A Layman’s Guide to Personal Finance/Investing


      This blog is written considering people who have elementary knowledge on personal finance but enthusiastic about starting fresh towards the rewarding journey of investment. They should try to follow below simple steps to begin with,

1.       First analyze your income and expenses thoroughly, not only your big-ticket expenses like EMI, but even minute details like laundry expenses which will give you realistic picture how well  are you managing your income and expenditure.

 

2.       Create an emergency fund which should be no less than 3 months’ of your monthly income. This will act as a primary cushion for unemployment or unavoidable circumstances.

 

3.       Buy Family floater plan for you and your dependents even if you have an insurance from your company. This will be very helpful when you are out of job or even for buying individual coverage at a later stage of life.

 

4.       Buy a term insurance plan for your dependent to protect your family from any hardship in future in your absence.

 

5.       Try to increase your investment by increasing your savings but cutting down extra costs. There can be several avenues for investment but one should choose right one based on your age and risk appetite. Never put all the eggs in the same bucket i.e. always invest your money in different kinds of instruments and not in a single one. Diversification reduces risk as well as enhances the chances of higher return. Try to first calculate how much you need to invest for each life goal (marriage, buying home/car etc). Also, with growing age gradually your investment should be moved from high risk to low risk instruments.

 

a)       Fixed Return Investment – FD, RD, KVP, PPF etc. Senior citizens can consider “Senior Citizen Savings Scheme”. Salaried employees can consider increasing their Voluntary PF contribution.

 

b)      Equity/MF – These are the best investment vehicle for long term investment.  As a layman, you can choose 4-5 well diversified Mutual funds/Equity/Balanced and regularly invest through monthly SIP route. Investment can be started from as lows as Rs. 500/-! MF investment to be tracked every year and for consistent non-performance a fund can be switched to a better fund. However, please note that frequent churn of your portfolio may erode the value of investment.

 

c)       Others - Gold/Jewelleray/Real Estate/Antiques

 

6.       Keep yourself updated. As financial instruments are rapidly involving, its important that you get in touch with the different product offering as much as possible. For this you can read personal finance magazines like Outlook Money, browse websites like Investopedia, valueresearch, read newspapers or watch business news.
                                                                                                              (To be Continued.)

Comments

  1. Very informative for layman like me. Will wait for more to have a % break for each bucket & advice on best mutual funds to invest - might be a link where top selling funds are shown.😃

    ReplyDelete
    Replies
    1. Visit sites like valueresearchonline.com and moneycontrol.com. compare four or five star funds which are appearing in both the sites. Try to analyze last 3-5 years performance. Select 2-3 large cap, one balance and one small cap fund for SIP. When you have time with your side, till 40 or even 45, invest 40 - 50% in equity, 30-35% in fixed savings instruments and 15-20% in other assets like Gold etc. After that gradually reduce your equity exposure every 3 years and switch to debt or fixed instrument before retirenent.

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  2. Can you mention 4-5 well diversified funds or equity for investment? What would be the ideal % of distribution across different investments you mentioned? What is the best way to keep high earning after retirement?

    ReplyDelete
    Replies
    1. First two questions I have responded above. The last one is really interesting. First of all to earn more after retirement you first need to build a huge retirement corpus. For that you need to start investing as early as possible which will help power of compounding to work for you. Switch 70% of your mutual fund portfolio to safe monthly divident option. Explore fixed income schemes like senior citizen savings scheme. Ensure your health insurance continues or obe single medical emergency can ruin your retirement plan.

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  3. How to review/ check the performance of MFs?

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    Replies
    1. Check current NAV with the NAV you had bought. Have realistic expectation of 10-12% in normal market scenario. Over 5 year horizon it can reach 15% or even more when things are really good. But do not exit only based on 3/6months' performance, give it at least 1 year because frequent churn of your MF portfolio will result in erosion of your fund value due to exit and entry load.

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  4. Is it safe to invest in Mid/Small cap Mutual Funds?

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    Replies
    1. Even life is not safe but that does not stop us from living :-) Never put all your eggs in one busket. Diversify. As I mentioned your mutual fund portfolio should be a combination of large cao, balance and small/mid cap may be in the ratio 3:1:1. Don't invest a lot in mid/small as risk/return tradeoff is nuch higher for these MFs

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