Aakash (28) works for an IT company. His in-hand monthly salary is about Rs 1 lakh. He wants to start investing for the long term but is confused about whether this is the right time to start, given the ongoing economic uncertainty due to the outbreak of the second wave of COVID-19. He also wants to know if he should invest in gold. He has a lump sum of Rs 2 lakh ready to be invested.
Start investing now
There is no good or bad time to start investing. What matters is that you choose the right investment avenue and invest systematically. It is essential to formulate a good financial plan and stick to it through thick and thin to achieve your financial goals. Market and economic uncertainties seldom go away. If one event is over, another arrives. Hence, don't focus on the short-term picture. Keep a long-term outlook. If you delay investing, that may result in an opportunity loss.
Also, do remember that in investing, often the worst-looking times are the best ones from a long-term perspective. That's because asset prices tend to be low during such times. So, never stop investing due to economic uncertainties. We saw how the markets sharply recovered from the setback in March 2020. Those who sat out of the market due to uncertainty would have missed a big opportunity.
Don't think of gold as an investment
Gold tends to come into picture whenever there is economic uncertainty, as is the case currently, but it is not a very productive asset. Its value is derived not from some economic fundamentals but from perception. So, you should see gold not as an investment but as a consumer good.
Still, if you must invest in gold, allocate not more than 5-10 per cent of your portfolio to it. To invest in gold, Sovereign Gold Bonds (SGBs) are the best option. On maturity, these bonds are redeemed for the prevailing gold prices and they also pay 2.5 per cent as interest during their holding period.
The right way to choose an investment avenue
Your choice of an investment avenue should be based on the time for which you want to invest the money, the purpose for which you are investing and your risk appetite. So, make sure that you define your goal first and then choose where to invest.
Among various asset classes, equity has proved to be most rewarding over the long term. For most investors, equity mutual funds are the appropriate way to invest in equity as they provide both instant diversification and professional expertise. A portfolio of three-four diversified flexi-cap equity funds is good enough for most investors.
However, equity could be volatile in the short term, so invest in equity funds only if your goals are more than five years away. If your goals are three to five years away, then you should opt for short-duration debt funds. For short-term goals, those that are due in one-two years, opt for liquid funds or ultrashort- duration funds.
Don't ignore saving taxes
Tax saved is equivalent to return earned. Hence, do pay attention to that. Section 80C of the IT Act mentions a number of avenues to get tax deduction up to Rs 1.5 lakh. Apart from this, one can also avail an additional deduction of Rs 50,000 by investing in the NPS under Section 80CCD(1B). Under Section 80D, your health-insurance premiums are tax deductible as well as per the specified limits.
Among 80C investment avenues, tax-saving funds are a good option to earn comparatively higher returns over the long term. One should invest systematically over the year in these funds to average one's cost.
Investing a lump sum
Aakash has a lump sum of Rs 2 lakh which he wants to invest for the long term. He should invest this amount in an aggressive hybrid fund. These funds are ideal for beginners as thanks to their debt exposure, they are less volatile than pure equity funds. Once he gets comfortable with market volatility, he can shift to flexi-cap funds.
However, this amount should not be invested at one go. Instead, it should be spread over the next six months. Staggering the investment in equity reduces the risk of entering the market at the wrong level and helps you average your purchase cost.
Don't ignore these
- Emergency fund: Maintain an emergency fund equivalent to at least six months' expenses. It can be kept in a combination of liquid funds and a sweep-in fixed deposit. Given the ongoing crisis, a higher emergency fund than you would normally need is desirable.
- Life insurance: Buy adequate term life insurance to financially protect your loved ones in your absence. Ideally, the life cover should be at least 10-12 times of your annual income. Purchase it before you start investing for any other goal.
- Health insurance: An unforeseen medical emergency can derail your financial plan. Buy health insurance that adequately covers all your family members.