Anand Bhisey, Associate Professor, School of Media, Pearl Academy
Congratulations! So you’ve landed your very first job. It’s an exciting, exhilarating feeling to have money that is truly, fully and really your own. However, it is important to make your investment planning at the very beginning of your career to ensure good returns and take the fullest possible advantage of the power of compounding. It is also important not to fall into typical “traps” that someone in the early stages of his/her career can fall into, due to either a lack of proper knowledge or wrong/biased guidance by the financial advisor. A wrong or defective financial plan will not only fail to fully utilise the potential of the returns that your investment can fetch, but can also actually turn your investments into a heavy burden over the years.
Here are some golden rules that will help you negotiate the investment jungle and bring you handsome returns while covering your risks-
File your Income Tax returns
One of the biggest mistakes that young people make at the beginning of their careers is not to file an income tax return. You must file a return even if you donot need to; for example, if your income is below the exemption limit. A lot of people will assert that you need not file your return, but the advice is inappropriate even if not downright wrong. Filling returns will create a record right from Day 1 of your career, and you will have a logical trail when you actually get into the tax bracket. This comes in handy later, for example, when you apply for a loan.
Get a PAN card
As you probably already know, PAN stands for Permanent Account Number (PAN). The Income Tax Department allots you one. You have to apply for a PAN and your PAN card when you file your first income tax return. Besides fulfilling a legal requirement, the PAN card is also one of the most widely accepted proof of identity, and, in fact, a mandatory one for some transactions.
Open a PPF account
You probably already know what PPF, or Public Provident Fund, is and how the scheme functions. The advantage of investing in PPF is that you create a huge corpus over its 15-year term, which you can use to meet some major expense. This is important because in 15 years, you will have additional responsibilities, like children’s education. Start by investing at least Rs. 1,000 per month, and increase the amount depending on your disposable income and other liabilities. A major advantage of PPF right now is that the ceiling on deposits in an account in a financial year is Rs. 1,50,000, which is exactly equal to the deduction limit available under Section 80C of the Income Tax Act. So instead of investing money in insurance policies only to get benefit of Section 80C, you can put it where it will earn reasonable returns. Another plus point is that if, God forbid, your financial condition worsens at some point of time, then you can deposit the minimum Rs. 500 (at present) per financial year to keep your account active. The scheme also has some flexibility, as you can make withdrawals during the tenure (you can refer to the scheme information for details). The best part is that the interest earned on a PPF account is exempt from income tax when you withdraw the money, either mid-way or at the end of the 15-year tenure.
Get life cover
This one is a “must do.” The earlier you buy a life cover, the cheaper it will be. However, remember to go for an absolutely basic cover, without frills like ‘money back’ or ‘extended cover.’ Insurance should be bought to cover your risk, and not for returns on your money. Remember – insurance is NOT investment. Don’t confuse insurance with investment. The more features a life insurance policy has, the higher will be the premium, and the higher will be the cost. The biggest drawback with an insurance policy is that you lose money if you exit before the term of a policy ends. Go for a term cover, which is probably the cheapest. Compare plans in terms of unit cost, i.e. annual premium per lakh rupees of cover. The money so saved can be invested in a better way.
Get health cover
Another important aspect of investment. The ‘earlier you buy, the cheaper it will be’ rule applies here, too. Buying health cover late will increase the cost, not only because of age, but also the perception of the insurer of higher risk, especially if you develop some disorder or have had a disease in the past. Make sure that your policy covers critical/major illnesses.
Get accident cover
Go for a separate accident insurance policy that will safeguard you in the unfortunate event of an accident. Ensure that it covers disability and hospitalisation.
Invest in equity
Probably the best way that your savings can beat inflation is by investing in equity. The risks are higher, of course, but you can minimise them by investing in absolute ‘blue-chip’ shares, in sectors like engineering, pharmaceuticals, FMCG, and so on. Do consult a competent investment advisor, but also do your own research and use your common sense when picking up shares. Go for companies with a long and excellent history of performance and consistent returns. Also keep the ‘100 Minus Your Age’ rule in mind. In brief, the rule means that you should normally invest that percentage of your savings in equity that your arrive at after deducting your present age from 100. So if you are 25, then you can put up to 75 per cent of your savings in equity, but if you are 50, then it should be only half of it. The logic is simple – the younger you are, the greater risk you can take and the longer you will have to recoup losses, if any. As you grow older, your responsibilities increase, and you cannot afford to have too much of your money blocked in a way that you cannot exit only for the reason that the returns are not up to your expectations or that the value of the investments has decreased since you made them. A major advantage of investing in equity is that liquidity is high if you pick the right stocks (and not get stuck with duds). Remember that the returns are high, but so are the risks. So carefully assess your present and future liabilities before deciding how much to invest in equity.
Invest in MFs
Mutual funds are a good way to generate reasonable returns in a systematic way. Pick a few good schemes and start an SIP – a systematic investment plan. Investing small amounts at regular intervals over the long term will give you the benefit of the power of compounding. However, you have to be patient and disciplined. The benefit here is that you can stop your investment in a fund any time you want, and can withdraw the money any time you want, subject to the lock-in period, if any. Besides, your money will be in safe hands – people who have expertise in the stock markets. Build up a portfolio that has a mix of pure equity, balanced and debt funds.
Invest in gold/silver
This may sound like grandma’s advice, but it has sound logic. Gold has always been considered a hedge against inflation. Best of all, it is very liquid. It is, in fact, the most liquid of all assets – you can usually get cash across the counter for your gold. However, you should invest in gold COINS, and not in jewellery. When you sell jewellery back to the goldsmith, he will deduct a certain percentage for impurities. On the other hand, when you sell the gold coins, you get full value! Remember that jewellery is for decking up and not for investment. Keep buying at regular intervals so that the cost averages out.
Do not confuse investment with risk cover
One big mistake that individuals make while making investment plans is to think that insurance policies are investment. They are NOT. Insurance policies are for risk cover. Do not confuse investment with risk cover for reasons mentioned under ‘Get life cover.’ The cost of combining risk cover with investment is very high and not worth it.
Stash some cash
Now this one is pretty obvious. Of all the savings that you make every month, stash away about 10 per cent. Putting it into a cash box at home would seem the most convenient thing to do, but your money will lie idle there. You can start a recurring deposit or open fixed deposits, but liquidating them is a hassle and may take time. Another way is to open an account at a bank and branch other than the one where you have your regular transactions, and keep putting money into it. This way, you will build up a store of cash over a period of time that you can access any time of the day with your ATM card. To optimise your returns on this money, go for an account in which money is automatically swept into fixed deposits, and back into your account when you make a withdrawal.
Real estate – really?
Real estate is generally considered a very good investment option, but do think hard and objectively before investing. The primary objective of property should be to have your own dwelling place. When investing in an additional home/property, do a proper ‘cost versus benefit’ calculation. Compare what you will save in income tax, with what you will pay as interest on loan, stamp duty, and so on. The situation changes if you let out your additional property. Worst of all, you may not be able to sell it off as quickly as you would like to and at the price you want when you need the money urgently. Give it a real hard thought – don’t get swayed by emotion or trends.
Invest in your health
And last but not the least, pay attention to your health. “Health is wealth,” goes the old adage, and it is so true. Take up an exercise routine, learn to relax, indulge in a hobby. Ensure that you don’t get into the rut of a sedentary lifestyle. You will reap the benefits in real monetary terms – like lower medical costs – if you stay in shape.
(Disclaimer: This article does not purport to be professional financial advice. Views are strictly personal.)