I am new to the stock market. My mother wants to park her money in post office schemes like Monthly Income Scheme for about Rs 10 lakh but I think trying the market is a good option. I am a student and haven't yet got a job. Is it okay to invest at least Rs 1 lakh in stocks or equity funds, if we do not have any other source of income right now. What do I do?
-Vikramsingh Dev
If you do not have any other source of income, investing in equity funds could be a risky move. When the markets crash, you could easily be looking at a short-term loss of 20 per cent or so, even in good funds. Are you sure this is acceptable? The first thing that you should be doing is invest in the post office monthly income scheme. It earns an interest of 8 per cent and at the end of the term, there is a 10 per cent bonus. The effective returns from this scheme work out 9.1 per cent, which is excellent. But this deposit comes with a ceiling of Rs 3 lakh in single name or Rs 6 lakh in a joint name. We suggest you invest Rs 6 lakh in this scheme.
You could look at investing Rs 3 lakh in other safe savings options like Public Provident Fund, National Savings Certificates or bank fixed deposits. You could invest a substantial portion of the Rs 1 lakh in a monthly income plan, which invests about 80-90 per cent of the money in bonds and the rest in equities, which will provide you safety and some upside from the stocks portfolio. You could look at Prudential ICICI MIP and FT India MIP here.
If you want to take an equity exposure then we suggest a balanced fund like HDFC Prudence, which invests up to 70 per cent in equities and the rest in safer debt instruments. If you still have some money left then we would recommend a large-cap fund which is likely to fall less than other equity funds in case the market falls. Franklin India Bluechip is one such fund you could look at.
Going by your query, we have come to understand that safety is paramount and that you want to protect the Rs 9 lakh as well as you can. With the MIP and balanced fund, a substantial portion of the Rs 1 lakh will be safe. And you get to learn about equity investments too. When you start working and have your own money, you will be able to take more risks. Good luck.
This article was originally published on December 07, 2005.
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