For the young and restless, equity rules!
We ask working professionals how they manage their money. As part of this series, we spoke to two young women and got wealth experts to evaluate their financial plan of action.Is their money working hard, enough? Let's find out!
MANASI Deshmukh, 25, an HR professional with a BPO company in Mumbai, saves Rs 15,000 from her take-home, every month.
She invests this amount in 'safe' avenues such as National Savings Certificate (NSC), Public Provident Fund (PPF), infrastructure bonds and life insurance policies offered by the Life Insurance Corporation.
"I usually invest at the end of the (financial) year, when it's time to save tax," she confesses.
Maya Kumar, 27, another young turk from the IT sector, saves around Rs 17,000 per month. She predominantly invests in PPF. She also puts Rs 5,000 every month, in a bank recurring deposit. Maya's total investment works out to approximately Rs 150,000 (Rs 1.5 lakh) per annum. The rest, lies idle in her bank account.
Is your money wasting time in a bank?
Yes! Here's why. "Though the recurring deposit is a good saving habit, the interest you receive on it, may not be enough to cover inflation," says investment consultant Sandeep Shanbhag. Both Manasi and Maya should invest their money, aggressively, in equity.
"The only time you can take advantage of equity without sweating at the risk level, is when you have at least 10 to 15 years before you retire and no family responsibilities ," he adds.
Why equity rules
Both girls have parked a significantly large amount of money, in a savings account. According to investment advisor Ajay Bagga, Maya and Manasi's year-end planning strategy is more of a tax minimisation plan. Instead, they need to invest, keeping their long-term financial goals in mind.
"Sure, we need to keep some amount in the bank for daily expenses and emergencies. But we must invest the rest in short-term mutual fund schemes. These schemes offer higher returns. And you can sell them any time," advises Shanbhag.
Ajay recommends a portfolio of 90 per cent equity mutual funds and 10 per cent in fixed return products such as PPF, recurring deposits, bank deposits.
Save tax. But make money!
The investment favourites to save tax seem to be: NSC, PPF and LIC. But Equity Linked Saving Schemes (ELSS) are a better bet. Here's why.
The returns for NSC are 8 per cent, and this is taxable. Equity, on the other hand, yields anywhere between 15 to 18 per cent, when held over a long period of at least five to seven years. What's more, the returns are tax-free!
Infrastructure bonds are not such a good investment either, according to Ajay. "The returns have fallen to approximately 5 to 5.5 per cent. Earlier, the attraction was that they were tax-saving instruments," he says.
Section 80C now allows investors the freedom to choose any investment of their choice, up to Rs 100,000 (Rs 1 lakh) per annum. So, infrastructure bonds are no longer an attractive option, because they yield low returns, and the interest is taxable.
Do I really need insurance?
Ajay suggests that Manasi reevaluate her insurance coverage and see if she really has dependents whom she needs to cover. Did she buy the policy because her agent insisted? Or merely because she wanted to buy tax? Ideally, she must try switch to a low-cost term insurance policy, which is offered by all companies, but which agents usually do not sell, because the commissions on these are pretty low.
5 wealth rules for the young and restless!
If you are in your early 20s with no dependents and earn more than you need to spend on essentials, follow these five wealth rules.
1. Invest 90 per cent of your money in equity mutual funds.
2. Opt for a Systematic Investment Plan (SIP) plan to help you save, regularly. With SIP, the benefit is that you will have to keep aside a monthly amount.
3. Invest in short-term mutual fund schemes (less than three years). The returns you earn from these schemes are higher and you have the advantage of selling whenever you please.
4. Choose a low-cost term insurance policy, which is the cheapest form of insurance.
5. Choose ELSS investments; it helps in tax-saving.
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Photograph courtesy Allen Solly
(Photograph used for illustrative purposes only)
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