If you wish to invest your money for short periods of time (up to 3 years), there are various financial products available. Some of the more popular ones are bank deposits, recurring deposits, some mutual fund products. All these
A bank deposit is similar to a savings account. Like with a savings account, when you open a bank deposit, you need to fill in a form and provide proof of identity and proof of residence and two photographs. If you already have a savings account with the bank, you may not be required to give these details.
The main difference between a savings account and a deposit is that in a deposit you cannot withdraw your money as and when you please. If you need to withdraw money in an emergency, you can do so by paying a small penalty. You also cannot keep adding to the amount you’ve deposited (unlike in a savings account where you can do so). Your money, which is called the principal, is kept in this account for a period of time that you specify at the time of opening the account. The period can be a few months, a year, or a few years. At the end of the period, the money gets automatically deposited in your savings account. If you do not have a savings account with the bank, you can receive the amount in cash.
The interest that you receive in a bank deposit is greater than that offered on a savings bank account. You can either receive your interest at regular intervals – perhaps every month or every six months or once a year or get it at the end of the period as one lump sum amount with your principal amount.
Banks also offer their clients the option to open a deposit where you do not have to deposit a lump sum principal amount but can contribute a fixed amount at regular intervals – such as monthly or yearly. Just as in the case of a bank deposit, you cannot withdraw your money before the end of the tenure, without paying a small penalty. For example, you can deposit Rs. 500 every month for 3 years. At the end of three years, you will receive not just the amount that you have deposited over the years but the interest as well.
Very often, people would like to invest in certain financial products, such as stocks or bonds. However, due to lack of knowledge or time they avoid doing so. Sometimes, the amount of money that they would like to invest is not enough to allow them to purchase a significant amount of units.
A mutual fund is a financial product that allows individual investors to buy such products indirectly. With mutual funds, money is collected from thousands of investors. The money collected is then invested in some financial products according to a pre-stated objective. For instance, the objective may be to invest only in government bonds or it may be to invest in a mix of stocks and bonds in a particular ratio. Some mutual fund schemes may have the objective of investing in certain sectors only, for example, banking, pharmaceuticals, software, etc. There are plenty of schemes from different mutual funds with different objectives. You can invest in a mutual fund scheme whose objectives suits your investment need best. In order to keep a track of how much each investor has contributed to the fund, each investor is given a number of units. Each unit represents Rs. 10 invested in the fund. If you invest Rs. 1000 in the fund, you will be allotted 100 units of that fund.
The value of your mutual fund units may vary from day to day. This is because the values of the products (shares of different companies, interest rate on bond, etc.) that the fund has invested in vary. Accordingly, the value of the whole fund varies. Once a year, it may pay you some part of the profit, if it has made any. This is called a dividend. Alternatively, you can choose an option where you do not receive any dividend, but the value of the fund, and therefore the value of your units keeps increasing. You can make a profit by selling your units at a higher rate than what you bought them for.
You can find out the value of your units by checking the Net Asset Value or NAV of your scheme on the website of the mutual fund house. You can buy mutual fund units from a mutual fund company and sell them on any working day. The price that you have to pay will be the NAV. When you sell your units, you will receive the NAV per unit. Here you may need to pay a small percentage of the total value as an exit load.
Source: Portal Content Team
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