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Mutual funds to NPS scheme: 4 investment options to beat inflation in long term


Portfolio management: Basic motto of long term investment is to create a fund for a long term goal like marriage of child, financial needs post-retirement, etc. However, to meet one’s long term investment goal, one needs to beat inflation growth during the investment period. 

According to tax and investment experts, one can assume annual average rate of inflation to the tune of 6 to 7 per cent and choose investment options that can yield more than 7 per cent in long term.

Listing out investment options that can yield more than 7 per cent and beat inflation, experts said that equity or mix of debt and equity should be chosen ahead of other tools as it can beat 7 per cent inflation growth with ease.

On why one should choose equity ahead of other investment tools to beat inflation growth, Pankaj Mathpal, MD & CEO at Optima Money Mangers said, ‘A long term investor who has a time horizon of more than 10 years should go for the equity exposure, whether it is direct stocks or it is equity mutual funds. But, one should opt equities as it would yield at least 12 to 15 per cent return in long term.”

On average inflation that one can assume while investing for long term, SEBI registered tax and investment expert Jitendra Solanki said, “One can assume average inflation growth at near 6-7 per cent per annum. However, for education inflation, it has to be kept at around 10 per cent per annum”

Here we list out investment options that tax and investment experts suggested:

1] Direct stock market: “To beat inflation, an investor with high risk appetite can go to the direct stock market investment as it would yield 12 to 15 per cent CAGR in long term. However, one has to be well informed about the stock market investment while opting for direct equity markets. A well informed stock market investor can expect 12 to 15 per cent return on one’s investment for long term. So, one should opt this option if the investment goal is related to education-related long term goal,” said Pankaj Mathpal.

2] Equity mutual funds: “Those who are ready to take risk but they don’t have much idea about stock market investments, they are advised to go for equity mutual funds as fund managers would handle their money on their behalf. In fact, some fund managers generate alpha return beating key benchmark return with ease. So, long term investment goal can be achieved here as equity mutual funds yield at least 12 per cent in long term,” said Jitendra Solanki.

3] NPS scheme: Those investors who want to take limited risk and beat inflation growth, they are advised to go for National Pension System ((NPS) scheme. In this scheme an investor has mixed exposure of equity and debt where an investor can choose equity exposure up to 75 per cent.

Advising NPS account holders to keep equity-debt exposure in 50:50 ratio, Kartik Jhaveri, Director — Investments at Transcend Capital said, “NPS account holders are advised to choose debt equity exposure in 50:50 ratio. In that case long term equity exposure will yield 12 per cent return and debt would yield 8 epr cent return. So, overall net return from their NPS investment would be around 10 per cent (6 + 4), which would beat inflation with ease.” He said that here in NPS scheme, one would be able to claim income tax exemption on annual investment up to 2 lakh in single financial year as well.

4] ULIP: In long term, one can expect better return from ULIP (Unit Linked Investment Plan) as it allows an investor to choose up to 100 per cent equity exposure. So, to beat inflation, one can choose ULIP as well.

Speaking on return that one can expect from a ULIP plan in long term, Pankaj Mathpal said, “Like NPS, ULIP is also a mix of both debt and equity. An investor here can opt up to 100 exposure in equity. But for striking a balance one can choose 50 to 60 per cent exposure in equity and rest in debt and can expect a double digit return in long term.”

Disclaimer: The views and recommendations made above are those of individual experts or personal finance companies, and not of Mint.

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