Whenever I ask how much are you saving….
Immediate answer is arey kuch bachegaa toh save karenge….kharche itne badh gaye hain……have you checked the inflation….etc….
I understand only one thing it depends on priority. Depending on priority our actions change.
All our decisions and activities are based on priority.
There are so many choices in investment that an average man finds it quite confusing as to where he should invest his money.
As per priority I can state how investment can be made!
Before we invest we should be able to save. Currently everyone applies only 1 formula for saving.
Income – Expenses = Saving
Let me restructure this formula then it becomes a magical formula.
Income – Saving = Expenses
If you apply this formula you would be able to achieve most of your financial goals.
Also you can analyse your monthly expenses. To find where your cash is leaking so that you can save more. First identify fixed monthly bills like utility bill, Cable, Newspaper, Home loan EMI, etc. Then analyse your variable expenses like groceries, eating out, shopping malls, etc. You can get a fair idea about expenses.
Once you identify how much are your expenses. Then in order to lead same standard of life after retirement you would need how much money based on inflation. So you know the final corpus required. This would be your retirement goal. Anyways there are various other methods to calculate this amount.
Once objective is known investments can be planned accordingly.
Similarly you will have other goals like buying car, buying home, etc. Each goal will have a period to achieve. But you need to prioritize your goals to create a realistic investment plan.
First and foremost you need to have exigency money. This is in case of any emergency like you loose job or there is some urgent need for money on immediate basis. So we need to have 3-4 months of our monthly income as exigency fund. This can be kept in bank account or better in some short term liquid fund.
Liquid funds are tax efficient investment.
Next priority would be to cover the risk in case you leave your family in the middle. Their financial life should be secured. You can buy online term insurance for the same.
Once you have accumulated exigency fund and covered risk after your death. Then you need to cover all your dependents and yourself with medical cover. Nowadays how much medical cover is a big question. By thumb rule we can say that anything in the range of 5-10 lacs would be sufficient cover.
Once we have covered ourselves with Life eventuality, Medical emergency and other emergencies, then we move to investment for our financial goals.
Before investments are done. Risk coverage takes priority – Life cover, Health cover and emergency fund cover.
There are vast variety of investment options available in the market. There are 3 factors which will decide which to choose.
- Time to achieve the goal
- Your Risk appetite
- Liquidity of investments
If time to achieve the goal is more than 3 years then we consider the goal as long term. If you are ok with the risk associated with equity market, then you can go for Equity diversified mutual funds.
If you want moderate risk then you can go for balanced mutual fund in which 70% is invested in equity and 30% in debt. If you want to further lower your risk then you can go for hybrid debt-oriented mutual funds in which equity is 30% and debt is 70%.
It all depends on your tolerance to the market risk. I would like to suggest if goal is more than 3 years you can safely go for equity oriented fund. Since all market fluctuations can be absorbed in long term investment.
All it depends on your risk tolerance.
In case your time to financial goal is less than 3 years go for debt oriented mutual fund investment. Important objective while investing is you need to beat inflation by at least 1-2% . That too tax adjusted returns. Then we can say it is a good investment.
Any investment which does not beat inflation is not a investment.
High Risk High Return. Low Risk Low Return. Do you have a Risk Appetite for investment?
After equity MF next priority can be sector specific mutual fund…this is a concentrated fund and carries high risk. This fund can provide high returns as well as high loss. Selection of the investment fund is the key.
Next if you really understand and have time to analyse the stock market then you can invest in stock market. You need to at least have 2-5 lacs to start investing in stock market.
If you still have money you can buy commodities like Gold, Silver. These are very high risk investment.
If you still have money then you can put in real estate. These are highly illiquid (not easily converted to cash) investments and it might be difficult to sell the property in case you need urgent money.
So the priority is based on liquidity and risk appetite.
Listing the order again for your perusal.
- Exigency fund (3-4 times monthly expense)
- Life Insurance (Term Insurance)
- Medical Insurance
- Capital Safe Investment
- Debt Mutual Funds
- Balanced Mutual Funds
- Equity MF
- Sector specific Equity MF
- Stock Market
- Commodity (Gold, Silver)
- Real Estate
