It becomes very difficult for a non-financial background
person to have a detailed financial plan and follow it systematically. So how
can we make the investing things simple? In this post we will try to simplify the
investment process in a lay man’s way.
Firstly we have to figure out our income, expenses
and savings. We should also identify our primary and secondary goals which we
want to achieve. We can divide our total income into four baskets
based on the priorities of the need for the money.
The
first part of the savings should go for immediate requirements and emergency
purpose; like if we lose job how are we going to survive and meet our daily
expenses. We can keep 3-6 months expenditure in this basket. The money saved
for this purpose can be invested in liquid/ultra-short term mutual funds or may
be in short maturity fixed Deposits. The main objective of this basket is to
get the money as and when required therefore liquidity of this investment is of
paramount importance. Now, many app-based systems for investing and redeeming
money from liquid funds have been introduced which can move funds back and
forth with ease and speed. They offer almost double the returns of savings
accounts while being potentially much more tax-efficient.
The
second basket of savings could be statutory or forced savings. Under Section
80C government gives us exemption for savings. Certain instruments are
qualified for this savings which includes PPF, Insurance, ELSS, NSC etc. This
type of savings helps us in two ways: first it reduces our income tax outflow
as well as it forces us to save for a minimum period of 3-5 years. Some of
these investment like PPF, ELLS are tax free at the time of maturity also hence
gives full benefits of the savings. We can save upto Rs. 1.50 lakhs under 80C
and additional Rs. 50,000 in NPS under section 80CCD. This saving can be used
for short to medium purposes and can also be recycled for future tax saving
purposes. Apart from this we should also have proper mediclaim polices which
are also tax exempted for self, family and parents under section 80D.
The
third basket of our savings could be based on our specific medium term goals. These
goals/expenses can be figured out with more certainty as they are in near
future say 3-5 years’ time. For example we would like to buy a house in next
five years and need to put down an initial payment. Or we need a new car in
three years, as the existing one will be pretty old by that time. We can separate
these needs from the long term needs as they are more predictable and have
shorter time period as compared to longer ones. This kind of savings can be put
into balanced or hybrid mutual funds which are more tax efficient and have
better returns comparatively. They are less volatile, and have a lower tax
outgo than bank FDs.
The
fourth and last basket is the one where we would be investing for a longer time
horizon for example eight to ten years and more. These savings could be for our
own old age requirements, or for kids education/ marriage etc. These
investments would be based on our age and specific needs. Since these
investments are for longer durations they can be kept in equity based
investments options i.e. equity mutual funds. Even though equity funds can be
volatile in the short term, they are the only asset class which can provide
good enough returns in the long term to beat inflation and provide substantial
returns. The income earned from equity mutual funds is fully tax free so gives
us the maximum benefits without any cut.
To
achieve anything we first need to know our goal, similarly to achieve a
financial freedom we must know our specific goals and plan accordingly. For a starter,
the four basket approach could be a good beginning in this path of financial
freedom.
No comments:
Post a Comment