Q. I am 23. I can invest ₹5,000-₹7,000 in stocks and mutual funds. What are the best options for the same to get a good return? I also want to know what ‘dividend’ stocks are?
A. If you intend to invest in stocks, you need both time and understanding of markets and stocks to know which to buy, when to book profits, when to exit. It’s not a simple list of ‘best’ stocks to buy today. Therefore, it’s best that you begin with investing in mutual funds. Once you have a better grip on the market movements, understand how to look at stocks, and understand the risks involved, you can gradually start investing in stocks.
This will also let you build up a more stable investment corpus in funds which can continue to grow, and then take on the higher risk, direct stock investments. Mutual funds are easier investments as they require far lesser understanding of market nuances and timing than stocks, are professionally managed and allow you to invest and hold for any length of time.
You can begin with plain large-cap equity index funds such as the Nifty 50 and flexi-cap equity funds, or hybrid aggressive funds. For ₹7,000, have 2-3 funds at most.
Add on more aggressive funds once your investment amount increases. Do note that equity funds require a minimum holding period of at least 5-7 years. If your investment time frame is shorter, stick to hybrid aggressive funds or debt funds.
As far as ‘dividend stocks’ go, the explanation of the dividend concept in stocks, how they can be used in a portfolio and how to pick them is far too extensive to be briefed here. You can turn to online sources to understand more about them.
Q. I am 22 and will be starting my first job this year. I estimate my investible surplus to be about ₹20,000 a month. I may go for higher studies 2-3 years later. How should I go about investments and insurance?
A. Unless you have family members who are financially dependent on you, it is not essential that you take life insurance right away at your age, in your first job, and since you intend to study further. For health insurance, take up a basic health insurance policy with a reasonable sum insured.
To know where to invest, ideally, you should have some idea on how long you can stay invested before you need it. If you intend to use the investments to finance part of your higher education with a time frame of about 3 years, go for hybrid aggressive funds or balanced advantage funds. Also, consider fixed deposits from small finance banks or other banks that offer high interest (invest up to ₹5 lakh in each bank, if so) for this time frame. Note that interest income is taxable.
Else, if you’re looking at longer-term holding of at least 5-7 years, start with large-cap equity index funds and flexi-cap funds. Allocate 40-50% of the amount to these funds. With the balance, consider more aggressive equity funds that invest in mid-caps and small-cap stocks like focussed, multi-cap or mid-cap funds. You can go up to 25% in these funds, but be aware that they are high risk. If you cannot handle volatility, avoid them and use aggressive hybrid and large-cap based funds instead. Allocate 25-35% to short-duration debt funds. Use a maximum of 4-5 funds in total.
Q. Please clarify as to whether a senior citizen could invest/operate ₹15 lakh each in SCSS and PMVVY at the same time.
A. Yes, you can invest up to ₹15 lakh each in the Senior Citizens Savings Scheme and the Pradhan Mantri Vaya Vandana Yojana at the same time. They both are great investment options for senior citizens.
Q. I have ₹4 lakh. With this, can I buy gold or invest in a post-office fixed deposit?
A. Where to invest this sum has to be based on how much this amount accounts for in your overall investment, the nature of your current investments, how long you can hold, and your risk level. Gold can only be used as a hedge against equity volatility. If gold accounts for less than 5% of your investments and you have a long-term holding, invest in gold up to 10% of your portfolio. Otherwise, if you do not invest in equity or you already have sizeable gold investments, go ahead with fixed deposits in post office or banks.
Q. I have a PF account which was opened in June 2012. Should I continue with it?
Senthil Kumar M
A. You may already be investing in other options for retirement. But even so, you can still continue with PF investments unless you have built up more than enough for retirement. For one, it is among the safest instruments you have. Two, it’s also more tax-efficient than other fixed-income instruments and this bumps up its comparative post-tax returns. Three, in any portfolio, mixing of high-risk and high-returning options with low-risk options is essential to balance risk and return. For retirement portfolios, PF contributions can constitute a small part of this low-risk requirement. The long lock-in also ensures that you do not unnecessarily use this amount to meet other expenses. The con is it delivers lower return; if your overall investment itself is on the smaller side, the lower return can make it harder for you to reach your target. You will also not be able to access this PF amount for any portfolio rebalancing.
(The adviser is Co-founder, PrimeInvestor.in)