Among the investments you are already making, NPS and EPF and PPF are very good choices to take care of your retirement or other long term goals.
Q. I am a PSU employee with a salary of 29,000. I save about 60% of the salary. The PSU deducted for NPS and EPF. I have purchased three life insurance plans, two of which are an endowment and one is a life insurance plan with â¹ 3 lakh as sum insured. I opened a PPF account and contribute around 1,500 per month. I started three SIPs totaling 3,000 with two equity funds and one debt fund. I have an emergency fund in FD bank for 8 months of expenses. What are the next steps in my investment journey?
A. Congratulations on having managed to save such a substantial part of your income and for making the right choices so far. Among the investments you are already making, NPS and EPF and PPF are very good choices to take care of your retirement or other long term goals. An emergency fund equal to 8 months of expenditure is also quite sufficient at this stage. Although we do not know the identity of your equity and debt funds, as a new investor we hope you have invested in index funds or flexicap equity funds with a good track record. On the debt fund side, it would be best to stick with short duration funds that invest in high quality debt securities at this point. If you need help choosing the right funds, hire the services of a qualified financial advisor.
The only problem we have is with your choice of insurance plans. Although you will need life insurance if you have dependent family members (they will receive a lump sum to compensate for lost income in the event of death), the cheapest and best option to purchase sufficient life insurance is to take out an indefinite policy. Endowment and whole life plans usually charge you a very high premium for very low coverage and are bad investments considering their below FD returns. If you have dependents (you don’t need insurance if you don’t have one) your current â¹ 3 lakh life insurance coverage is woefully insufficient considering your income levels .
We suggest that you use online calculators to determine the right amount of life insurance for you and purchase a pure term policy online. You can end your high cost endowment and whole life plans and redeploy the money into term coverage or other investments. As the next step in your investment journey, you need to define your financial goals and the horizons within which you want to achieve them. Refer to the URL / scan the QR code alongside to find out how to do this. As your career chart and income increase, try to increase your investments in tandem.
Try to get a 5% increase in your surplus each year to beat inflation in the long run. While you may have insurance coverage with your employer, get another stand-alone plan that can help you get through times when you change jobs.
Q. My daughter (24) works in the private sector and earns 25,000 per month. Please indicate how much she should save each month and where she should invest to get 7 lakh in three years. She saves 1,000 per month in PPF. So far, she has saved 70,000. Where can she invest this lump sum?
A. At the start of her career, she should aim to save around 15% of her salary and try to increase it up to 20-25% as her income increases. However, even with a higher level of savings, it will be quite difficult for him to reach â¹ 7 lakhin in three years. A monthly investment of 10,000 (40% of his salary) for three years, if he generates an annual return of 6.5%, can make him reach around 4 lakh after 3 years.
While a higher yielding investment (like mutual funds or stocks) may earn her a higher amount if she is very lucky, it would be very unwise for her to invest in risky instruments such as stocks or stocks with only three years horizon. Indian stock markets today are trading at fairly high valuations and if there were to be a correction or crash, a three year period would not give it enough time to even recoup its invested capital. To achieve specific goals, it would be good if she took the time to develop a comprehensive financial plan, as explained above. (Refer to URL / scan QR code next to it.) As the article explains, it will be good if she sets aside an emergency fund amounting to 9-12 months of spending before start investments. Savings of 70,000 can help. She can park it in FDs with a systemically important bank.
Q. I am 21 years old and I want to invest 10,000 per month to buy a house over the next five years. Which MF plan should I choose?
A. Since you’ll need to finance most of the cost of a home with a home loan, we hope you’re looking to save on the down payment only. If you are very keen on buying a house in five years, you should stick with mutual funds that invest in debt securities to build up your down payment. Funds that invest primarily in stocks or have a strong component in stocks are not a good option if you plan to be withdrawing money from them in five years. With stock market valuations at record highs, there is a high risk that a market correction will reduce the value of all equity investments made at this time. If such a correction materializes, it may take more than five years to recover your capital and earn a good return beyond that.
To save money for the down payment, you can think about short term / floating rate or target maturity debt funds that invest in both PSU bonds and state government loans. Investing 10,000 per month in a fund that earns around 6.5% per annum can earn you 7.1 lakh after five years.