suppose you have invested ₹100 at a 10% interest rate. After one year, you are earning ₹100. So, your total amount becomes ₹110.

By compounding, next year, you will get 10% interest on ₹110, which will make you ₹121.

Thus, a long term savings plan helps you grow your wealth quickly.

Tax Benefits

Long term savings plan offers tax deductions under various sections of the income tax act 1961.

You can save up to 1.50 Lakhs of your earnings by investing in the right avenue. This way, you will grow your money and save tax also.

Security from Short-Term Volatility

The money market is hard to predict. So, investment becomes prone to risk, especially short-term investments.

Long term savings plan eliminates the volatility of the stock market and allows you to gain the maximum benefits.

Maximum Return

If you are investing long term, you do not have to worry about the due date. Most long term investment stocks allow you to invest for as long as you wish.

Therefore, you can plan for your significant milestones like retirement, house purchase, kids' education, marriage etc.

Just give your bank a standing instruction to auto-debit your monthly contribution to make investing easier and more convenient.

Portfolio Diversification

When you invest long term, you can study the market conditions and trends over the years and diversify your investments. Alternatively, suppose you invest in an equity mutual fund.

It allows you to expand your portfolio across various industries without any hassle and overcome the risk associated with one particular industry.

Risk Associated With Long Term Savings Plan

One of the major risks associated with a long term savings plan is inflation. Inflation is the major reason behind the country-wide increase of prices that impacts the value of money and assets.

It corrodes your purchasing power and reduces the value of your investment in the long run if you aren't careful with your choice. So, make sure you inflation-proof your investments. Wondering how to do it? Read our blog on it. 

Final Thoughts

Like small drops accumulate to make the sea, long term investment over the years can help you save a big amount of money for your future.

Make sure you research well about the best investment options in India and align them with your financial goals to get the desired benefit during the maturity.