Mid-20s and need financial help?

Got a question about your money? What you should or should not do with it?

Our expert Devang Shah has the answers.

I am an infotech professional, 26 years old and married.

Recently, I received Rs 10 lakh (Rs 1 million).

Currently I can save Rs 1,00,000 per month. Of course, it might increase as I get bonuses from time to time.

I have no responsibilities as of now. In the near future I might have an addition to the family.

My dilemma is whether to invest in real estate or buy shares.

How should I proceed if I want to diversify and play it little bit safer?

- Hemanth Kumar

Hi Hemanth,

Keeping the figures aside for a moment, it seems you are set to lead a financially satisfying life. And that's not just because you are earning well but because at such an early age you already have a vision to plan and diversify.

While, in general, real estate is likely to give you lower real returns than the stock market, the reality is that all real estate is not the same. To give you a hypothetical example, while South Mumbai may have a stagnant market, Noida might be booming.

Assuming you are looking at real estate only as an investment avenue, it appears too early to consider that asset class for diversification. It could be worthwhile to wait till we have real estate mutual funds or when you have an investment portfolio of substantial size, let's say Rs 2 to Rs 4 crore.

You wanted to know how to "diversify and play it little bit safer". That's a very broad question. A few suggestions:

Set the goal for which you are saving money. Let us say, for example, that you are saving for your retirement 34 years later. If you currently spend about Rs 40,000 per month, based on some assumptions, you might need Rs 4 crore on the day you retire to subsist you through your retired life.

With a time horizon of 34 years, equity investments are likely to be the best bet. As your 'Retirement' portfolio grows you can diversify in small proportions into property and international investments.

Use simple, transparent and plan vanilla vehicles/products to invest in equities, instead of hybrid and bundled products. Monthly Income Plans and balanced funds are hybrid products. These are mutual funds that invest in both, equity (shares) and debt (fixed return investments).  Unit linked plans and money back policies are bundled products that combine insurance and investment. Avoid these.

Mutual funds are likely to be a good vehicle for you. Diversify within your equity mutual fund investments across styles (value, aggressive) and across caps (small, mid and large caps).

Instead of timing the market, which in my opinion is very hazardous, make a disciplined investment of fixed amounts at fixed intervals, pretty much ignoring which way the market is going. Systematic Investment Plans of mutual funds help you achieve this. They allow you to invest fixed amounts every month.

All this is likely to help you "play it little bit safer" and might be one of the best ways to becoming truly wealthy.

At the risk of sounding biased, I would believe one of the best investments for you, might be to find a good, competent and genuine financial advisor (not agents and product sellers) to be on your side, for life.

• Saving for multiple goals?

I am 26 and shall be getting married by the end of this year. My monthly take home salary is Rs 15,000.

I need to send Rs 4,000 every month to my parents while my rent is Rs 3,000.

Over the past two years, I have invested Rs 10,000 in the Public Provident Fund per annum while my insurance premium is Rs 3,500 per annum.

I need to invest to save on tax. And, I want to buy a house within the next 18 months. I also have to save another Rs 50,000 over the next two years for my sister's marriage.

- Nikhil Soni

Dear Nikhil,

I am very concerned about your financial situation. Out of a salary of Rs 15,000 you have fixed outgoings of 7,000 every month. Roughly another thousand per month you put away in insurance and PPF. You want to save another 2,000 every month for your sister's wedding. That leaves you with Rs 5,000 every month for expenses.

How much do you think you can save out of this towards the downpayment for your home in 18 months?

The question you might want to address is whether your new life partner can work and help you augment this income. Another important investment you might consider making is in upgrading your skills for a better paying job.

On the question of where you need to invest to save taxes, the important issue is that most tax saving instruments will lock away your money for much more than the 18 months time horizon you have set for your home purchase.

The investment avenues open to you are also very limited because the risk you can afford is very little. And, a low risk essentially means a low return.

Floating rate income funds might be your best bet to save. These are funds that invest in fixed return instruments but whose interest rates keep moving with interest rates in the economy.

Illustration: Dominic Xavier

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