Investing in your 20s: How I finance vacations, beer, food and my future

19 Oct


I am no finance guru but over the past few years I have made some good investment decisions that have helped me to fund various travel trips across India, buy a motorbike, and secure my future in case any mishaps happen.

Some investment rules I follow:

  1. Don’t live on credit:  I don’t have a credit card and will probably never use one. While using a debit card I know how much money I have in my account and I spend within my limits.
  2. Always invest a certain percentage of your salary right at the start of the month. After one year you will be surprised with how much money you have accumulated over the year. I do this by investing xxx amount in 5 mutual funds, which is the SIP (systematic investment plan) route.
  3. Take Risks: I started investing at an early age, so I can afford to take risks. The equity market (stocks, mutual funds) is risky but the returns are huge. Having a SIP in many mutual funds protects me from the market ups and down due to the law of averaging.
  4. Invest in equity for the long term: Day trading and short term trading in stocks requires a lot of fundamental and technical knowledge. So don’t dabble in shares for the short term.  If you really want to do that, first spend a few months learning about the equity market and then start investing low amounts so that if you make mistakes, at least the amount of loss will be minimum.
  5. Don’t blindly follow the advice of the so called ‘economic’ experts and financial advisers appearing across all news channels.

Where to invest?

I currently invest only in mutual funds. I also have health and life insurance policies. I am currently learning about the stock markets by investing small amounts every now and then.

Mutual Funds

MFs in Layman terms: You buy mutual fund units at the asking price say Rs 10 per unit. You buy 1000 units and thus the total investment is Rs 10,000. Many people buy such units and thus a mutual fund manager controls a corpus that runs into hundreds of crores. The fund manager is responsible for investing the money across various stocks and debt instruments and the aim is to maximize profits for the investors. The unit value increase as the fund starts making money. So if the unit value for the fund bought is now Rs 20 per unit, my total investment grows to Rs 20,000. The unit value can also decrease if the fund manager doesn’t invest wisely or if there is a major downturn in the economy.

The best way to invest in a mutual fund is a systematic investment plan. This works like a recurring deposit. You link the fund to your account and every month a certain amount is invested in the fund. The big advantage of this is you are protected from the market ups and downs due to averaging. To understand this in more detail, read http://mutualfundwala.com/sip.htm.

Major types of funds

Equity: As the name says, these funds invest their corpus in stocks. High risk, high returns. But if you check the performance of some top funds, you will never think of going back to bank FDs. http://www.valueresearchonline.com/toprated.asp

Balanced: If your risk appetite is less, you can invest in balanced funds where a certain amount is invested in stocks and the other in safe debt instruments. I started my investments through balanced funds. Some top funds are  HDFC Balanced Fund and HDFC Prudence Fund.

Debt: I don’t invest in debt funds. Invest here only if your risk appetite is very low.

Advantages

  • You can buy and track funds online
  • SIP gives you a disciplined way of investing
  • You don’t have to time the market; the fund manager takes care of that
  • You just have to check the performance of your funds. This can be easily done through some popular sites such as http://www.moneycontrol.com/mutualfundindia/ and http://www.valueresearchonline.com/.
  • High returns ranging from 12 to 20% over 3 to 5 years, which is certainly more than the 10% that bank FDs offer.

Never mix insurance and investment: ULIP vs Term Plans

All insurance agents will coax you to buy ULIPs (Unit Linked Insurance Plans), especially those highest NAV plans. ULIPs are equity market linked insurance-cum-investment plans. ULIP returns are good only if you invest for a very long term. You would be better off investing that money in a mutual fund or even a bank FD.

So why do these agents run behind you to buy ULIPs? Well the reason is simple—they earn a lot more money through agent commissions on ULIP plans than term plans.

A term plan is where you pay a premium amount either monthly, quarterly, annually or a lump sum to get insured for a particular amount for up to 40 years. The annual premium usually starts from as low as Rs 6000 for an insured amount of 50 lakhs. The premium changes depending on the tenure (I suggest you go for the max tenure) and the ‘riders’ with the policy. The most common rider is the accidental disability rider, which entails you to a certain amount if you become disabled during the insurance period.

