Part Four - How to Invest
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How to go about putting the money which has been allocated for savings/investing?
How to decide how much to put where?
We will create two categories or my preferential term Baskets (or Buckets).
Basket 1: Money which can be needed in next 5-7 years
Basket 2: Money which is needed after 5-7 years.
Why 5 years? Because that is the cycle of our national elections! Just kidding. It is just an arbitrary number but 5-7 years is a reasonable. If you like 7 years, keep it 7. Say if you like India (5 letters), keep it 5 years and if you like Bharata (7 letters), then keep it 7 years.
Aim: money which is needed within 7 years.
What to use: If you are using ICICI Liquid Fund - Direct option. Then, a good option to use here is ICICI Prudential Banking and PSU Fund - Direct option. It is a conservative debt fund with very low chances of reduction in value. If you are using Parag Parikh Liquid - Direct option as your goto Liquid fund, then a good choice for this Basket would be their Parag Parikh Conservative Hybrid - Direct fund.
Aim: money which is needed at least after 7 years.
What to use: Now this is a little more complicated, so we will go step-by-step.
Cash - The money is with you physically. The closest equivalent is a Current / Savings account in a bank.
Bonds - You are giving your cash to someone who will provide you regular payouts at fixed intervals and give you back a predecided lumpsum at the end of the period. Sometimes, you can skip the payouts and ask for them to be given at the end of the period (eg, compounded growth option of fixed deposits or bonds). When you invest Rs 1000 in a 9% FD for 1 year , you are basically giving 1000 now with the promise that the bank will give you 1090 at the end of 1 year.
Depending upon the quality and return-back capability of that someone, the net lumpsum and payouts vary. A govt backed bank / agency will give you a lower lumpsum with a higher degree of probability that it will return you the money than a small private business.
Stocks/Equities (=something related to Sensex/Nifty) - You are giving cash to someone to hand over to you a part of a company so that you can get the payments (called dividends) declared by the company. There are no guarantees of the amount or the interval of these payments. There is no fixed time interval or a lumpsum at the end of a time period (effectively holding period is infinite).
To assess these payments, a higher level of understanding is required (higher as compared to above options) to assess the quality and probability of the company to provide those payouts in the future.
For long term money (>5-7 years in this case), I will just cut the complications and suggest to put money in a single fund. That would be ICICI Multi-Asset fund - Direct option. The reason is that this fund will give you a 65% minimum equity, some gold, some real estate investment exposure and reasonable bonds. Plus, the biggest benefit is the built-in rebalancing inherent in this style of fund. As an alternative, Parag Parikh Flexi Cap fund - direct option would be good choice too in this basket group. Just one single fund with predominant Indian equities and 20-30% foreign equities.
More terms:
SIP (systematic investment plan) – this is a way to invest a fixed amount of money on a particular date periodically. They can be applied to any mutual fund, and is not applicable only to equity funds. They can be started for the all the above funds.
More Questions:
How long to continue the above combination? For 3-4 years at the least. Ideally 5 years.
Should I increase the money when I get a raise next time? Of course. When your income rises to say 60,000 then increase the amounts to 15,000; 7,500 and 7,500 per month.
Which date should I put the SIP date on? Put it 7 days after your normal salary day. So, if you receive your salary on 1st, then put SIP on 7th. Why? Because sometimes the salary gets delayed, and then your SIP will get skipped. Don’t worry, they will not charge you money for that skipping.
Why equal divisions? I am smart enough to calculate the exact ratios. Well, if this series has woken you up to that level of smartness, indeed do those calculations but do start investing within this month onwards, rather than doing all those calculations only. Stop the action paralysis and get a decent start NOW. Rather than an optimum start some months/years down the line.
Why these funds only and not any other? Because I am saying these funds are good enough for long term holding. I have personal experience with each of them. Pattu can vouch for them as well.
What if I need to plan out 80C investment also? Opt for Parag Parikh's taxsaver or ICICI Prudential Long Term Equity fund - direct option (their taxsaver) and use it for complete usage of 80C limit. No need for PPF or SSY or any of the moneyback / endowment / insurance plans. Keep it really simple.
To summarise the approach (across 4 posts):
Have 1 bank account with netbanking enabled.
Keep some amount of money in that account, while rest of the money should be moved to a liquid fund. Or FD, if the tax rate is less for you (10% bracket max.).
Get a health insurance, if not done yet.
Get a life insurance.
Do less spending.
Don’t get a credit card. Have a debit card and use cash.
Target a savings amount (50%, 30%, 10%, whatever and gradually either increase that or increase income and keep that ratio intact).
Put 2 SIPs, 7 days after salary credit into account, for the relevant amounts.
Do this for next 3-5 years.
Ping me after 5 years for what to do next!!
Addendum:
Why such a plan combination? This is for those who want to know more intricacies of the choices.
We have got 3 funds which correspond and take care of respective baskets, across 1/2 AMCs. Much easier to start and manage. Eventually, when there will need for switches between these funds, then it remains easy.
Till 1-2 crores of amounts, I don’t see any real need to have more funds than these.
Mutual Fund – please .