3 things you need to do before you start investing

Summary: Upon starting their first job, many jump right into investing. While it is essential to grow your wealth, there are three things you need to take care of beforehand. We’ll walk you through each of them to help you become a confident investor.

One of the essential ideas we teach at Value Research is that of a financial pyramid. It is fashioned a lot like Maslow's hierarchy of needs.

At the base, there’s your emergency fund – you should start with this. Then comes insurance, both term and health. Finally, you are left with investing for the short-term and then the long-term.

So, there are a series of steps to go through before you even begin putting your money to work. However, thanks to the rabid noise of finfluencers, FDs are constantly vilified. And ULIPs are touted as the best thing since sliced bread.

As a result, many people have thriving portfolios but lack the basic safety net. I too was one of them, having put my money in the market without regarding the basics.

In this article, I’ll explain why a safety net is crucial and the best way to go about building it.

Here’s how you can start.

1. Build a basic emergency fund

Many people who read our articles often misconstrue our advice about FDs. We never advise you against them. Our intent is simply to highlight the tax deferral benefit and sheer power of compounding that a mutual fund offers. It is not to bring down the value of an FD.

If you are building your emergency fund, an FD is great. It ensures you don’t worry about market fluctuations. Additionally, it is a simple vehicle that just keeps your money secure.

However, you can elevate your emergency fund by putting it in a liquid fund. Unlike FDs, liquid funds don’t penalise you for premature withdrawals. Also, your gains remain tax-free until redemption.

Lastly, you need to have 6 months of your expenses saved up. That is a rule of thumb and a strict guideline that you’ll need to maintain.

Suggested read: How can a three-layered emergency corpus help you ride out emergencies?

2. Prepare for medical emergencies

Health insurance is a growing necessity with the constant rise of healthcare costs. However, it isn’t easy to find the right one. You need to read the fine print, be well-versed with some essential terms and keep your fingers crossed when asking for a settlement.

In short, the insurance industry is broken and this is becoming worse by the day.

Hence, a solution might be to dedicate a portion of your savings to medical emergencies. After all, falling into a quagmire of paperwork and phone calls is truly harrowing. To avoid this, you’ll need some liquidity when the time comes.

That said, the importance of a good health insurance policy cannot be overstated.

So you’ll need to dedicate some time to finding one. We’ve discussed some key terms in this article to help you in doing your research.

Suggested read: Is health insurance still worth it in India today?

3. Have life insurance

People unnecessarily complicate life insurance. However, all you need is a pure term insurance that gives you adequate cover with reasonable premiums. Our rule of thumb for this is that the coverage needs to be 10 years’ worth of your income.

Please do not fall into the mess of ULIPs. The marketing surrounding it is very misleading. We recently did an article where we noted that the coverage for these vehicles is typically 10 times the premium. Here’s why:

If your annual income is Rs 10 lakh, you need Rs 1 crore of life cover. To get Rs 1 crore of cover through a ULIP, you must pay Rs 10 lakh as annual premium. But that's your entire income! The structure of ULIPs ensures they cannot provide adequate life insurance at any reasonable cost.

Meanwhile, proper term insurance can provide a Rs 1 crore cover for perhaps Rs 30,000 annually at age 30.

Suggested read: The ULIP illusion returns

Conclusion

So, why is this groundwork necessary?

Let’s say you put your entire first paycheck in a cool stock of your choice, many will pat you on the back. And you’ll even have bragging rights.

But the moment that stock falls, your stomach will churn. Even if the fall is due to a short hiccup, your risk-taking capacity will quickly slide.

Having a safety net ensures that you can make smart and rational decisions. Because the panic in the market will not impact you as much when you have a savings cushion.

And you’ll never be in a rush to take out all your money from any investment when you know you’re covered. It is kind of like driving on an empty highway with the comfort of knowing you have a spare tyre.

Want to take the first step into investing?

Mutual funds are the easiest place to start. After all, there’s one for every type of investor. But with so many options, picking the right fund can feel overwhelming. That’s where Value Research Fund Advisor comes in.

We provide personalised recommendations based on your goals, time horizon, and risk tolerance. With us by your side, you can invest with confidence.

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