There will be a lot of people who find themselves caught in the last minute rush and here is a guide for them to complete this process.
Reduce risk: The first thing that the investor has to check when they are making an investment in a hurry is the extent of the risk involved by investing at a single juncture. The idea is that they would not want to have a high risk just due to the lump sum investment factor.
This means that a large investment that goes fully into the equity area would in crease the risk, as future returns will depend on the position at the point of investment. This will result in a situation where the investor would want only a part of the amount to actually go towards the equity side. The rest has to be in debt where there is a lesser risk due to such an investment. There are several options that are present here which range from the Public Provident Fund (PPF) to National Savings Certificates (NSC) and even five-year post office time deposits and fixed deposits with banks.
Continuing cash flow impact: This is the time when the individual is likely to end up with a wrong decision because of the fact that they may be given an investment that they may not actually want. Importance has to be given to the choice of the instrument used and the reason why they are choosing this as an investment. In many cases, they need to consider the fact that they might be able to afford only a one-time commitment rather than a multiple year requirement, as this will also impact future cash flows. For example, an insurance policy has a multiyear impact because the premium payment will arise each year till the end of the policy term. This is the reason why they need to look at the options carefully while they are making the decision. They need to make a proper choice after considering the alternatives and not just based on what is brought in front of them.
Lock-in is important: Selecting a particular route is one thing but what is also required is that they consider the lock-in of the money that they will invest. There are various time periods for the purpose of the lock-in.
For example, there is a five year lock-in period for the fixed deposits from banks, while the figure is three years for an equity-linked savings scheme from mutual funds. A longer lock-in doesn't mean that this should not be considered, but that this has to be seen in conjunction with the aims and requirements of the individuals. So an investor may go and invest in the PPF where lock-in is for a long time.
Returns and tax impact: The returns that are being earned on the instrument also need attention along with their tax impact. There are different requirements for various people in terms of the cash flow that is required or the fact that some would like to have a large corpus by using the route of compounding. This will not be found under all cases and wherever this is possible, the investor has to ensure that they are able to get the benefits. A higher rate has to be considered in line with the taxation of the investment also because there can be a higher post tax impact when there is tax free income like that of a PPF compared with some other route where the return rate is higher but the final figure drops when the tax aspect is considered.
