Your first steps to investing

Want to splurge as well as save for the rainy day? Here’s a game-plan

You’ve bagged a plum offer, and salary credits from your employer have just begun to fatten up your bank balance. What should be your first steps into the world of investing? Here’s a game-plan.

Save before you spend

Getting your hands on your own money is a thrilling experience. Here, finally, is your chance to splurge on all those cool gadgets, clothes and vacations that you’ve always coveted. But once you let the shopaholic in you break free, you may find that there’s very little left at the month-end to invest.

That’s why it is important to commit to fixed savings from your income at the beginning of every month, before you begin spending.

Start with saving 10 or 15 per cent of your monthly pay, ramping it up to 20 or 25 per cent as your pay increases.

If your employer offers an Employee’s Provident Fund account, there will be an automatic deduction out of your pay every month towards retirement, which also counts towards your tax breaks under Section 80C. But equity investments are a must at this age to create long-term wealth.

Therefore, you must supplement this by starting a systematic investment plan (SIP) in a multi-cap fund or tax-saving fund (ELSS) depending on the room for 80C savings. If you don’t know how to choose a fund, opt for equal SIPs in a Nifty 50 and Nifty Next 50 index fund.

If your employer doesn’t offer EPF, open a public provident fund account with a bank and invest ₹1.5 lakh a year towards 80C. Supplement this with equity fund SIPs. Always spread your investments over three or four options to diversify risk.

Pay off debt

There’s no point investing or saving diligently if EMIs are systematically draining your bank balance. If you’ve started your working life with loans of any kind (education, vehicle or credit card), use your savings and bonuses in the initial years to pay them off.

If you’ve got loan repayments looming, use safe and liquid avenues such as recurring deposits or SIPs in liquid or short-term debt funds to invest, where the risk of capital loss is lower. Plough your bonuses into the same kitty. Once EMIs are off your head, you can invest the money freed up in PPF or mutual fund SIPs.

Avoid wrong kind of cover

Protecting what you have takes priority over investing for the future and that’s where insurance products come in. But buying the wrong kind of insurance can decimate instead of protecting your wealth.

Many folks of the earlier generation signed up for 10- or 15-year endowment plans from insurers as soon as they got their first pay cheque. This is imprudent, as such plans yield measly returns after locking you into rigid monthly pay-outs for much of your working life.

Before signing up for insurance cover, evaluate your life goals. If you’re a family person, a generous pure term policy that covers 20 years’ living expenses is critical to take care of your dependents in case of your death.

If you are footloose and single, there’s no point in buying a life cover. Instead, sign up for critical illness, personal accident or health insurance plans that will help you tide over Acts of God or personal misfortunes during your working life.

Defer that property purchase

Indians starting out on their first job are often urged to buy a home asap, so that they have ‘compulsory’ savings. But there’s a very big difference between compulsory savings that build your own wealth and those that go to fatten up a bank’s balance-sheet.

Buying property at a very early stage in your career can be damaging to your finances as the burden of a monthly EMI robs you of the ability to spend freely on your other lifestyle needs. Owning a home in a specific city will hamper your mobility in seeking out better career opportunities elsewhere. Paying an EMI on a property you aren’t going to live in and incurring rent in another city is doubly debilitating.

EMIs rob you of savings potential during the best years of your working life, reducing your ability to create wealth outside of that one piece of property. A ₹50-lakh home loan today (8.6 per cent interest) locks you into an EMI of ₹49,400 for 15 years. By the time you’re done with it, you would have paid the bank an interest of ₹39 lakh on top of the principal amount of ₹50 lakh!

Set goals

Scrimping and saving towards some unknown objective can be quite painful when you’re young and looking to enjoy life to the brim. Listing out the goals towards which you are investing and checking on your portfolio periodically, to note your progess , can help make up for the pain.

The goals you list out can range from buying a MacBook Air next year, to a European sojourn in three years’ time, to retiring early. Setting out specific goals with time-frames also helps you decide on appropriate investment vehicles.

For goals up to four years, you must stick to safe vehicles such as RDs or safe debt fund SIPs. For five- to seven-year goals, SIPs in hybrid mutual funds can work. Equity funds should be considered only for goals that are over seven years away, to give your portfolio time to recoup from market ups and downs. Your goals can always be rejigged as you go along.

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