Where to invest, setting objectives and understanding time horizon and risk appetite is essential
One of the most common queries we receive is from young folks starting out on their careers, asking which investment products we’d recommend. Though the query is usually about which mutual funds or stocks to buy, that’s a topsy-turvy approach to starting one’s investment journey. To select the investment products that best fit you, you need to be clear about your investment objectives, time horizon and risk appetite first. Here’s how first-timers should go about investing.
Many beginners think that the secret to creating wealth lies in betting money on high risk-high return products. It isn’t, really. You need money to make money, so the secret to wealth creation lies in maxing out your savings that can be funnelled into investments.
Running a monthly SIP of ₹5,000 for 10 years in a mutual fund (MF) that delivers a 15% compound annual return will help you accumulate ₹13.93 lakh, but double that SIP to ₹10,000 and it can get you to ₹20.65 lakh with a 10% return.
This is why it helps to set a savings target that you’ll stick to, come what may. Warren Buffett’s tenet — “Don’t save what’s left after spending, but spend what’s left after saving” — is a good way to ensure a high level of savings. Set a savings target that is at 10% or 15% your take-home pay to start with and raise that amount to 20-25% as your income takes off. Set up automatic debits in your salary account that compulsorily deduct, say 15% of your pay, before the 5th of each month to go into investments like recurring deposits, SIPs in MFs or contributions to your NPS/EPF account.
Many folks commit to equity SIPs, ULIPs or 15 to 20-year insurance products early in their career thinking this will help them build wealth. Long lock-in products can deprive you of quick cash to meet emergencies or fulfil short-term goals. Mapping out your financial goals with their timelines before you choose products, helps you avoid this pitfall.
Start your investment plans by putting some thought into why you’re investing in the first place. List out the financial goals you’d like to achieve within a year, 1-3 years, 3-5 years, by 7 years and beyond. The goals need not be lofty like buying a 3-BHK or acquiring bitcoins. Even modest short-term goals like taking a vacation, replacing your smartphone or giving your parents or partner a surprise gift can count. If you have debt to pay off (say, an education loan), get to that first by adding it to your less than 5-year goals.
Once you have a list of goals mapped to their time horizons, asset and product choices are simpler. For goals that fall within 3 years, safer avenues such as recurring deposits, post office deposits or SIPs in short-term debt funds are good options. For goals that have a 5-to-7-year horizon, SIPs in hybrid MFs, deposits with top-tier NBFCs, post office schemes like the NSC or Kisan Vikas Patra and Government of India’s 7-year floating rate savings bonds are good options. For long-run goals like retirement, SIPs in equity funds, stocks and NPS are a good bet.
Stock market or equity funds should figure in your portfolio only if you are willing to give the investment a minimum 7-year horizon to deliver.
Investing in equities with a shorter horizon can lead to a sub-par experience if you’re forced to pull out money in a bear market. Use insurance only for protection against risks, not to create wealth.
Prepare for emergencies
Our best-made plans can go awry when Acts of God or emergencies strike. During COVID-19, many folks saw their savings depleted because multiple family members had to be hospitalised. Some families lost their bread-winners.
Those who escaped such serious adversities saw their employers hand out pink slips or cut their pay. Unforeseen emergencies of this kind can force you to dip into savings, stop regular investments or even withdraw money from your retirement kitty.
Insurance plans are the most cost-effective way to shield against such risks because the insurer pays you or your dependents a big lump sum against a nominal annual premium. Pure term-life plans compensate your dependents for the loss of your income on your untimely passing. Health insurance plans cover medical expenses in the event of hospitalisation. Critical illness covers pay out a lump sum if you’re diagnosed with serious illness that interrupts your career or income. Household insurance protects your home and your other assets against natural calamities. These are the four types of insurance you should seriously think of getting in the early stages of your career.
Insurance plans, however, tend to have many exclusions that may leave you unprotected in some unforeseeable emergencies. To be able to tide over such events, it helps to have an emergency fund parked in liquid and absolutely safe avenues.
A misconception many beginners have is that complex products can get them faster to their goals. On the contrary, Investing in something you don’t understand can make it very difficult to stay the course. When you select products, make sure you understand where your money is going and how returns are delivered.
In insurance plans, it is enough to start with a pure term cover and a basic mediclaim policy. For your emergency fund, a fixed deposit with a leading bank can suffice.
For medium-term needs, post office instruments like NSC or GoI savings bonds can fit the bill. For retirement, EPF, Public Provident Fund and NPS are excellent instruments. For your equity allocations, index MFs mirroring the Nifty50, Nifty Next 50 or Nifty500 can simplify your choices and reduce the need for tracking and juggling.
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