Managing money is easy, but managing it efficiently is tough. In this era, when a plethora of products are on offer, the investor sometimes gets confused about what to opt for and what not. Simply put, “Don’t put all your eggs in one basket,” is an age-old axiom, which proves that even our ancestors were aware of the need of diversification to minimise, if not mitigate, investment risks. This axiom still holds true, and, in fact, there has been no better time than today to take advantage of it. In the world of investments, I have always observed that the investor, who diversifies his investments over the long run, has always benefitted. Investors have always been in a dilemma about where to invest their money and how much to invest. Well, the correct answer of this question could only be found after applying the concepts of financial planning, but, to generalise, we take a look at what we must have in our portfolio.
SIP in equity mutual fund: No smart investor in today’s world can ignore this prominent asset class. Although, compared with the west, the Indian mutual fund market is still at a very nascent stage, but, with assets under management at
Rs 6,64,000 crore as on financial year ending March, one cannot ignore it. Strict regulations and investor-friendly initiatives taken by the regulator has, indeed, turned mutual funds into a very good asset class. Whether you wish to invest in equities or debt, mutual funds offer expert management of funds at a very small cost.
Systematic investment plan (SIP): It is a mode of investment in a mutual fund scheme through which a prespecified amount, which can be as little as Rs 500 per month, is automatically deducted from your bank account (through the ECS mode) at a prespecified time interval, and is invested in the prescribed mutual fund scheme. Apart from all other mutual fund benefits, the best advantage of investing in an equity mutual fund through this mode is the benefit of rupee-cost averaging, which means you get more units when market is down and lower units when market is up. Over a longer period of time, for instance five years or more, you can expect very good returns through SIPs as your average cost of units will be very low.
Bank fixed deposit (FD): With interest rates hovering at around 9.5 per cent to 10 per cent per annum and compounding quarterly, this investment makes sense and it makes one feel comfortable and wealthy too. Although, returns are taxable, yet it is good to keep some money in bank FDs.
Public Provident Fund (PPF): Another very important and popular savings scheme that is a must for all investors because of the multiple benefits it offers. The recent interest rate hike has made it more lucrative. Now this scheme offers an annual rate of interest of 8.8 per cent, which is totally tax-free, and also, the maximum deposit limit has been hiked to Rs 1,00,000 per annum. Apart from these benefits, this account does not comes under the wealth tax purview, cannot attached by any court of law in India and is an EEE (exempt-exempt-exempt) benefit account. The amount invested gives you a tax rebate under Section 80C of the Income Tax Act. The interest accrued is also tax-free and the maturity amount is also tax-free. This account can serve as a very good tool for retirement planning and is a must.
SIP in gold fund: Just like in equities, mutual funds these days offer gold SIPs too. Although, technically speaking, these are fund of funds. Gold SIPs invest in gold exchange-traded funds (ETFs) promoted by their fund house only. Yet, it opens the door to invest in this precious and lucrative commodity through the SIP route in small denominations and also get benefit of rupee-cost averaging.
Real estate: Now, this is something that everybody cannot get into, but if you can, then exposure in this asset class is a must. Although, all investments in real estate are not profitable, but most are.
Term insurance policy: The list cannot be complete without insurance, but, we should always keep in mind that insurance should be taken as a risk cover tool rather than an investment. So, the best life insurance policy is a term insurance policy. This product gives you maximum risk cover at a low price because the investment component is nil in such a policy.
Health insurance: Medical treatment costs are going up every year and every individual/family needs some protection against this risk, otherwise his/her savings, which are done for other goals, might get eroded if illness occurs. It is advisable to buy a family-floater policy, which these days come with a lot of benefits, or, one can consider the alternative of creating a medical contingency fund.