News APP

NewsApp (Free)

Read news as it happens
Download NewsApp
Rediff.com  » Getahead » Single? Here's how to save

Single? Here's how to save

By Devang Shah
March 29, 2006 09:08 IST
Get Rediff News in your Inbox:

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

Our expert Devang Shah has the answers.

Image

I am a 23-year old bachelor working as software engineer. 

My monthly take home is Rs 35,000. Out of this, I have to give Rs 25,000 to my parents (I live with them).

How do you suggest I save?

 - Pankaj Dhingra

Hi Pankaj.

I suggest you focus on what you want to achieve by saving this money. Your reply might be -- buy a house, have a nice vacation or it could be simply nothing.

Let's say you want to create funds for a downpayment to buy your own house. The questions you will have to answer are:

1. How much do you think you will need for it?

2. When will you be needing the money?

If you invest Rs 10,000 every month and your investment generates a 10% return, you will have close to Rs 7,75,000 at the end of five years.

It might be useful for you to initially invest predominantly in low-risk investments like floating rate income funds. These are mutual funds that invest in floating rate instruments as against fixed rate instruments. The Grindlays Floating Rate Fund is a prime example. You should also put some money in a diversified equity mutual fund like the HDFC Equity Fund.

After a couple of years of investing experience, you could consider inverting the ratio. Put the bulk in a diversified equity fund and the balance in a floating rate fund.

Or, let's say you want to save up for a vacation.

Then you will need a shorter time horizon and therefore you should invest more in debt (fixed return investments) as against equity (shares).

On the other hand, a vacation trip is more amiable to higher risk investment, so you could use more equity!

So, if I were in your place, I would do 20% of my savings in equity for the first six months and then increase it by 20% every six months. In effect, after two and a half years, I would be investing fully in equity.

What if you want to save for 'simply nothing?'

You may want to consider not saving at all.

Jokes aside, if you do not have a reason to save, you would not be asking where to save. Those who say they want to save to just have more money really need to pursue that thought further, hopefully with their near and dear ones, and identify goals worthy of pursuit.

Nothing charges up everyone more than goals that stir imagination and touch all involved.

I am a 27-year-old bachelor, earn about Rs 50,000 every month and plan to get married this year.

I have three life insurance policies for which I have to pay an annual premium of Rs 37, 500.

I also have a PPF account in which I deposit Rs 12,000 every year.

How must I invest for the future and save for emergencies too?

- Anurag Karnawat

Firstly, let me raise a flag about investing through insurance policies. Very often, insurance policies bundle in investment products as well. The more obvious ones are called unit linked insurance policies.

However, I put any insurance product that promises to give you money even if you survive the policy into this category.

Let's for a moment classify them as insurance investment products.

Such products typically have fairly high entry loads. These are percentages of your total investment that are paid as fees and expenses to the company. This could 15% to 40% or even more. They are quite difficult to evaluate by lay people and often the most 'flexible' plans offer less flexibility than what other alternatives may make possible.

I believe it is often worthwhile to do two things:

1. Stick to doing what you understand

2. Buy advice from a non-sales person (the ones who do not get a commission on selling you certain products)

You haven't mentioned how much you can save every month. Let's assume you can invest Rs 25,000 every month. In that case, there is no reason not to make the most of the Rs 70,000 limit of the Public Provident Fund. Why do you put in just Rs 12,000 per annum?

Over and above this, you would do well to invest in equity for the purpose of saving for your retirement. A few suggestions would be:

1. Consider a mutual fund

For most of us, including myself, it makes tremendous sense to pay an investment manager to invest in stocks on our behalf. Mutual funds are a good investment vehicle that allows us to invest in stocks with small investment amounts.

2. Choose plain diversified equity funds

Avoid balanced funds which invest in equity (shares) and debt (fixed return investments).

Also, the risk is much less than a sector fund.

Avoid dynamic funds which give the choice to the fund manager of when to invest where (in various market caps – small-cap stocks, mid-cap stocks, large-cap stocks). But, if you are willing to increase the potential returns and take a higher risk, try specific mid or small cap funds.

If you wish to take lower risk, value style funds are the right choice.

Value funds are those in which the fund manager looks at the fundamentals of stocks and invests in them, irrespective of whether or not other fund stock market players are bullish on them. Theoretically, the fund manager would not mind picking up a stock that the market hates, if he finds value in it. Similarly, the fund manager would not touch a hot favourite of the stock traders if he does not believe it is a good value proposition.

Templeton India Growth Fund and Prudential ICICI Discovery Fund are supposed to be value funds. Value funds, due to their structure, are expected to be less volatile than other equity funds.

3. Do not time the market

It is extremely difficult to be able to get into the market when it has fallen to its lowest and sell when it is at its peak. It is often better to invest regularly with a clear time horizon in mind. If you do not have a time horizon of 7 to 10 years, rethink about whether or not you should invest in equity. And if yes, how much?

I personally believe those who make the most in equity markets are investors who had the stomach to withstand bad times. If you rush into equity markets and make a huge loss, you are likely to stay away forever.

Rather, go in slowly and live through a few ups and downs before committing large money. This is all the more crucial if you are doing on your own and don't have a financial advisor telling you what to buy.

You can use your good old bank fixed deposit or a liquid fund like the DSP Merrill Lynch Liquidity fund to save up for emergencies.

Liquid funds are known as ultra short-term bond funds or cash funds that invest in fixed return instruments of short maturities. Their main aim is to preserve the principal and earn a modest return. The money you invest will eventually be returned to you with a little something added.

Hope that helps.

Image

 

 

Illustration: Dominic Xavier

Got a question for Devang Shah? Please write to us.

Note: Questions may be edited for brevity. Due to the tremendous response, all queries will not be answered.

Disclaimer: While efforts have been made to ensure the accuracy of the information provided in the content, rediff.com or the author shall not be held responsible for any loss caused to any person whatsoever who accesses or uses or is supplied with the content (consisting of articles and information).

Get Rediff News in your Inbox:
Devang Shah