We belong to a conservative culture where saving habits are built into our DNA. As a country, we prefer to save than to spend, unlike the advanced economies that are fueled by the expenditure-driven demand of their domestic economies. Saving comes naturally and we all save for the future in our own way. Whether it’s putting our savings in a bank FD or contributing to a PPF or cutting expenses on managing an EMI for a home loan, saving is all we do. But what about grow your money to something beyond the savings that will give you an 8% – 9% return at best, half of which is somehow gobbled up by inflation?
That’s when savings and investments come together to help you build wealth and gain a sense of financial security. Having a job isn’t enough to make you feel financially secure, because what’s left of your paycheck after all the monthly expenses are paid isn’t enough to pay for future lump sum expenses that will be due over time. Salary and salary savings cannot provide for important things in life, such as higher education for children, their weddings, medical expenses in old age, and costs of the long, retired phase of your life when salary would no longer cover you. It is imperative to put your savings into investment opportunities where they can grow prolifically over the long term.
You need to understand the difference between short-term and long-term investment decisions so that you take a holistic approach to building financial security and wealth.
Safe Short Term Goals
Short-term goals are usually defined as milestones that you want to achieve in the next 1-3 years. If there are some short term goals that you should not miss, go for savings options like bank FD or better yet, invest in appropriate debt mutual funds if you are comfortable with mutual funds. Fixed income mutual funds or debt funds are safer than equity-oriented mutual funds and have the potential to give you higher returns than bank FDs. But you should do good research or enlist the help of a investment advisor to choose the right funds that are a good fit for your financial goal and risk taking.
Don’t leave your money in the bank
Most people just leave their money in their savings account, even if the amount is significantly higher than what is needed to manage day-to-day expenses. Don’t leave excess cash in a savings deposit. Rather invest it in a liquid investment fund which could potentially offer you a higher return than what the bank would offer you. Liquid funds are convenient to use because they have no entry and exit charges and redemption money is available to you the next business day when you want to sell your interest in the fund. Liquid funds are best suited to investing excess cash for 1-90 days and are the least volatile of all mutual funds.
Invest in balanced investment funds for medium-term goals
If there are certain requirements that you expect to be met in the next 3-5 years, choosing a balanced mutual fund or an appropriate hybrid mutual fund may be a good option. Balanced funds that are a kind of hybrid investment fund invest in a mix of equity and debt securities. They capture the characteristics of both equity and debt funds, while offering their investors a moderate risk-return proposition suitable for those who prefer to play it safe and look for some upside potential from stocks.
Invest in long-term stock-oriented options
When a financial goal is a long time away, say your retirement life starting in 15 years or your daughter’s higher education being paid for in 7 years, the best option would be a well diversified stock fund. Equity funds are best suited for: long-term investments longer than 5 years, as equities are sensitive to higher volatility in the short term, but can provide good returns in the long term. Invest wisely in a few stock funds that suit your personality, ie your willingness to take the risk. You may also want to consider investing directly in stocks, but mutual funds are more suitable for those who don’t like taking the risk with stocks. Always try to understand everything about risk of investment funds before investing in it.
Be flexible, check and rebalance your portfolio periodically
Once you’ve invested your money in various mutual funds, FDs, stocks, ULIPs, PPFs, etc., that’s half the battle. You should check your portfolio regularly and adjust it if necessary. Rebalancing is needed to reflect any changes in your living conditions. For example, you change the job from an MNC to a start-up where the risks are greater. In such a situation, your portfolio exposure to equities should be reduced, as your human capital is now invested in high-risk equities. Working for start-ups is just as good as owning risky stocks.
Get professional advice
It is best to seek professional advice from an investment adviser or to seek the help of: mutual fund distributors to get through the paperwork and the…