A beginner’s investment hustle

If you’re reading this article, I assume you’re in the quest for investments and you want to grow your savings for your short or long-term goals. And if you are a beginner, this article can help you to at least form a perspective about the different investment options.

TL;DR: If you don’t know much about investing, always avoid emotions and try to ask as many questions as possible to at least get enough confidence to invest like how much return it’ll give after maturity, or can you stop in between and what happens then. Also, try to understand how mutual funds work.

I think we all have some family members or friends who will always act like he/she is the best player in the investments and will suggest you to invest in some policies that will eventually give you very little return after its maturity. When I started my career last year after my graduation, I thought to invest my money for two reasons, one is to save taxes and another is to grow my money. And guess what happened? Correct, I invested in one of the LIC plans and got to know that it’ll give me around less than 4% return after its maturity. But now that I know, I closed it after the first premium. I sure lost a huge amount but I’ll lose more than that if I continue to pay its premium.

Moral of the story: Don’t involve any emotions in investment, try to analyze as much as you can to understand how you can get good return from your investments.

Just FYI, we can save 1.5Lakh under 80C by investing in products like LIC, PPF, NPS, ELSS, etc. But don’t think tax as you have to get rid of that. It’s good to pay taxes as it helps our country to grow.

Okay, enough chit chat, let’s come to the point. There are few things you should focus on before investing (below are the average estimates but feel free to adjust as per your convenience).

1. Your spending should be 45–50% and savings at least 15–20% of your take-home income.
2. You should have at least six months’ living costs in an emergency fund. This will help you in an emergency and you don’t have to discontinue/close your investments.

You should have at least one medical insurance policy (though many companies already provide this to their employees). While buying any medical insurance policy, always compare these policies on the basis of the following:

1. Price: Compare price with policies from other companies and check how does the price differ over the years.
2. Benefits:

• Ignore co-pay (this means that you’ve to pay some percentage of your medical expenses)
• Check disease-free period and exclusions
• Sub-limits
• How much of the costs before and after hospitalization it’ll cover
• Claims settled by the company (ideally it should be less than 30 complaints per 10k claims made)
• No-claim bonus (It is bonus money added in the sum insured for every claim free year)

Now, you’re most probably thinking about LIC (especially those policies that give return after maturity and also cover your insurance, believe me, that is always the worst policy in long term). There is a 72-rule that says:

To know the rate of return every year of a “double-your-money” proposition, just divide the time period(in years) in which your money gets double and divide 72 by that number. Ex: If 1 lakh will grow to 2 lakh in 15 years, then 72/15 is around 4.73% per year you get.

Whatever your policy is, make sure it should always return more than the inflation rate (In India, on average, the inflation rate is around 7%), otherwise, it is degrading your money.

Life Insurance policies bundled with investments are very high-cost products that benefit the agents, banks, and insurance companies more than they benefit you. But keep in mind, you should have at least one term insurance(only insurance coverage policies), and a good time to buy it is when you’ve dependents or the probability of getting dependents arises.

Now, let’s talk about mutual funds. I’m no expert in investing but as far as I understood by my experience, I’ll always prefer mutual funds over other investments as my career has just started and I can take a little high risk to get a higher return. There are a lot of things that one should know about mutual funds before investing in them and I’ve added links to books and talks that I found helpful for me in the last section of this article.

Few things that you should always check in a mutual fund are:

1. Expense Ratio: Cost to you for handing over your money to fund managers
2. Past History: Check for how it is giving return in 3–5 years.
3. Fund Investment: Check where the fund manager has invested the money and it should be diverse.
4. Lock-in Period: This means that once you’ve invested, you can withdraw your money after this duration of time.
5. Exit Load: You’ll be charged some percent of your money while exiting (Most of the mutual funds keep exit load if you exit before a certain period of time like within 12 months or 24 months)

There are many other things that one should check like whether it is direct or regular, equity or debt, etc. The good thing about the mutual funds is their money is invested in multiple companies, so in case if the stock price of some of the companies are down, those will be managed by other ones whose stock price are up.

It’s been 2 months since I’ve started investing in few mutual funds with the Paytm Money app(it’s really easy and very transparent & helpful) and I already got around 8% return on some of them. I know I’ve just started and some points may vary from person to person but I think sharing my experience can help someone to have a perspective about some of the investment products and policies and you should always explore as much as you can to have a perspective about the product before investing in it. Always learn from other’s mistakes(especially in investing) and ask a tons of questions from your agent or anyone who has invested before. Listen to all but do what you think is good for you and always try to avoid emotions in investments.

References:

1. Let’s talk money by Monika Halan
2. The Psychology of Money by Morgan Housel
3. A Developer’s guide to wealth — Slides by Adnan A M

I hope you learned something from this post and if you want to discuss anything, please feel free to connect with me on Twitter or Linkedin

Happy investing! Peace out✌️