To summarize Term Plans:

  • You pay a premium and in case of your death, your dependents get a huge lump sum amount.
  •  No benefits if you surrender the policy ; so choose carefully.
  • You won’t get any money if the policy matures. But again, you can’t really expect any returns if you are paying a small amount for a huge insured amount such as 50 lakhs
  •  The common riders you can buy are Accidental Death, Critical Illness, and Permanent Disability.
  • Don’t take a term plan if you don’t have any dependents.
  • Do thorough research before buying a policy. Don’t select a policy solely on the premium amount;  go through the exact clauses and the riders and select the one that suits your requirement.

You can even buy an online term policy. Just visit the websites of some famous insurance companies such as ICICI, SBI, Religare, and more.

Medical Insurance

Indians usually tend to ignore medical insurance. A lot of modern medical procedures cost a bomb with many costing more than a lakh. Recently a friend of mine had to go through surgery and he didn’t have a medical insurance and he ended up paying 1.2 lakh rupees from his own pocket. It ate up a lot of his savings and now he has no money to spend on vacations, new tech gadgets, and other things.

A medical insurance costs about Rs 4000 to 6000 for a cover of 2-3 lakhs, which turns out to a measly amount of 16 rupees per day.

Just visit the web sites of famous Insurance providers and buy a mediclaim policy asap!

Tax saving instruments

As per current rules you can save tax by investing 1.2 lakh rupees, out of which 20,000 is for infrastructure bonds. For the other 1 lakh the major instruments are:

  • Premium for Life Insurance or ULIP
  • Provident Fund (PF) contribution: This is the fixed amount your company deducts from your monthly salary.
  • Public Provident Fund (PPF) – only up to Rs. 70,000 in a year: This is a good investment option for the long term if you want a risk free instrument product. You will have to open a PPF account at a post office or some banks.
  • Rent: If you stay on rent then most of your 1 lakh quota will be filled by the monthly rent you pay.
  • Equity Linked Savings Schemes (ELSS) of Mutual Fund Companies: From April 2012, ELSS won’t be a tax saving instrument.
  • National Savings Certificates (NSC): A good option for long term risk free investment.

Resources

http://www.investopedia.com/ — your go-to guide to learn everything about investments

http://www.moneycontrol.com — a great site to track markets and mutual funds.

http://www.valueresearchonline.com/– a dedicated mutual fund website

Tying it all up

Now whenever I want to buy something, or finance a vacation, I can rely back on my investments without having the need to approach my parents or friends for money. Once you get into the habit of investing reguarly, you will lead a good life. Okay, that was a cheesy line, but try it yourself and see how it goes…

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5 Responses to “Investing in your 20s: How I finance vacations, beer, food and my future”

  1. Rasik Tirodkar October 19, 2011 at 8:34 pm #

    I remember reading that lot of mutual fund schemes actually ended up losing money but this was awhile ago. So is it true that you can actually lose money buy ivnesting into some mutual fund schemes?

    • Amey Kanse October 20, 2011 at 9:56 am #

      Yes, you can lose money in mutual funds but this usually happens when you invest for a short term. For example, I invest in the HDFC TOP 200 fund. Here is the performance of the fund:

      1 year -14.1
      2 year 4.0
      3 year 25.2
      5 year 13.4

      The poor performance over the last year is due to the fact that the market has been on a downside.But if you stay invested for more than 3 years, you are bound to get much higher returns than traditional instruments such as fixed deposits.

      You can probably start investing in balanced funds such as the HDFC Prudence Fund — http://www.moneycontrol.com/mutual-funds/nav/hdfc-prudence-fund/MZU003

  2. Sosha October 19, 2011 at 8:59 pm #

    Yes, Amey, the last line was cheesy!

    I get what you’re saying here. I trade in BSE daily for this very reason of funding my own trips.

    • Amey Kanse October 20, 2011 at 9:59 am #

      Yes, the BSE is a great platform to make quick profits. I am currently dabbling into shares by investing small amounts and booking small profits. Once I thoroughly understand the technical aspects of the market, I will invest huge amounts.

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