Q. I am a PSU employee with a salary of ₹29,000 p.m. I save about 60% of salary. The PSU deducts for NPS and EPF. I have bought three life insurance plans, of which two are endowment and one a whole-life plan with ₹3 lakh as sum assured. I have opened a PPF account and contribute about ₹1,500 a month. I have started three SIPs totalling ₹3,000 with two equity and one debt fund. I have an emergency fund in bank FDs for 8 months’ expenses. What are the next steps in my investment journey?
Yogi Patel
A. Congratulations on managing to save such a substantial portion of your income and making some right moves so far. Of the investments you already make, NPS and EPF, and PPF are very good choices to take care of your retirement or other long-term goals. An emergency fund equal to 8 month’s expenses is also quite adequate at this stage. While we don’t know the identity of your equity and debt funds, as a first-time investor we hope you have invested in index funds or flexicap equity funds with a good record. On the debt fund side, it would be best to stick with short duration funds that invest in high-quality debt instruments at this juncture. If you need help with choosing the right funds do use the services of a qualified financial adviser.
The only quibble we have is with your choice of insurance plans. While you will need life insurance if you have dependant family members (they will get a lump sum to compensate for loss of income in case of your death), the cheapest and best option to buy sufficient life insurance is to purchase a pure term policy. Endowment and whole life plans usually charge you a very stiff premium for very low cover and make for poor investments given their less-than-FD returns. If you have dependants (you don’t need insurance if you don’t), your current life insurance cover of ₹3 lakh is quite inadequate given your income levels.
We suggest you use online calculators to work out the right amount of life insurance for yourself and buy a pure term policy online. You can discontinue your high-cost endowment and whole-life plans and redeploy the money in term cover or other investments. As the next step in your investment journey, you should map out your financial goals and the horizons by which you would like to achieve them. Refer URL / scan the QR code alongside to learn how to go about it. As your career graph and income rise, try and step up investments in tandem.
Try to achieve a 5% increase in your surpluses each year to beat inflation in the long run. Though you may have an insurance cover from your employer, get another standalone plan that can see you through periods when you change jobs.
Q. My daughter (24) works in the private sector earning ₹25,000 per month. Please advise as to how much she should save every month and where she should invest to get ₹7 lakh in three years. She is saving ₹1,000 a month in PPF. So far, she has saved ₹70,000. Where she can invest this lump sum?
Raj Genevive Veena
A. At the start of her career, she should aim to save about 15% of her pay and try and step up this to 20-25% as her income rises. However, even with a higher level of savings, it will be quite difficult for her to get to ₹7 lakhin three years. A monthly investment of ₹10,000 (40% of her pay) for three years, if it earns a 6.5% annual return, can get her to about ₹4 lakh at the end of 3 years.
While a higher return-earning investment (like equity mutual funds or stocks) can get her to a higher amount if she’s very lucky, it would be very imprudent for her to invest in risky instruments such as equities or shares with only a three-year horizon. Indian stock markets today are trading at fairly high valuations and if there should be a correction or a crash, a three-year period would not offer sufficient time for her to recover even her invested principal. To reach specific targets, it would be good if she takes time to map out a comprehensive financial plan as explained earlier. (Refer URL / scan the QR code alongside.) As the article explains, it will be good if she sets aside an emergency fund amounting to 9-12 month’s expenses before starting on investments. The ₹70,000 savings can help towards this. She can park it in FDs with a systemically important bank.
Q. I’m 21 and want to invest ₹10,000 a month to buy a home in the next five years. Which MF plan should I choose?
Khushal Satwara
A. As you will need to fund the bulk of the cost of a home with a housing loan, we hope you are looking to save towards the down payment alone. If you are very keen on buying a home in five years’ time, you should stick to mutual funds that invest in debt instruments to accumulate your down-payment amount. Funds that invest mostly in equities or have a large equity component are not a good option if you plan to withdraw money from them in five years’ time. With stock market valuations at record highs, there’s a high risk of a market correction reducing the value of any equity investments made right now. Should such a correction materialise, it may take more than five years’ time to recoup your capital and earn a good return over and above it.
To save money for down payment, you can mull short-duration/floating rate or target maturity debt funds that invest in both PSU bonds and State Government Loans. Investing ₹10,000 a month in a fund that earns about 6.5% a year can get you to ₹7.1 lakh at the end of five years.