I am 32 years old and invested fully in PF and PPF. I put Rs 5,000 a month into a savings account that pays only 4.5 per cent. I am not familiar with stocks and have limited knowledge of mutual funds, but I wonder if that Rs 5,000 can fetch me better returns elsewhere. Any suggestions?
I have a few suggestions, but before that, I want to tell you what a pleasure it is to hear from someone in his early 30s who is fully invested in PF and wants to invest money outside the employer and government tax-favoured accounts. With age on your side, you will probably be able to create a post-career/retirement life of your choice. Indeed, you may achieve financial independence or something close even sooner. Now, about what to do with that extra Rs 5,000 per month that you are saving.First, I am going to eliminate individual stocks from the list of options. I am not convinced they are worth the extra return you might (note I said might, not will) earn. Besides, to the extent you want to work harder and improve your financial situation, you are probably better off putting that extra effort in bettering your career so that you can earn more and maintain or even improve your savings level.
Against this background, I suggest you invest in mutual funds. Not that that eliminates complexity. There are enough fund companies, fund categories and funds to confuse even the veteran investor. To help you cut through the mind-numbing multiplicity of choices, I would like to recommend three relatively simple routes you can the good way, the better way and the best way.
All three can get you a decent long-term return on your money and help you achieve financial security both during and after your career.
The main difference among the three is how much you wish to earn to achieve your financial goals a tiny amount, a small amount or a moderate amount.
The Good Way
The Good Way involves investing in a breed of mutual funds known as tax-saving funds. Several fund companies offer a menu of tax-saving funds. But, again, to keep things simple, I think it pays to stick to companies that have a good record of keeping investment expenses low and posting competitive gains. To select a particular fund, one should look at its performance in the light of the following parameters:
Reward versusrisk in the investment;
Measure ofthe volatility in a portfolio compared to the entire market (index) as a whole;
Measure ofhow much individual elements tend to deviate from the average;
Risk-adjusted measureof the so-called "excess return" on an investment; and
The proportionof variability in a portfolio.
So you can begin your search for tax-saving funds. Get a list and you will get sufficient information on the investing style, its holdings and returns.
The Better Way
Too much work for you? Let's go the better way. As there are various tax-saving options Life Insurance and Medical Insurance, PF/PPF, NSC, repayment of housing loan, children education fees based on your risk profile and needs, you should spread your investments.
These avenues to save tax serve different needs of an individual. So what could be easier than doing that? Why, the easiest way, of course.
The Best Way
Imagine, if instead of creating your own portfolio, you invest in one tool that did the work for you.
In other words, a pre-mixed diversified portfolio of stocks, bonds and insurance. And imagine if the mix of stocks and bonds is not only appropriate for your age but also changes that mix as you age, that is, gradually shifted more assets to bonds.
Well, you do not have to imagine it. Such a single avenue does not exist but you can get the same benefits by doing some planning. For your short-term goals, make sure you take the right kind of risks. Keep aside money for an emergency and to meet three-five months expenses, invest money that you will need in the next two-five years in cash and short-term bonds.
If you have taken on too much risk for short-term objectives, pull back now. There is no telling where the bottom of this market is. It is better to cut your losses and retain the money you already have for short-term goals.
For your long-term financial goals, consider equities. There may be many financial needs such as buying a house, a car, providing for children's higher education, planning for an emergency fund, or even retirement.
This is what financial planners do. They simply make plans that have a target date that corresponds to the year you want to achieve your financial or life goals and you get a readymade diversified portfolio that makes sense for someone your age and that changes over time.
In other words, apart from buying the fund, you do not have anything to do. The certified financial planner will do all the work. I don't think investing can get easier than that.
Of course, you do have to choose the target dates. You can have a plan that targets your particular goals, and check out all the target offerings to see if there is one that suits to your set target better.
So, check out the three easy routes; there can be nothing certain in the investing world. But I am quite confident that whichever option you choose, the extra Rs 5,000 a month will do a lot better in the long run there than in that savings account.
(The author is CEO, Financial Planning Standards Board India. The views are of the author and not that of the organisation.)