Ask us | Simple equity funds, a better option for new investors
Q. I saved ₹ 4000 per month and started earning in recent months. I want to plan investments in a mutual fund or through SIPs. I am also open to direct investments. What will be a good option for beginners?
A. You can consider simple equity funds from the Nifty 50 and Nifty 500 indexes and use the PPF as part of your borrowing option. The PPF can also serve as a tax-saving investment in the event that you fall under a taxable slab. Other than that, make sure you have a good health insurance policy and cover your family as well, if they don’t have one. It has become a necessity now.
If you have parents, spouse or dependent children, please take out term insurance to cover at least 8 years of your income and individual accident insurance.
Q. I am a 20 year old student. I have no income, savings or investments, therefore I have no income. However, I want to learn more about financial planning so that every time I get my very first salary, I put it in the right place at the right time. Please also suggest how I can earn money as a student.
A. It’s good to know that you want to learn and to win. There is a lot of material on the Internet to read about financial planning. You can also read good books like ‘Let’s Talk Money’ and Retire Rich ‘. If you need to earn money as a student, your best bet is to work part-time, probably online in the current scenario, relevant to your field of study. Other than that, it is not a wise choice to try and trade stocks for the money until you have enough savings. When you have such savings, start a combination of recurring deposits for shorter periods of 1 to 2 years and open a PPF account to deposit savings there. These early habits will instill disciplined savings. You can then slowly venture into other investment products.
Q. I am a 25 year old student and have savings of around $ 50,000 for the investment. I can also invest 1000-5000 as a monthly contribution in some productive assets, but it has to be somewhat predictable and profitable.
I can invest my money in these options for up to seven years (if better options are available, in this case up to 15 years). Based on the above criteria, please suggest options to me.
A. If you want your returns to be predictable, it is best to go with fixed income options. Right now, consider investing the lump sum in RBI Floating Rate Savings Bonds. This is a 7 year foreclosure product where the interest rate will be floating (7.15% currently) and will rise if the rate rises and fall if it falls. But it will remain 35 basis points above the NSC rate. It is therefore one of the most cost effective and safe options today. The return is not fixed – to that extent, it is not entirely predictable. But you can expect better rates than FD. For the remaining amount, you can consider 50% of your monthly savings in banking RDs where the return is predictable and an additional 50% in equity index funds where it will pay off in the long term but will never be predictable. We suggest this based on your age and your ability to take risks. Please note that no market related product will be predictable.
And it can have short term losses but can generate long term profits.
Q. I am 25. I recently got a job with the government and my base salary is 30,000. I want to get the most out of my salary. Can you please guide me on how to spend? Should I invest part of my salary, and if so where and how? Please also recommend books on this subject.
A. Congratulations on your new job. It’s good to start saving early. But it’s hard to teach people how to spend because it’s all based on personal preferences and habits. However, you can learn a lot about investing and personal finance from good books like “Let’s Talk Money” and Retire Rich. Set aside money for investment, then spend. It’s a better way to manage your money. Consider simple products like PPF and recurring deposit and slowly start SIP on equity index funds like the Nifty 50 index. You can then gradually build up mutual funds. Don’t be swayed by the allure of quick returns in the stock markets without taking a few years to figure out how it works. Read good books, rather than just listening to videos that teach you “all about investing” in 20 minutes.
Q. I am 70 years old. I have been in business for 45 years. Unfortunately, I suffered a business loss a few years ago and had to sell all of my assets to settle my debts. My wife and I are now left with our dwelling house and a bank deposit of only 30 lakh. I don’t have a pension and we have to depend on the interest earned on these deposits. My children are employed, they have their own family responsibilities and remain separated. Since the interest on bank deposits has fallen dramatically, we are struggling to make ends meet. I ask you to suggest a good safe investment plan that will earn at least 25,000 per month for our expenses including drugs.
A. I am sorry to note your situation. It is indeed difficult to get a high rate of interest in these times. You may want to consider investing in a Savings Plan for Seniors (SCSS) available from the post office and major banks, for 15 lakh and the rest in RBI floating rate bonds (available in SBI and a few. other major banks and brokerage houses).
At present, the SCSS gives 7.4% and the RBI bonds 7.15%. But RBI bond rates can rise if interest rates rise and vice versa since it is a floating rate bond. But you can expect it to be higher than regular FD rates. We recognize that it is difficult to reach your goal of 25,000 per month, even with these. Make sure your children include you in all medical insurance policies so that you are covered at least in the event of illness or hospitalization.
Q. I’m 21 and recently graduated with a bachelor’s degree. I now work for a private company, earning around 50,000 per month. I plan to go abroad and finish my masters this year. Therefore, I want to invest the money for 4-5 months. Also, if I were to invest for a year, what would be the best option?
A. Considering the short investment period, simply invest in FDs or liquid funds. Any other form of investment for this period, especially investing in the stock markets, may come with risks. For a year at best, you can start a recurring deposit or use super-short debt mutual funds.
Q. I am pursuing my MBA and I get 5,000 for my expenses each month from my father. Apart from an occasional outing for 500 per month, I don’t spend the rest. So I want to keep it for my future. The amount is in my account. I have an interest in mutual funds. Can you suggest some good mutual fund programs for me so that I can divide my 5,000 by five and invest in different programs to get returns after 10 years?
A. Given your schedule, you may want to test your feet in stocks through mutual funds. Use the Nifty 50 and Nifty 500 equity index funds and 30 to 50% of your savings in cash or recurring deposits or PPF (15 years). You can gradually increase it and broaden your choice of funds with more index funds. Index funds will allow you to simply emulate the market without the need to track the performance or strategy of the fund or the change of fund manager. It also comes at a much lower cost as they are passive and just let you roll into the key benchmarks in the market.
(Vidya Bala is co-founder, Primeinvestor.in)