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Under 30? A great investment plan for you

Jinendra M Shah in Mumbai | December 15, 2008 10:07 IST

When the market is going through a financial turmoil, making a decision to invest is a rather tough call. But for the young, who want to create a portfolio over time, there couldn't be a better time to do so. The Indian stock markets have already lost a good 50 per cent and valuations look rather attractive.

But before you start doing so, make a simple mantra: Consistent investing with conviction.

The most important thing favouring the youth is time. As investment experts will always say "the longer the horizon, the better the result for investors".

Also, there is a distinct advantage of a larger surplus in the initial years of your career because of lower or no responsibilities. Given the long-time horizon, investment strategies can be altered to suit the needs over time.

Ideally, the investment strategy for the youth should entail the following:

  • Emergency liquidity needs
  • Intermediate planned expenditure
  • Long-term wealth creation

It is important to remember that sometimes there could be a trade-off between medium- and long-term needs. For instance, a medium-term need or goal could be purchase of a car in the next three years.

To fulfil that, you have to dip into the corpus you are creating for the retirement. This will be completely dependent on the way you are prioritising your goals.

As a thumb rule, the exposure to equities should be higher than that to debt. Typically, it is advised that equity investments in the portfolio should be 100 minus the person's age. So, if your age is 30, then out of your total investible fund, you should invest 70 per cent in equity-oriented instruments. The balance should be used to invest in secure debt and insurance.

To begin with, take care of your insurance needs. This could include an appropriate medical insurance policy, with necessary accidental and terror risk premium.

As far as life insurance goes, never go for a product that offers or promises to offer the best of both the worlds, that is, a mix of investment and insurance. Look at insurance as a means for life cover and not as an avenue to make profits.

So, going for the cheapest form of insurance makes sense. Ideally, if you are under 30 years of age, the sum assured should be 7-10 times that of your yearly income. That is, if the yearly salary is Rs 500,000, purchase a policy that gives you Rs 35 lakh (Rs 3.5 million) to Rs 50 lakh (Rs 5 million) cover. The yearly premium of a term policy of this sum assured would be between Rs 7,000 and Rs 15,000.

As you can see, the policy is rather cheap because of two factors. One, because if you live after the policy expires, there will be no survival benefit. Also, since the policy is being bought at a young age, the premiums are rather low.

Also, it would be a good idea to create a small emergency corpus for times when the regular income is interrupted, for instance, by a period of job loss or shifting between jobs. During such times, it is very important to have at least three to six months' salary in the kitty.

Earmark some part of your salary to create this corpus and invest it in either bank fixed deposits or cash funds. Remember that the basic idea is to have funds ready when you need them.

Now that the emergency needs have been taken care of, look at debt instruments because they provide a safety of capital, though returns are quite low.

If you are an employee, some part of your salary is already getting saved because of the Employees' Provident Fund contribution. This 'forced saving' is a boon in disguise because it allows you to concentrate more on other investments.

Some investments can be made in fixed deposits of banks, post office savings scheme, central and state governments' project-specific bonds, debt mutual fund schemes and Public Provident Fund.

The returns being offered by these instruments are 8-13 per cent a year. Mostly, in the initial years, investment in some of these instruments will become a part of your Section 80C declaration.

Equity investments are the best investments, provided they are done with a long-term horizon (more than 5-8 years). Though direct investment in equities is possible, one requires some sort of expertise to be able to consistently invest well in the market. A better option is to go through mutual funds.

There are various mutual fund schemes that take direct exposure to the equity market for a fairly longer term. In these times, it is important to choose funds that have a track record. That is, go for a scheme that has a performance record of at least five years and has a corpus of Rs 1,000 crore (Rs 10 billion). Also, choose a scheme that has invested largely in blue-chip companies.

Yes, you need to do a little bit of research here and select the best fund, according to the risk appetite. The good news is that there are various sites that provide these data. Lastly, bulk investments use the systematic investment plan route to create a portfolio over time.

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