What is the best way to invest money? For we common men, practicing need based investing is the best way. Why? Because it gives purpose to our investment. A purposeful investment often yields better returns.
How need based investing is different? In need based investing we are actually integrating the ‘power of investment’ with our ‘needs’. What is power of investment? Ability to make our money grow faster.
As our money grows with time, we can actually see our needs getting fulfilled.
In 2011 I bought a new car. I needed additional Rs.5 lakhs to fund its purchase. How I got this money? From investment. I invested Rs.9,000 each month in a mutual fund SIP for 3.5 years. I still remember that day in 2011 when I had those Rs.5.0 lakhs in my portfolio. Sublime happiness.
This is an example of integrating ones need with investment. It is a very powerful tool.
[After you complete reading this article, I will suggest you to also read about 100+ investment alternatives provided at the bottom of this post]
Grouping our investment based on our ‘different needs’ is the key. Different need will demand different types of investment.
Example: A need which is getting realised in next 6-7 months will require different investment than a need which is 4 years ahead in future.
See, need based investing has already started to pave its best way to invest money. How? It is already pointing us towards the right direction.
What is a right direction? Direction which takes us to our best investment alternative.
Investing without clear objectives is like hoping to build a strong castle with only sand. But attaching needs with our investments gives it more strength. Needs works like a binder (cement). Practising such investment often leads to success.
Needs of life & best ways to invest for it…
Some people has many needs to be fulfilled, and some are inherently more contented. But speaking in general, majority has few common needs in life. Which are these needs?
- Annual Vacation.
- Car Purchase.
- Home Purchase.
- Child’s Future.
- Building Retirement Corpus.
The best way to invest money will be to select those investment options which are like tailor made for the above needs of life.
So let’s analyse which are the best investment options tailor made for the above listed 5 needs of life.
[You can use this calculator to check how much monthly contribution is necessary to reach the goal]
- Annual Vacation: Suppose a person want to raise funds (Rs.1.0 Lakhs) for his next vacation. He plan to go in next 12 months. So how one can invest for this need of life? First, how far is the goal? 1 year. So how much return one can expect? Maximum 7% pa. Which investment option can yield such a return? A Money market fund. ‘Reliance Money Market Fund (direct plan)’ has yielded 8.38% in last 1 year. Alternatively one can also invest in a recurring deposit which will yield 7.1% return. Read more about recurring deposit.
- Car Purchase: Suppose fund required for car purchase is Rs.4.5 Lakhs. Time in hand is 3 years. So how one can invest for this need of life? How far is the goal? 3 years. So how much return one can expect? Maximum 8.5% p.a. Which investment option can yield such a return? A conservative hybrid mutual fund (80% Debt, 20% Equity -others). ‘ICICI Pru Regular Savings Fund (direct Plan)’ has yielded 10.9% p.a. in last 3 years. Read more about sharpe ratio to buy best funds.
- Home Purchase: Fund required to make 20% downpayment for the house is say Rs.10 Lakhs. Time in hand is 5 years. How one can invest for such a long term goal? How much return one can expect? Maximum 14.0% p.a. Which investment option can yield such a return? An aggressive hybrid mutual fund (70% Equity, 25% Debt -others). ‘Principal Hybrid Equity Fund (direct plan)’ has yielded 15.7% in last 5 years. Read more about how beginners can invest in mutual fund.
- Child’s Future: Suppose one has estimated that he/she will require Rs.30 lakhs for child’s higher education in next 10 years. How one can invest for such a long term goal? How much return one can expect? Maximum 16.0% p.a. Which investment option can yield such a return? A Multi-Cap mutual fund. ‘HDFC Equity Fund (direct plan)’ has yielded 18.5% in last 10 years. Read more about types of mutual funds here.
- Building Retirement Corpus: Suppose ones estimated retirement corpus is Rs.5.0 core. This amount needs to be accumulated in next 20 years. So how one can invest for this need of life? How much return one can expect? Maximum 20% p.a. Which investment option can yield such a return? A Mid cap Mutual Fund. ‘Invesco India Mid Cap Fund (direct plan)’ has yielded 22.9% p.a. in last 10 years. Read more about mid cap fund.
Kindly read on the following related topics to add more value to your knowledge.
- Direct plans offered by mutual funds.
- How to invest retirement fund in India.
- Managing personal finance – How to go about it?
The best way to invest money in India will be, attaching a goal to each investment. No investment shall be made just for the sake of doing it. It must be done with a purpose.
How to assign purpose to ones investments? Look deeper into your finances and needs of life. Idea should be to identify all future needs, and then invest money to build these corpuses.
The short term needs demands different treatment than mid-term and long term needs.
What are short term needs? Which are getting realised in next 2 year. Which are medium term needs? One which will get realised in 2-5 years. Long term needs are those which gives you 5+ years for investment.
Categorise all your needs in terms of their duration.
Then you can use the five examples that I have shown above to identify your preferred investment option.
Read more about which is the best investment plan in India for middle class.