Sound Money Advice (That Won't Cost You a Dime)
India's top experts break down the rules of smart investment.
Gaurav Mashruwala, Financial planner and author
- Identify your financial goals, then choose your asset class. Create a separate strategy for each goal and pick financial instruments accordingly. For instance, a woman in her 40s with investments in place, and saving for her child's higher education and retirement is looking at a long horizon. So, her preferred asset class would be equity and she could choose from a mutual fund scheme to suit her goals.
- Diversify to minimize risk and invest regularly in a disciplined manner. A single man in his 20s, with an eye on a future family and retirement, could start investing regularly in both equity and debt funds, so that, if needed, he could even make a down payment on a house in the next two to three years. The younger the investor, the more justified a higher percentage of equity investment.
- Equity is best for long-term investments of over seven years. The chance of losing your money is less as the severity of risk goes down over a period of time. The impact on one's overall returns could average out. However, that same equity could be highly volatile if invested in for a year or two.
- Avoid knee-jerk reactions to current developments, such as talk of the bail-in clause as a part of the FRDI Bill. Remember, every change in your investments will have an impact on your finances -- payment against exit clause, brokerage, short- or long-term capital gains tax. A retired person with a nest egg may feel vulnerable, but he should ideally have a little reserve cash at home, with only contingency funds for about a week in the bank. Ideally, he should have regular income from various options (monthly income schemes, pension) and a corpus that grows at a rate higher than inflation (a small portion in gold mutual funds and equity). A systematic plan such as this may make him feel more confident.
- Don't follow financial advice blindly. Investments may always be risky, which is why be led by good advice. Always go to the source (RBI or SEBI websites would help) instead of relying on WhatsApp forwards. Look for opinions after you have familiarized yourself with facts. Ask questions, read all the documents and speak to a trusted advisor. Go to the advisor or agent's office to get a sense of his set-up. Ensure that your financial advisor is approved by a regulator, has the necessary qualifications and valid licences and permissions. After all, you are handing him your hard-earned money.
Nilesh Shah, Managing director, Kotak Mahindra Asset Management Company
- Optimize returns with Mutual Funds (MF). The nature of MF is to optimize return per unit of risk taken. When it comes to liquid funds, lump sum investment is advisable. Whereas, generally in equity mutual funds an SIP that involves regular investment is ideal.
- Choose long-term, regular investments. Use the right technique and tools to maximize returns. The long-term investment horizon is ideal, having a fair asset allocation across different categories is prudent and investing regularly is key -- which, of course, requires discipline. SIPs average out your risks and allow you to ride out the ups and downs in the market. The best way to diversify MFs is to invest in a multi-cap fund, which invests in stocks across market capitalization, i.e. large-, mid- and small-cap stocks.
- Always do your research. CRISIL, for example, is a great source for industry insights. It's an independent research agency and ranks Indian MFs on quantitative parameters such as past performance and qualitative parameters like return volatility and portfolio quality.
- Learn from your mistakes. In the stock market every investor has lost money. The way to make money from stocks is to learn from your mistakes. Sector-specific funds like banking, pharma and information technology (IT) are meant for experienced investors. While they add spice to your portfolio, these can be tricky for the average investor.
- Have patience, allow it time. For the average investor, external factors and disruptions in the market don't make a difference. MFs will continue to manage your money well, as you have invested in a diversified fund. The fund manager's job is to take a call based on the market variations and build a portfolio to outperform the market. The investor has to have patience and allow their investments a time horizon. Overall, the basic rules of investments don't change. Always remember, price is what you put in and value is what you get.
Sankaran Naren, Executive director and chief investment officer, ICICI Prudential Asset Management Company Limited
- Save as a lifelong habit. For a long-term goal like retirement planning, the key is to consistently save throughout your earning lifespan. Since the time frame is relatively large, this is a good opportunity to consider equities, as they deliver reasonable returns, compounded, enabling you to build a sizeable corpus. Here, slow and steady wins the race. To put this into perspective, SIPs make bigger goals look achievable -- investing Rs 5,000 monthly for 20 years will accumulate around Rs 50 lakhs, assuming returns of 12 per cent p.a.
- Diversify across asset classes. Systematically investing in a mutual fund scheme is recommended for beginners who do not have the time or inclination to follow market trends. Taking the required exposure to multiple asset classes, as opposed to putting all your eggs in one basket or spending all your savings buying one type of financial instrument, is the need of the hour.
- Be cautious with thematic funds. They are a form of equity investment, advised for people well versed with the stock market. This is because when investing in a thematic fund (high-risk, high-return), all the stocks in that portfolio will have exposure to just that one theme. Sector-wise, banking, big pharmaceuticals, IT and rural themes currently look attractive from a three-year investment perspective.
Yashish Dahiya, CEO and co-founder, Policybazaar.com
- Pick the plan that suits you. While a pure term plan guarantees a fixed sum assured to the nominee in case of death, within the coverage period, a whole life-term plan gives a payout for life insured throughout their lifespan. The term return of premium (TROP) plan ensures that the premium paid is returned to the insured at the end of the cover period. Whole life-term plans can be availed by those who are looking for a guaranteed payout or might have liabilities well into their 70s-80s. The nature of the plans you choose is related to your dependents and their earning capacities.
- Have a judicious mix of plans that offer protection and handsome returns. Unit linked insurance plans (ULIPs) offer various benefits including high returns, protection in the form of sum assured and tax savings. They have undergone many changes in the past few years. Guidelines by the Insurance Regulatory Development Authority of India (IRDAI) in 2010 limit total charges over the lifetime of the policy. Thereafter, innovations by insurance companies resulted in ULIPs turning into low-cost investment products. The average rate of returns from ULIPs now range from 12-15 per cent. If invested long term, this is enough to beat inflation.
- Get a buffer against hospitalization. Pick your health insurance according to the cost of living in your city. Room rent limit (a common feature in health insurance policies) should be as high as it can be because the claim expenses depend on it. Do consider restore options and no-claim bonus (NCB). While the latter is an add-on feature, the former works towards enhancement of the sum insured, where the insurance company restores that sum in case it is exhausted during treatment. If you live in a metro, a minimum cover of Rs 10 lakhs for you and your family would be sufficient. In case of a tier-2 or tier-3 city, a Rs 5-lakh cover should do. A newly married couple could consider one with the best maternity cover while a couple in their late 40s could go for one with a minimum waiting period and no room rent cap.
- Customize your plan. A super top-up plan is an economical option to enhance the health insurance cover. A working professional should opt for the super top-up cover to get adequate/enhanced health insurance cover at a nominal cost. If you live in a metro and have a health insurance policy worth Rs 5 lakhs, you should buy a super top-up plan with a deductible of Rs 5 lakhs. The premium of a base health insurance policy for a 30 year-old man, from a metro, would range between Rs 6,000 and Rs 8,000 and a super top-up would come between Rs 1,200 and Rs 1,500. The only limitation of a super top-up option is that the features would depend on your base policy.
- Consider critical illness and personal accident term riders. Anybody between 35 and 45 years should have a critical illness plan. Buy one as early as possible and look for one that covers the maximum number of illnesses, their severity and the survival period (which should be minimum).
-- Interviews by Chitra Subramanyam, Ayushi Thapliyal, Suchismita Ukil and Gagan Dhillon