The best way to save? Have a goal

What do you want to save for? Sometimes, savers don't have an answer for this question. This might seem harmless but it isn't.

Saving and investing without a purpose often creates an attitude which focuses on money as an end in itself -- a quality I do not advocate. However, that could be a discussion by itself.

I put high priority on setting up reasonable goals. I have often found that just this exercise creates a lot of energy which is required to take each one of us to the goals we dream of.

Let's say your most important goal is to create funds for a downpayment to buy your own house. The questions to ask would be:

1. How much do you think you will need for the downpayment?
2. When will you need 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 mostly in low risk investments like floating rate income funds (mutual funds that invest in floating interest rate instruments as against fixed interest rates ones) such as Grindlays Floating Rate Fund and in a small way in diversified equity mutual funds such as HDFC Equity Fund.

After a couple of years of investing experience, you could consider inverting the ratio.

What if you want to save up for your retirement?

You will find that you have a substantial time horizon on your side. That makes it a good idea to invest predominantly in equity. If I were in your place, I would invest around 20% of my savings in equity for a couple of years and then increase it by 20% every two years till I have around two-third of my investments in equity.

Another suggestion: be careful with insurance products that are bundled with investment. Evaluate them properly. Let's call them insurance investment products.

What would fall into the category of insurance investment products? Unit Linked Insurance products are one. But I would categorise any insurance product that gives you money while you are alive, in this.

Insurance investment products often have high entry loads (percentage of your investment that goes as a fee) compared to investment through mutual funds. 

So do make a comparison of what would happen if you were to buy a product like a money back scheme. How much would your premium be every year? Now take into account how much your premium be if you took a plain term life cover of the same amount. You could choose to invest this difference (difference in the premiums).

It will get confusing if you try to include too many scenarios at the outset. So just do an end of term scenario first. Then you can try out various alternatives.

So, for example, let's say you are looking at a 10-year money back policy. The sum assured (what you will be given on maturity) is Rs 10 lakh (Rs 1 million) with a life cover of 10 lakh. Let's also say the annual premium works out to Rs 15,000. Now look for a term insurance of Rs 10 lakh for 10 years. Your annual premium may work out to Rs 4,000. 

Now, you can invest Rs 11,000 (the difference of premiums Rs 15,000 - Rs.4,000) in a debt fund (a fund that invests in fixed return instruments). Assuming a return of 6.5%, you will have about Rs 1,58,000 at the end of 10 years. 

• Too young for a home loan?

I am 25 years old and single.

I work with a firm as a consultant and get a retainership fee of Rs 7,00,000 per annum.

I plan to get married by the end of next year and so might need to start planning for the same.

I send Rs 10,000 per month to my parents who live in my native place. Besides this, I intend to save/ invest Rs 15,000 per month.

This would tentatively leave me with around Rs 30,000 per month for my own expenditure.

I do not have any particular plans for buying a property as of now, although I am inclined to upgrade my car within the next six months.

- Ankit Goyal

Hi Ankit,

You forgot to mention your question :).

I would like to bring to your notice a few areas in your financial life which might help you take things a step forward.

Saving for your marriage is a very simple task in your case because you do not have much choice there. You only have a 12-month horizon. If you plan to save Rs 15,000 per month, you are going to save Rs 1,80,000.

You will need to use a floating rate mutual fund like HSBC Floating Rate Fund or simply a bank fixed deposit. A floating rate fund invests in fixed return instruments that have a floating interest rate. This interest rate moves up or down depending on how interest rates in the economy are moving. The former might suit you more in terms of ease of withdrawal (you can withdraw anytime and there is no lock-in period) and marginally better returns. If you venture into any other alternatives like equity, you could increase the risk of losing your money substantially.

The question I would ask is: beyond marriage (and a car), is there any other event which will require substantial resources, such that you need to plan the funds? It might be a home, further education or extended travel.

Other goals like retirement and children's education (I know you are not yet married but I am only talking about planning) are events that would happen a few decades later and are therefore more amiable to using higher risk investments such as equity.

At this point in time, it appears that equity markets might be poised for a correction (temporary downturn). Hence, sometime later, you could start equity investments using diversified equity mutual funds such as HDFC Equity Fund using the Systematic Investment Plan (whereby you invest fixed amounts every month). Start small and increase the amounts over time. Most mutual funds allow you to do a SIP for as little as Rs 500 a month.

In my opinion, reviewing this amount as seldom as once every year might be good enough. During this time, you will be saving more than what you put into equities. Put this extra saving in low risk instruments like floating rate funds, bank deposits, post office recurring deposits or even RBI Bonds.

You will be surprised how much this money could add up to, within the next five years and more importantly how painless and effortlessly this usually works!!

Hope this helps.