Q. I am 26 and earn about ₹35,000 a month. I just finished repaying my education loan and am looking to save for my retirement that will cover my expenses and enable me to be independent after my working days. I am looking to invest a minimum of ₹5,000 per month. I stumbled upon stocks, bonds, PPF, FD and the like but am not sure how to start investing. How should I go about it?
Naresh Kumar a.n.
A. If you have not set aside money to be used for emergencies (about 6 months’ worth of expenses) then start to do so even as you invest. You can use a part of your intended monthly investment for this emergency portfolio until you complete building it up.
Since you already have a goal in mind and an amount, that’s step one of the investment process done. The next is to decide how much risk you’re willing to take. Equity markets (stocks) are highest on the risk scale, followed by bonds, FDs and PPF. Your portfolio can have a mix of all these based on your risk profile and time frame. As you’re saving for retirement, you can afford to have higher allocation to equity. How much, depends on your ability to take market declines in stride and not worry into selling.
Start with moderate levels of 40-50% and increase allocations as you gain confidence in your understanding of the equity market. Use large-cap index equity mutual funds (MFs) to begin with, since your investment amount is on the lower side and you do not have a good grip on understanding markets or mutual fund performance. Add on active funds, and diversify into mid-cap/small-cap segments as your investment size and understanding improves. Avoid direct stock investing until you know markets well enough and you’re able to identify investment-worthy stocks; when you do begin direct stock investing, don’t disturb your core equity fund portfolio. Use stocks to diversify your portfolio and capture different opportunities.
If you already invest in EPF, skip PPF. Maintain some funds in FDs to have a safe portfolio component, but avoid investing excessively here as they are tax-inefficient. You can use FDs for your emergency portfolio. Use debt MFs from short-duration or corporate bond categories for the low-risk component of your portfolio. Refer https://bit.ly/InvestmentBeginner or scan the QR code alongside for our guide to investing.
Q. Please clarify if we can invest in government securities? If yes, how? Are the returns handsome? Where do we invest if we have about ₹5-10 lakh, with optimum risk?
A. Yes, you can invest in government securities (G-Secs). There are some brokerage platforms that allow you to invest in G-Secs and treasury bills. You can also consider the recently-unveiled RBI Retail Direct platform that allows you to invest in any G-Sec, treasury bills, as well as State Development Loans. Whether returns match up to your expectations depends on what you mean by ‘handsome’. G-Secs are very low-risk instruments. So, to expect high returns on these is not a good idea. Coupon (interest rate) on G-Secs depends on the maturity of the bond and the nature of the interest-rate cycle. But because G-secs are traded, you may see capital appreciation of the bond prices (the coupon paid remains the same) based on the interest-rate cycle.
Decisions on where to invest a surplus will need to be based on how long you can keep this amount invested, the purpose for which you’re investing, the nature of investments you already have, and your own risk level. If safety is a priority, G-secs are a good option. If it’s low-risk investments you’re seeking, high-interest FDs and low-risk debt mutual funds will work. If you can take higher risk and you have at least 5-7 years’ time frame, blend in equity mutual funds.
Q. I am a government servant in Delhi and have government employees’ insurance. I have added my parents also under the cover, as they are my dependants. They are aged 53 and 57 years and don't have any other health insurance. Would you suggest taking a separate health policy for them (and for myself also)? If yes, which would be better — taking individual policies for them or adding them under my private policy?
Ajin Krishnan K
K. Nitya Kalyani replies
A. Taking an independent insurance cover for yourself and your parents is a wise move. However, don’t add them to your policy as the premium rate will be as per the oldest insured member in the family. This will become even more expensive when you add your spouse and children to the policy in future. A separate policy for yourself and for your parents is better. While you can take basic policies, try this for better premium efficiency: check with insurance firms you are targeting if they would give a top-up based on the sum insured of your government insurance scheme. If so, you can access a higher sum insured on the top-up for the same premium compared to the basic policy.
As you move forward, keep revising the deductible on the top-up policy as the sum insured on your employer’s policy is revised.
(Bhavana Acharya is Co-founder, Primeinvestor.in and K. Nitya Kalyani is a business journalist specialising in insurance & corporate history)