Birthday celebrations bring an excellent opportunity to connect with your family and friends. It becomes a special opportunity when your childhood friends wish you and spend time with you on your special day! A few weeks before, I was blessed with such an occasion. However, what caught my attention was how our conversations have evolved from job opportunities, love, and travel plans to children’s education, aging parents, and growing medical expenses. One topic that concerned us all was how to secure our future. We were all discussing children’s rising educational expenses, meeting the caregiving needs of old parents, paying off debt, and being ready for retirement. Those conversations made me look at my financial planning hard and realize that I am woefully falling short. And so, I started my journey to improve my financial health!
The first question that came to my mind was, ‘Am I too late to start investing?’. I read many articles and opinion pieces by experts. The answer to that question is a resounding No! Yes, it would have been better had I started much earlier, but it’s never too late to begin investing. However, before investing, one must be clear about the objective of the investment.
Mitigating the risk of financial burden on family
For instance, if you are concerned about protecting your family against any financial burden, then you must invest in Medical and Term Insurance Policies. Medical insurance policy will ensure that medical and hospitalization expenses are met without causing much stress to the family members. A term insurance policy will allow the family to continue with their current lifestyle in your absence.
Short term goals like saving for vacation
If the main objective of your investment is to have sufficient corpus for your vacation, then it implies that you are a short-term investor. In that case, you must keep some amount aside as cash and may invest short-term mutual funds. Short-term mutual funds invest in financial securities whose duration is typically between 1 to 3 years. The short-term mutual funds are liquid, allowing the investor to access the funds to meet their short-term goals easily.
Lumpsum amount at the end of time period
We have seen our elders investing in recurring deposits in which they save money regularly and get a specific amount at the end of the investment period. An alternative to recurring deposit is having a Systematic Investment Plan (SIP) in debt-based mutual funds. There are a few debt-based mutual funds that have specified the maturity date. It is important that you align the maturity date of the mutual fund with your expected date to achieve your goal (may be child’s education). You may earn higher yields if the mutual fund is held till maturity. It is to be noted that mutual funds are subjected to market risk.
Beat the inflation
We have often been advised by our elders to invest in gold. The practice of investing in gold is a well-known characteristic among Indians. Investment in gold is considered the best bet against inflation. It is observed that during an inflationary environment, the stock market plunges, and the purchasing power of the currency declines. But the value of the gold rises. However, the purchase of gold carries with itself the hassle of storage and the risk of theft. A better alternative is Gold Exchange Traded Funds (ETF). Purchase of gold ETF implies that you are purchasing gold in electronic form. The gold ETFs are tradeable in stock markets, and hence, are highly liquid. They offer certain tax benefits as well.
Emergency Funds
It is important that one keeps emergency funds that are able to meet the expenses of three to six months. For emergency funds, one must invest in securities which are liquid and have very low risk profile. Fixed deposits and liquid funds are a few of the options available to create a corpus of emergency funds. Fixed deposits will offer higher returns as compared to savings accounts. However, the returns are taxable. Also, penalty is charged for the premature breaking of the FD. Liquid funds are mutual funds that invest in debt securities (like treasury bills, commercial papers, and certificates of deposit) with a duration of less than three months. Liquid funds have a low risk profile and typically yield higher returns than savings accounts and fixed deposits.
Retirement Planning
National Pension Scheme (NPS), Pension Plans, Public Provident Funds (PPF) are few of the investment avenues available for your sunset years. NPS is an investment plan for retirement, which is regulated by Pension Fund Regulatory and Development Authority (PFRDA). Under NPS, one invests in regular intervals during their employment period. Post retirement, NPS holder receives lumpsum corpus and regular monthly pension. The NPS invests in equity, debt or corporate bonds. It has offered annualized returns of 9 percent over that last decade. The subscriber to NPS also enjoys tax benefits under section 80C. Many mutual fund companies offer pension plans in which the holder receives regular income post-retirement. These schemes also enjoy tax benefits. PPF is a risk-free investment opportunity with lock-in period of 15 years. It typically offers returns of around 7 percent per annum. Its returns are guaranteed and are not subjected to any tax. PPF is a good option for an investor who is risk averse and want an assured return.
Wealth Creation
Investment in equity shares or stocks is a good way to create wealth. It can offer good returns if the investment horizon is long. In the short term, an investor may face volatility in prices. However, research has proven that investment in good quality stocks always yields good returns in the long run. One may directly participate in the stock market or invest indirectly through mutual funds. It is important that one identifies stocks with strong fundamentals and good future prospects. Hence, it is always advised to conduct proper research and due diligence before gaining exposure to the stock market. One may also take advice from financial experts to better understand good investment opportunities in stock market. SIP in equity funds helps an investor to earn good risk adjusted returns in the long run.
