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How to plan your financial future
Smita Tripathi |
April 12, 2003 15:15 IST
They are young, independent and they have money to burn — or to save. So where does the younger generation, the 20-somethings', the it's-my-money-so-I'll-do-as-I-please tribe invest its money?
The answer is that there are many routes to financial nirvana. Some young people put all their money in public provident fund (PPF) while others are already accumulating real estate.
We look at how different youngsters are planning their financial future and we check out what financial experts suggest.
Sumit Bhatia, a 26-year-old accountant with one of the top five firms spends a large chunk of his salary paying the equated monthly instalment on his car loan. He is also keen to take a house loan in the near future.
"I personally feel that rather than saving and investing to buy these things in the future, it's better to leverage my salary for loans and not delay consumption," he says.
What about PPF? He only puts in whatever is necessary for tax saving purposes. "I value liquidity. Long-term investment is not for me," he says. However, he believes in providing a safety net for his family and so has bought a life insurance policy.
At another extreme there's Somya Sugandha, a 24-year-old management trainee with a leading telecom company. She is not an adventurous financial planner. Every month she deposits Rs 5,000 in a PPF account. "I believe in savings from a long term point of view. PPF is safe, tax-free and so is ideal for me," she says.
Then there's 25-year-old Nikhil Mohta, an associate with a leading consultancy, who has divided his investment portfolio into different categories — tax planning, short-term investments and mid-term investments.
Since he earns more than Rs 5 lakh per year, there's very limited scope for tax planning. He has put money in a life insurance policy combined with a pension scheme which is eligible for deduction under Section 80 CCC.
As a short-term investment he puts money in term deposits of three months to six months and sometimes even invests in stocks for one month to six month duration. "Basically I end up doing 101 random things. Put a little money here, a little there. Experiment a lot," he says.
He considers investments that mature between one year and three years to be mid-term investments. He uses a combination of fixed deposits (FD) and mutual funds (MF). "While the FDs give me a lower return, the safety factor is important there. My hope is that the return on MFs will balance out the low FD return and give me a decent overall number," he says.
Single men and women don't mind experimenting with their investments but their outlook usually changes when they get married.
Then they start looking for safe investments. Take the example of Shagun Gupta, a consultant with a leading multinational, who used to dabble a lot in the stock market when he was single.
"It was OK with me to live month to month on my salary. I hardly had any savings then," he says.
However, things have changed considerably after his marriage. Now he is looking at fixed deposits and recurring deposits as an option for regular savings.
He also has a housing loan. Besides, he has taken a life insurance policy and also a medical insurance policy.
His wife, Sanyukta Gupta, on the other hand, has always been a safe investor.
"For me safety is prime. I'm fine with low returns as long as the risks are low," she says. She only invests in NSC, RBI Relief Bonds and the like. Moreover, she feels tracking the stock market requires a lot of time and effort and a knowledge base which she does not have. "I don't have the patience to follow stocks," she says.
In fact, that is a problem with most youngsters. Says Aditya Verma, an executive in an FMCG company, "I don't have the time to really follow the movement of the market and have discussions with my broker. So I prefer mutual funds rather than investing in stocks directly."
And talking of the married, there's Yogeshwari Bhaduri, a 26-year-old school teacher, who has been investing for the last year. "Immediately after marriage I realised the importance of saving my hard-earned money," she says. She has planned her investments in such a fashion that her investments mature at regular intervals providing her money as and when she needs it.
She has invested in the Jeevan Shree policy of the LIC. Under this policy she pays a premium of Rs 31,000 every year and at the end of 15 years she'll get Rs 17 lakh. "When I first heard about the policy I thought it was expensive.
But after 15 years I'll have to look at my children's education and that's when this money will be needed," she says. Besides the LIC policy, she has invested in NSCs. "Since my policy remains locked in for 15 years, I needed something that I could encash after a few years (say after six years when my children are growing up). Therefore I opted for NSC," she says.
What do the experts recommend? Anil Kumar Chopra, CEO, Bajaj Capital, a financial services company, feels the young should invest keeping their future needs in mind. "The young are more keen on consumption rather than saving.
However, the earlier you start saving the better it is," he says. He recommends a life insurance policy combined with a pension plan as a must for every young investor. "Very few private firms have a pension plan and so although you may be earning a lot currently, you won't be getting much after your retirement. You should invest today keeping the future in mind," says Chopra.
Such schemes are also eligible for deduction under Section 80 CCC of the Income Tax Act. He also suggests buying a health insurance policy which is eligible for deduction under Section 80 D.
For those in the below Rs 5 lakh category, it is essential to avail the benefits of Section 88. For this at least Rs 70,000 should be invested in PPF and another Rs 30,000 in infrastructure bonds like those of ICICI and IDBI.
People earning more than Rs 5 lakh can get tax deductions under Section 80 CCC and under Section 80 D. After taking care of their tax needs, they should invest around 60 per cent of their portfolio in debt-based mutual funds, dividing money between five or six different funds.
Chopra recommends that the remaining 40 per cent should be put in equity-based diversified funds. These funds do not put money in one sector but rather allocate it between various sectors. Again, don't put all the money in one fund, but divide it between four or five funds. "Instead of directly dealing in stocks, one is advised to go the MF way and leave it to the professionals to handle your money," says Chopra.