In your 20s? Invest for the future NOW

- Brina D'souza

Hi Brina!

Why are you worried about paying taxes? Would you prefer getting a 5% tax-free return or a taxable 10% return? What you need to be concerned about is post-tax returns.

The question of good returns is best answered by answering the following two questions:

How long can you put away the money?

What are you going to use the money for?

If you can put the money away for a long period of time -- 10 years -- the asset most likely to give you 'good' returns will be equity (shares). If the time horizon is three years or less, you need to largely focus on debt (fixed return) investments.

The former might return about 16% and the latter about 6% to 7% in the current inflation scenario.

If you have a time horizon that falls between three to 10 years, then you need to have a mix of equity and debt investments.

Which brings us to the next question: What should be the right mix?

The answer to this is critical.

Very important end uses like marriage, child education and retirement require one to take a lower risk; in such cases, you should end up keeping lesser amounts in equity.

End uses which are less important may allow you to take a higher risk and have a higher exposure to equity.

Again, in terms of which investment options are best, using mutual funds is very likely to suit your purpose. Most mutual funds will allow you to invest almost any amount more than Rs 500; the procedures are simple and transparent.

For equity, you could look at HDFC Equity Fund or Templeton India Growth Fund. For debt, you might want to consider Grindlays Floating Rate Fund or HDFC Floating Rate fund. These are funds that invest in fixed return instruments whose interest rate varies with the overall direction of interest rates in the economy.

What should your savings ideally be?

The most authentic way of answering that question requires a bit of detailed working of how much money you want to have, when and for what. That will provide you with the answer of how much you need to put away today.

But I would risk asking a young person like you, "Can you put away Rs 5,000 every month and promise not to touch that for the next seven to 10 years?"

And I would encourage you to learn what alternatives you have and what the implications of those alternatives is to the end result 10 years later. It will give you a perspective on money, which will be your biggest asset forever.

• Mid-20s and need financial help?

I took a home loan from a private bank of Rs 10 lakh (Rs 1 million). This one is for 20 years at 7.75% per annum. Here is my dilemma.

Must I slowly pay off the loan to avoid the interest burden?

Or, must I keep paying back the loan and avail of the tax benefit?

There is no prepayment fee and I can do so four times a year.

- Vishu

Vishu, one prime consideration on whether you should prepay or not would be your liquidity (cash) requirements.

Financially speaking, paying off the loan as early as possible is in your interest.

However, if that is going to leave you crunched for liquidity, compelling you to borrow from other sources (including selling long term investments), then it's a cheaper alternative to keep the loan.

Despite the tax deductibility, you are paying in the whereabouts of 5.50% interest (post tax) on your borrowing. That's about the return you will get (post tax) if, instead of paying back your loan, you invest in a low risk instrument. So, despite the tax deduction, it's better to pay back the loan.

Illustration: Dominic Xavier

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