We have now not only entered a new year but also a fresh decade and therefore it is but natural to hope that everything shall be as bright and rosy as possible. In many ways 2011 envisages the start of an era that holds huge promises for India as an economic powerhouse. In fact just as the last decade shattered the egos of many mighty nations and put them on the mat, it is now our turn, as a nation, to unshack-le ourselves from the limitations and perceptions of the past and move forward with a lot of vigour since we know now that we have the capabilities to do so.
On the more micro platform this is the best time to make new strategies and revise the existing ones so as to move toward fulfilling our financial goals. With that perspective in mind we are dedicating this issue’s personal finance story to the youth of the country in an attempt to try and inculcate in them a sense of saving and investment so that they can become the economic engine of growth for the country in the coming decade. What is important to note is that after the Second World War it was the youth (marked as young urban professionals or yuppies) that scripted the meteoric elevation of the United States of America in the global arena and now it is the turn of the Indian youth to do the same for India.
Start Early
Investment is all about planning and as an individual this should be done at an early stage, more so for the fact that we don’t have a system of social security in our country. So if you are a professional or an entrepreneur and haven’t yet given due importance to financial planning then 2011 should be your target year to go for the kill. Your first resolu-tion for the New Year should therefore be to start building your portfolio with a long-term (at least 10 years) view just like an ant that saves a little bit at a time. The encouraging factor is that Indians are in the habit of saving at least 30 per cent of what they earn and therefore it shouldn’t be too difficult to get into that habit.
Further, your investments should be such that they pro-vide enough returns along with a great deal of liquidity. “We should adopt an approach that comes with the assurance of providing a degree of return without much risk and with a fair bit of liquidity in the probable future,” advises invest-ment consultant Shivkant Vaish. Considering that there are no major expenditures involved for those in the age group of 25-30 and a large part of them can be termed extravagance, a wiser thing to do would be to park your funds in the right manner and with calculated risks.
Liquidity Vs Security
Having inculcated the habit of saving, the next crucial step would be to get into an investment mode with a clear objective. There are two important factors to be taken into consideration. These pertain to the liquidity and the security of the investments. Liquidity is important because you should be able to use the funds to meet any unforeseen circumstance such as a medical crisis, higher education, marriage, etc. “Liquidity is provided by instruments such as gold, silver, fixed deposits, mutual funds, shares, etc. These instruments provide good returns and can also be converted into cash at any moment. At least 15 per cent of the invest-ments must be made in such pro-liquidity instruments,” says financial planner and chartered accountant Dhruv Gupta.[PAGE BREAK]
Studies indicate that liquid assets yield handsome returns over a long-term period. If we consider the return on equities over the past five years, the Sensex has provided 110 per cent returns till December 2010 while the return in gold was 169 per cent. On the other hand, security of capital is also of utmost importance. “In my opinion, security is much more important than liquidity and so efforts should be made to focus on this aspect of investment at the first instance,” Dhruv states. Some of the major investments in the category of secured investments include fixed deposits, bonds/infra-structure fund, PPF, post office saving instruments such as Kisan Vikas Patra, NSCs, etc. At least 50 per cent of your funds should be earmarked for such secure instruments.
Put A Propeller In Place
The next step is to give wind to your financial portfolio so that it grows at a brisk pace. For this you have to resort to investments that yield high returns such as shares, equity mutual funds, commodities, etc. Though risky they are very crucial for building a robust portfolio and if you believe in the India development story then you can invest in these instruments without being too bothered about the timings and levels of the markets. Take into account what India’s big bull Rakesh Jhunjhunwala had to say on a television show: “It is really a difficult to time the market but the best strategy for an investor is to regularly invest in equities on a monthly basis irrespective of the levels of the market. This strategy always pays in the long run as this is the best time to invest in India’s story.”
If you are not too comfortable with investing in shares then opt for a systematic investment plan (SIP) of various mutual funds. The reason why this kind of investment is very necessary in the portfolio is that the average return easily ranges between 20-70 per cent over a span of 5 to 10 years, thereby giving a robust push to the portfolio. However, one must always keep the risk factor in mind and go by the advice of the experts who say that out of the invest-able amount the maximum allocation to shares, mutual funds, etc should not be more than 35 per cent.
Be Careful With Real Estate
One of the other investment avenues is real estate. In fact in the major metros real estate assets are being sold as an alternative to secured assets like fixed deposits, bonds, etc that provide assured returns. But you should be careful with real estate since this asset can turn out to be a dampener if not indulged in carefully. “Purchasing property is always a good option but it offers little flexibility since you may be forced to pay EMIs for a long period of time before the property is transferred into your ownership. Also, one has to keep an eye on the rising rates of interest,” cautions financial planner Anil Mitra.
So while a house for your own use is always a good option since it also provides income tax benefit of Rs 1,50,000 on interest on loan, purchasing a second house on loan can lead to a debt trap. Also, it is an asset that cannot be easily converted into cash. Another important point to be considered while purchasing property is that it should be done after adequate deliberation only in ‘A’ rated properties with no legal or other hassles.
Secure Your Future
Though India does not offer social security to its citi-zens, most people do not pay serious attention to insurance or mediclaim policies. The thumb rule is that a person should have an insurance policy cover of six times the annual income. Unfortunately insurance policies in India are often viewed as instruments of tax saving or investment (as in the case of ULIP). Rather, insurance should be seen as a form of security, especially when it comes to a mediclaim policy