Making money work for you… in all times!

Tax planning season is upon us, and with it comes the last-minute scurry for investments that will protect your money. Priya Sunder, director of PeakAlpha Investments, tells you how to avoid the last-minute cinch, and multiply the money with just a little bit of planning, no matter what stage of your life and career you’re in.

IN YOUR 20s
Invest wisely:
In this phase, people aren’t usually thinking of retirement, or meeting long-term goals. These are their first few years of earning, and putting money away is not really on their minds. So the goal is to get them into the savings habit, bit by bit. Sunder suggests starting with tax saving investments – even if it’s a Rs.500 SIP (systematic investment plan) in a tax-saving mutual fund. Appetite for risk is high at this life stage and given the long time horizon of investment, people can invest in equity. Sunder is not in favour of people investing in direct stocks unless they understand the stock market. She adds, “A good rule of thumb to start with is to subtract your age from the number 80 and keep that per cent in equity, and the rest in debt,” she says. For the risk-free part of their portfolio, they can invest in the company provident fund. If not, they can invest in a Public Provident Fund. “At least `2,000 a month is a good amount to put away in this fashion at this point. I suggest a 70-30 per cent equity to debt ratio.”

Sunder suggests planning towards a short-term goal – say you have Rs.30,000 in your account and you want to go on a vacation at the end of the year, plan to save up a lakh. For this purpose, a monthly liquid fund/ money manager fund, which offers twice the return of your savings account, makes sense.

Don’t make these mistakes: Sunder has seen many cases of people in this age group racking up credit card debt or taking on personal loans, both of which she deems unnecessary. “They then pay the minimum due amount on the credit card bill every month, not realising that the rest is accumulating interest, the highest on any loan they take,” she says. If you don’t need a credit card, don’t take it, she suggests, because most people will end up with a scar on their credit report when they’re unable to pay the bill. In short, don’t take on liabilities such as car loans or personal loans at this stage. They put pressure and offer no tax benefits.

IN YOUR 30s and 40s
Invest wisely:
This is when people are getting serious about their finances. They’re getting married and starting a family, maybe even thinking about retirement. But a lot of them continue with the same old investment plan. Sunder demurs, “Just making some investments is not enough. Every rupee you have must be directed towards a specific goal: whether retirement, an emergency fund, a children’s education fund, or an asset purchase. There’s no other way to do it,” she says.

She doesn’t recommend purchasing too much real estate, because it puts EMI pressure on you without offering too much gain. “Unless you see yourself in your current job for the long term, it’s a big risk,” she feels. “I always tell people there’s no harm in paying rent – paying Rs.30,000 rent for a Rs.3 crore property and enjoying all the benefits, for instance. Instead, if you buy that property, you’re paying Rs.2 lakh EMI every month.” Tying down all the money in real estate is illiquid and compounds pressure.

Instead, she recommends mutual funds, which inculcate the discipline of investing every month. Equity mutual funds are a great way to build wealth and get exposure to the stock market. “This is better than investing in a single stock where you are going up against the best fund managers in the country,” she says. Corporate debt (debentures), and money manager funds are also a good option depending on the tenure of investment. Sunder also suggests debt mutual funds, which offer superior tax benefits to a fixed deposit, and which, unlike fixed deposits, have a tax liability only at the time of redemption.

Don’t make these mistakes: “People tend to concentrate too much in one asset class,” Sunder says. Instead, they need to keep re-balancing their portfolio every quarter to keep a good balance. When the market is moving up, people’s equity is usually overweight and if you ask them to shift some to debt, they won’t want to. But Sunder says that is a mistake. “If you keep re-balancing, you’ll do better than 90 per cent of the population,” she says.

Another mistake people make is buying products for tax planning such as endowment plans; they offer neither high returns nor adequate life cover. Also, purchasing inadequate life/medical cover to bring down the premium doesn’t work because you’re not getting adequate cover. If you don’t have adequate cover, you are going to be liquidating your assets to fund medical or other expenses. With life insurance, the rule of thumb is to ensure at least the routine expenses are taken care of. “I usually suggest you multiply your annual expenses by 14, for starters. Of course the cover needs to include your liabilities too, such as a home loan and non-negotiable goals such as your children’s education,” Sunder says.

Thirdly, everyone should have private medical insurance. Sunder cites an instance where a client was afflicted with a brain tumour.  “His company paid for three months of treatment, but couldn’t keep him on the rolls after that. So who will pay the bills? It makes sense to purchase a health cover when you’re young and healthy at about Rs.20,000-25000 per year,” she says.

IN YOUR 50s
Invest wisely:
With eight to 10 years to go before retirement, Sunder encourages her clients to make sure there are no liabilities, and to be loan-free. So she recommends that her clients put any bonuses etc towards closing down loans. “Move most of your investments from equity to debt (bond funds) – because 50 is a time for consolidation. You don’t want market swings to affect your accumulation so far,” she says. This is also a time when you are earning the most. If children are going away for higher studies, ensure that education loans you take on their behalf do not compromise your financial security.

Don’t make these mistakes: Even at retirement, ensure to have at least 10-15 per cent exposure to equity. “With falling interest rates – 15 per cent on a fixed deposit in my father’s generation, 8 per cent in mine and probably even less soon enough – it’s the only way to beat rising inflation.” Sometimes, you lose more by staying away from the market than by being in it, she says. It could seriously impact the returns on your portfolio and threaten your financial security. Don’t purchase another property at this stage.

Real estate is consumption rather than investment. And you can’t track its performance regularly like you can a financial asset. In real estate, you don’t factor in stamp duty, registration fees, broker fees, repairs, etc.

Don’t make emotional decisions – simplify your life.”

Credits Bangalore Mirror

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