You’ve read our last three articles and made up your mind to start saving and investing 10-15 per cent of your pay. If you Google ‘investments’ or turn to social media, you may hit a brick wall because there are so many products!  

Should you go by Mutual Funds Sahi Hai and start SIPs? What about looking at high yield bonds from bond platforms? Your relatives urge you to buy a home or LIC policy.  Your friend says she’s minted money from the stock market, so should you try it out?  

The best thing you can do to break this logjam is to simply stick to investment options that can meet your specific needs. Here’s a simple framework.  

Emergency money

As we saw in the first video (Why should you invest), emergencies can happen to anyone. When they do, they can empty out your bank account. Or worse, force you to borrow at high cost. Therefore, the first thing you should do when you begin earning is to start building an emergency fund. Textbooks say an emergency fund should be equal to 6 months’ worth of expenses, but it would be good if you can stretch this to 9 months. So if you spend ₹50,000 a month on essentials (including EMIs) your emergency fund should be ₹4.5 lakh over time.  

Emergency money should only be parked in safe instruments that can be withdrawn at any time. This rules out LIC policies, real estate and gold which are quite illiquid. Recurring deposits or fixed deposits with banks (the breakable kind) are your best bet. Put away your monthly surpluses in FDs or RDs until you get to the number. SIPs in MFs will not meet the brief here because MF values are market-linked and your investment value can be ruling below cost, when you want to withdraw.  

Short term goals

If you have financial goals that will crop up within the next 3 years (buying a phone, travel, higher studies etc), you need to go with fixed income instruments, not equity. Again LIC policies, real estate etc are a no-no. Yes, a FD with your own bank may serve the purpose.

But if you want a slightly higher returns, you can also shoot for FD programmes from good small finance banks or leading NBFCs which have AAA ratings. Certain types of mutual funds can also be good 3-year vehicles. But their returns are not fixed or predictable and you need to choose them carefully. If unsure, go for money market mutual funds which only invest in treasury bills from the government of India.  

Medium term goals

Have financial goals you want to achieve in 5-7 years’ time? You still shouldn’t go in for stocks or equity mutual funds, because they can let you down when you want to withdraw. For this horizon, if you want to play it absolutely safe, go with the post office National Savings Certificates (7-8 per cent interest) or a 5-year FD with your bank. FDs with NBFCs mentioned earlier can also be an option.

Read: NBFCs’ cost of funds should peak out by Q3 FY24: Nomura

There are specific mutual funds that can help you do SIPs to meet such goals. Corporate bond funds which invest in 4-5 debt issued by high quality companies are an option. If you can take a little bit of risk to your capital, conservative hybrid funds or balanced advantage funds are another possibility.     

Read: Mutual funds seek SEBI support for dedicated REITs/InvITs schemes

Long-term goals

If you are the well-organised type and know exactly where you want to be life 7 or 8 years hence, then you can consider adding some of riskier options to your investment menu. This could be in the form of investing in stocks, if you know enough to pick decent ones. If you don’t, you can start SIPs in equity funds, particularly index funds.  

Read: Fund Query: How and where to invest ₹10 lakh today?

But if you are averse to seeing swings in your investment value and can’t handle unpredictable returns, there are many safer options too for the long run. There is the Public Provident Fund or PPF account you can open with leading banks. There are bonds from the government or from high quality companies. There are mutual funds investing on long-term bonds. Then, there is your EPF account with your employer. There is the National Pension System (NPS) that gives you market linked returns at ultra-low cost.     

Related Topics
comment COMMENT NOW