Wednesday, September 16, 2009

Part 6: An immediate action plan for investments

It is one thing to learn all the concepts before getting into the meat of a subject.  It is quite another to wait for an indefinite time period for some practical suggestions on what is to be done in the immediate near term.  Concepts are fine, and we need them to enable us to make our own decisions, but we need to be practical as well!

I just realized that there are quite a few concepts/theories still to be covered.  I also realize that I run the risk of losing the attention of my audience (I am making a big assumption here – that you have been avidly devouring every word written so far)!

So, what are those things that you can do right away in terms of a concrete action plan for your investments?  I am assuming that you already have a Third Bank Account and you have made it investment ready.  I am assuming you know how mutual funds work (at least the basics – we shall go in depth later).  And I am assuming that you do have some money set aside in a form that can be easily liquidated in case you have to make some adjustments to your investment portfolio.

If you strip the subject of all its complications and jargon, it’s not really that difficult. 

Do you have credit card balances?  Are you in the habit of carrying forward the dues and paying interest on them?  In case you did not realize it, the interest rates on cards are in excess of 40% per annum.  Your first priority should be to repay all your card (or cards’) dues.

Do you have an emergency fund to cover for three to six months’ expenses?  If you don’t, your next step would be to build that up.  This money should necessarily be in the bank – either in the savings account, or in easily cancellable fixed deposits.  Whether it is three months’ worth of expenses or six months’, I leave that to you to decide.  It depends on what  your spending patterns are, and what kind of social support systems you have.  You don’t want to be facing a sudden medical or family emergency without some liquid cash in hand.

Do you foresee some expenses hitting you in the near future – within the next couple of years?  It could be for marriage, for a house, for education, etc.  When you are keeping aside money for this, remember not to invest in “long-term” investments like equity shares or real estate.  This money should be preferably kept in Bank FD’s or in debt mutual funds that invest in securities of short-term maturity.  You could target the “liquid funds” or “short term debt funds”. 

Once you have taken care of these, whatever is left (the moment of revelation arrives – do you have anything left at all? J ) is for the long term.  Whatever is for the long term can be invested in avenues that are likely to offer a larger rate of return, though with some amount of risk and unpredictability due to volatility.  You could first keep aside some portion for investing in Debt Mutual Funds.  Your typical “Income Fund” of any fund house should fit the bill perfectly. You could also invest in equity mutual funds; or you could invest in Gold.  If you invest in equity mutual funds, pick out a large “diversified equity fund” of any major fund house. For Gold, you could look at Gold ETF’s which are traded just like shares; that is where you pay the least amount of trading margins / dealer profits. Remember, buying gold ornaments does not count as investment – at least not in my book.  You could look at buying gold biscuits (available in any quantity five grams onwards) – if you do, remember it is better to buy it from a jeweler rather than from a bank – the margins charged by banks are huge and unnecessary.

Depending on how much money you have at your disposal you could keep an eye out for buying that property or piece of land.  If it is your first and primary house which you need to buy –don’t delay – take that big loan and do it right away.  If you are already living in your own house (and probably paying a huge emi on it), and are looking for a second property, right now seems to be a good time.  The real estate markets, after a huge rally, have seen some correction in the last one year.  The market seems to be firming up now –  the potential upside is quite good. You should of course be prepared for the long haul – in real estate, the returns are normally good, but over a time frame extending to a decade or more. When you do buy that property, you are fully entitled to sell off all the other investments you have– keeping some emergency funds as a back-up, of course.

Do you have insurance policies that are running on which you are paying regular premiums?  We shall have a lot of things to say on insurance – but that has to wait for later.  For the time being, continue paying your premiums.  Before investing in any new insurance product however, pause: my advice would be to go in for “pure term insurance” where you pay only for life cover and where there is no savings/investment element involved.  The typical premium you will pay will be about Rs. 300 per lakh of life cover per year, for a thirty-year old. 

If you are keen on knowing more about how to manage your own finances and want to build up that mind-set over a period of time, it is not a bad idea to start reading up on the subject.  I would seriously recommend that you subscribe to “Outlook Money” and “Money Today”.

Do all this and you are all set, at least for a reasonable period of time.  In the meanwhile you can continue to pick up more on the subject so that you get more comfortable analyzing options and preparing to make your own financial decisions.

I know that I have covered a lot of ground above, which assumes a basic understanding of some underlying concepts.  We shall be covering all that one by one in subsequent issues.

Happy Investing!

Dinesh Gopalan
Fidelity India Finance
mobile: 9845257313

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