Women have always been smart savers, kitty parties, chit funds, money in that small shoe box were all smart savings techniques that our mothers have been using over the years. Mothers have quietly passed on these saving habits to their daughters over the years. Sadly as the markets have matured and better investment avenues have come the saver mothers have not really migrated to being investor mothers!
Savings and investments are not two sides of the same coin but two different coins with very different outcomes
Picture the following: there are two friends both 30 years old both save Rs 10,000 a month one puts them in a Fixed deposit which earns 7% per annum but the second one invests her savings. She every month invests Rs 5,000 every month in two mutual fund schemes which on an average fetch her 15% per annum. Today both are 63 years old. Guess what Friend one is still worried about her old age she only has Rs 1.5Cr saved. While friend two is planning a holiday with her grandchildren she has Rs 11 Cr!
So it’s time we embark on the journey to becoming a smart investor! So what do we need to pack along?
Knowledge: Equip yourself with knowledge read about various investment avenues and have a basic understanding. You are not expected to become an SME ie a subject matter expert but to be aware of your options so that you can take correct decisions. This knowledge will help you sieve out bad and biased advice. Remember bad advice does not necessarily come from non-trustworthy sources very often it comes from known well-meaning friends and relatives.
Clarity: Get clarity of your goals, how much you can invest and for how long. Your investment horizon should broadly decide your investment choice. Use the following simple thumb rule:
For goals which are short and medium term invest in safe instruments. Always invest in bank deposits and ultra short-term mutual fund schemes for goals that have to be met within a few months or in a year. Use bank deposits and short-term debt schemes to take care of goals that have to be met within a couple of years. Always invest in equity directly or equity mutual funds to fund long-term goals. Long-term is five years or more.
Here is a quick list of investment options
Short-term investment options
Bank Fixed deposits: They are the safest and they also offer assured returns. But they have two problems one interest rates are very low that they hardly beat inflation and two they are taxable. Use them only for keeping contingency funds, and money needed in the next few months to a year.
Company deposits: They offer slightly higher returns, but they are also riskier. Always stick to AAA rated deposits of well-established companies. Do not compromise on ratings for higher returns. Also, don’t invest for long-term in these deposits.
Debt Mutual Fund schemes: Use short-term debt funds for parking money for shorter tenures they are ideal to park money for two to three years. These funds offer higher returns than fixed deposits. Use liquid funds to park money for a few weeks or months. Ultra short-term funds are suitable to park money for a few months to a year.
Long-term investment options
Equity mutual funds: If you have an investment horizon of five years or longer, you can invest in equity mutual fund schemes. Always choose to invest in a systematic way in equity mutual funds. If you are a conservative investor or new to the market you can invest in equity-oriented balanced schemes. Balanced schemes invest in a mix of equity (at least 65 percent) and debt, and they are less volatile than pure equity schemes because the debt portion offers a cushion in times of volatility. For those with a bigger risk appetite can invest in diversified equity schemes to fund their long-term needs.
Long-term debt schemes: Investors who are risk averse can invest in long-term debt schemes. They are especially beneficial to those in highest tax bracket because after three years long-term capital gains from these schemes are taxed at 20 percent with the indexation benefit.
Stocks: Investing directly in stocks can be extremely rewarding, but it is also equally risky. You should attempt it only if you have both the knowledge and time. Knowledge about the working of the stock market and time to pick stocks and monitor them.
Well, when I started working nobody told me this and I created my portfolio on stock tips of friends and relatives. Believe me many of the stocks I bought then I still have them but companies are not even listed now!
Tax saving options
Public Provident Fund: Ideal long-term tax saving option for conservative investors. The contributions to it qualify for tax deductions and interest earned is also tax-free.
Equity Linked Saving Scheme or ELSS: ELSS is the best tax planning instrument for the more aggressive investors. They have a mandatory lock-in period of three years, like with equity mutual funds invest only if you have 5 years or more investment horizon.
Ladies like I said in my previous article get into your financial front seat; know what you own, what you owe and what your goals are, ensure that your money works as hard as you do. Let 2018, be the year when we become Smart Investor Gurgaon Moms!