Got a question about your money? What you should or should not do with it?
Our expert Uma Shashikant has the answers.
I am 29 years old and drawing a monthly income of Rs 15,000.
I want to buy a house and a car. But whenever I plan to buy something, I always end up shelving the idea.
Right now I am thinking of investing in shares.
What must I do? Is it right for me to invest in shares if I am earning just Rs 15,000? Should I go for a home and car loan right now?
- Ritesh Sachdev
Begin with some saving, any saving. See whether you can keep at it regularly. Once you are comfortable with that, you will be in a position to know how much you can afford to pay towards your loan every month.
Take a loan only to that extent. For instance, if you can comfortably save Rs 5,000 every month, ensure that the Equated Monthly Installment (the amount you pay towards repaying the loan every month) is that amount.
It is important to create a cushion of other investments before you invest in shares. The risks in equity are big enough to wipe off your savings. Without a buffer, you could be in a bad shape.
In an earlier piece, I had advised a reader to view his investments like a pyramid.
At the bottom of the pyramid are the absolute essential, safe options: bank fixed deposits, Public Provident Fund account, RBI relief bonds, post office schemes.
You then build the next block of the pyramid, where you move into some amount of risk cover for yourself (insurance), and accumulation of some assets (like property and gold). Make sure you have your income generating capability assessed.
Move to the next block, where you are ready to look at mutual funds. Choose from the top performing, well managed fund houses with reputation. Allocate some money into balanced funds (funds that invest in shares and fixed-return instruments), and some into diversified equity funds. About 20% can be in specific aggressive funds. Build a portfolio of mutual funds, either by allocating money or through monthly investments in a Systematic Investment Plan.
To understand SIPs in greater detail, read How to invest in a mutual fund.
The top layer of your pyramid is for direct equity. Keep it minimal and only after you have build a sturdy base. Draw this picture on a piece of paper, see what you will be able to allocate where.
Over the years, you should have a portfolio that is almost completely allocated. Then you only have to increase its size by adding to the components.
Saving and investing is more about patience and discipline than about adventure and thrill.
I am 23, single and living alone. My monthly take home salary is Rs 22,000. I plan to buy a house in next couple of years. Before that I would like to ensure that I have a sufficient amount as a savings.
How must I save to be financially stable at the time of purchasing a home?
- Sushant Bhangre
Begin with a simple bank deposit. Build in some tax saving instruments like the PPF, insurance and Equity Linked Saving Schemes. Within two years, you will not only have some savings, but also a better handle on how much you can consistently save.
Buy a house that meets your needs, and is well within your repayment capabilities. Don't base your loan on the amount a bank will be willing to give you.
They have no idea about your other commitments or saving requirements.
I also suggest you read the answer I have given above to Ritesh.
I'm single and earn Rs 4,00,000 per annum.
I want to invest in shares, mutual funds and fixed deposits. Must I also keep some cash in my savings account?
- Naveen Kumar
Your liquidity buffer should be about three month's salary.
You can keep this in fixed deposits, if you do not mind sacrificing return for the relative safety of a bank. Though several make this conscious choice, it all depends on you.
Keep it in a sweep account with your bank to meet any exigency. Here the money is kept in a fixed deposit and you can withdraw portions if need be. The balance continues to earn the designated rate of interest since the entire deposit is not broken.
You can open a PPF account. The rate of interest is high and you do get a tax exemption. You can invest anything from Rs 500 to Rs 70,000 in a year. The only limitation is that you cannot withdraw it until seven years are completed, after which 50% of your deposits can be withdrawn, if needed. Since you are young and employed, you may not need to draw on the PPF.
Choose mutual funds with care. Choose the ones with track record of consistency, performance and good management. Spreading across three diversified equity funds would be good to begin with.
Illustration: Dominic Xavier
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