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I am 25 and got employed recently with a reputed company. I earn around ₹50,000 a month and want to know how to start the investment process. I am confused looking at different schemes and ways to invest. As of now, I have opened a PPF account and an LIC Jeevan Labh policy.
NV Rahul, Hubli
The early bird catches the worm. You have done very well to start investing so young. Continue deploying money smartly and on a systematic basis. This will pay off handsomely in future, thanks to the force-multiplier called compounding.
Keep your investing simple, disciplined and long-term, and take calculated risks for good returns.
First, save for emergencies and buy insurance. Put aside a small sum each month as ‘contingency reserve’ – keep this in highly liquid, safe options, such as bank fixed deposits, and don’t use this fund unless there is a real emergency.
Next, if you have dependents, buy a no-frills term life insurance plan with cover of about 10 times your annual income. Buy this term plan online as the premium is quite cheap. We are not fans of mixing insurance and investment, and do not recommend traditional insurance plans such as LIC Jeevan Labh that invariably fare poorly on returns over the long term.
You will be better off with a combination of term life insurance and equity investments, bought separately. Also, buy adequate health insurance, again online.
Coming to investments, aim for a diversified portfolio, including equity and debt. Thumbs up to your opening a PPF account; continue with this. This is among the safest, most tax-efficient, debt options and will help you build a tidy corpus.
Besides PPF, you will be automatically investing 12 per cent of your Basic plus Dearness Allowance as contribution towards Employees’ Provident Fund (EPF) through a monthly deduction from your salary. This is also a best-of-the-class, highly tax-efficient debt option.
That said, given that you are young, you must make bold with equities and start deploying the chunk of your investible money here. In the long term, equity has the potential to deliver much superior inflation-beating returns than debt.
Investing directly in stocks could burn your fingers. Start investing in well-managed equity funds through the monthly systematic investment plan (SIP) route. This lets you tap into the expertise of professional money managers, inculcates discipline in investing and helps benefit from market volatility by reducing the average cost of purchase.
SIPs are especially recommended over lumpsum investments now, given the sharp run-up in the market. Begin with relatively less-riskier large-cap equity funds and equity-oriented balanced funds. Birla Sun Life Frontline Equity is a fine large-cap fund while HDFC Balanced is a good choice in the equity-oriented balanced funds category.
Investing in equity-linked savings schemes (ELSS) is also a good idea, since it is also eligible for tax break under Section 80C. But note that each SIP investment in ELSS is subject to a three-year lock-in. DSP BlackRock Tax Saver is a good fund here.
Once you get comfortable with the process, start SIPs in multi-cap funds and mid-cap funds; these are riskier than large-caps and balanced funds but can get you higher returns. Franklin India High Growth Companies is a good multi-cap fund and Mirae Asset Emerging Bluechip is a fine mid-cap fund. Restrict your investments to five to six mutual funds; too many funds could get difficult to track. You can invest through regular plans (via distributors and brokers) or directly with the fund house. Going direct saves distributor costs and improves returns, but is recommended only if you have the know-how to pick good funds.
To sum up, create a contingency reserve, get life and health insurance, and invest about 75-80 per cent of your investible surplus in equity mutual funds and 20-25 per cent in debt instruments.
The proportion of equity can be reduced and debt increased gradually as you age. We have assumed that you do not have pressing financial commitments.
Send your queries to mf@thehindu.co.in
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