Saving means creating a strategy that is truly in line with your financial goals. Whether the goal is to have a reserve for emergencies or buy a house for retirement security, the strategy must fit that goal.

In India, numerous methods are available for saving that are suited for different purposes. But how does one decide which one of these is right for them? The following considerations should help you select the best saving plan for you.

Define Your Financial Goals

Before you can choose a savings plan, it is important to understand your financial goals. Ask questions such as: What am I saving for in particular? Once you have established your goals, it becomes easier to find an investment plan matching the time period and risk profile you can handle. Choosing the best saving plan aligned with your needs is a matter of choosing.

Compare Various Saving Plans

There are various traditional saving plans, each with its features and limitations. Here's an overview:

  • Fixed Deposits (FDs) are one of India's most widely known conservative saving options. Their fixed interest rate within a given period makes their returns relatively safer than equities or mutual funds, whose investment earnings are linked with market performance. However, FDs are not inflation-protected, so the real return could be low in times of high inflation.
  • Public Provident Fund (PPF): This long-term saving scheme is most suitable for those who place a premium on the tax benefit it offers. PPF pays good interest rates, plus the maturity proceeds aren't taxed at all. However, with a lock-in period of 15 years (partial withdrawals allowed after 6 years), it is only possible to do long-term planning on it.
  • National Savings Certificate (NSC): Like PPF, this is another government-sponsored product. NSC is useful if you are looking forward to guaranteed returns. This also provides tax relief under Section 80C, but the interest earned is taxable.
  • Mutual Funds: With greater returns in the long term but a riskier element, mutual funds are your best choice. Equity mutual funds are useful as long-term investment tools for bigger financial needs. Additionally, Equity Linked Savings Schemes (ELSS) provide tax benefits under Section 80C.
  • Recurring Deposits (RDs): Fixed at a certain sum each month, RDs are suitable for disciplined saving. As the returns are certain and slightly lower than FDs', they suit medium-term goals nicely. However, returns on RDs are taxable.

Risk and Returns should be considered.

Once you have identified your goals, then matching them to the right plan - in regards to both risk and return - is critical for your success. Thus, if your plan has a long-term objective, it makes sense to pick one that accrues interest on money and compounds it over time. PPF or equity mutual funds provide just this type of investment – with great potential rewards, though PPF is a safer option while equity mutual funds come with considerably higher risks. However, sticking to safer choices such as an FD or RD is a much better option if your aim is short-term savings. Other options for short-term needs include debt mutual funds or liquid funds.

Look for Tax Savings

Many saving plans in India provide tax benefits as per Section 80C of the Income Tax Act, capped at ₹1.5 lakh per year. Take PPF, NSC, and tax-saver FDs (which have a lock-in period of 5 years), for example, to save yourself from taxes while building your estate. It's always a good idea to choose plans that offer dual benefits – tax savings and returns.

Conclusion

Choosing the right savings plan for your financial goals is a personal decision. Consider all these factors when making this decision.