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Straight from the Specialists

Five things to do before you turn 30 — financially

By Deepak Yohannan
June 1, 2011

(The views expressed in this column are the author’s own and do not represent those of Reuters)

1) Start investing in Mutual Funds
There is a reason why I mention this as the first point in the article. Mutual funds are by far the best starting tool for any investor. And this holds true for any type of investor — extremely aggressive ones and those who do not know much about investments.

The tough part of managing the portfolio is best left to the experienced funds managers who have adequate resources and the knowledge to best maintain the returns on their funds portfolio and manage the associate risks. They are far better informed than an individual can expect to be in most cases.

HOW TO DO IT?

Always go the SIP way, at least initially. Well, as the name (Systematic Investment Plan) suggests, you systematically invest a certain amount every month, irrespective of the market conditions. Choose one or two large-cap funds with a proven track record and then just stick to it. You can base your choice of funds on recommendations from websites like mutualfundsindia.com or taking help from your financial planners.

The amount invested every month can be as low as 500 rupees or maybe even 5 percent of your monthly salary to start with. You can start with small amounts and then gradually increase it when you get comfortable. You should have a minimum five-year horizon, the longer the better.

WHAT NOT TO DO?

Do not evaluate the portfolio every month or with every dip or rise in the stock market. Once decided on the funds (take your time in doing this), leave it for at least a year. You may want to review the performance of your funds once every year and compare it with peers to check the relative performance and then maybe make a shift, if needed.

2)  Build your Equity Portfolio

Once you have a couple of years of mutual funds experience, it may be prudent to try your hands at investing in equities directly. It is more fun and the returns can be better. Nowadays, investing in equity is very easy and you can directly do the same online by opening a trading account with any broker.

Equity is the purest form of investing in markets and if done properly, the returns can be much better than other modes of investment. There are risks involved, but so do all types of investment — and if you have a long-term horizon, you are much better off investing in equities directly.

HOW TO DO IT?

Once you open a trading account, you would need to narrow down on the amount you want to invest in a month and then the stocks you would like to buy every month. Again no need to start with a very high amount — but yes, you would need 5,000 to 10,000 rupees per month to get going meaningfully on this one.

Mutual funds SIP score higher on this note as you can invest in blue-chip funds with an amount as low as 500 rupees every month. Once you decide on the amount, now for the stock picks. You can use the services of a relationship manager the brokerage will assign to you. The idea is to pick only the best companies in their line of business. You might just end up buying a share of SBI and two shares of L&T but that’s OK — stick to it. Spend time doing research on the companies you would like to buy — take help from experts and the internet wherever needed. The idea is to build a portfolio of quality stocks over a period of 10 to 15 years — yes, dividends too would come to you every year.

WHAT NOT TO DO?

Do not get into this if your time horizon is less than five years. You will see some fluctuations in the prices — stay calm and invested.

Do not get into speculative stocks — companies which you have not even heard of but are being recommended by a lot of people to make quick and handsome returns. Buy stocks of companies which have been the best in business for a long time and performed well in the markets.

Do not invest an amount every month which you need to fret and worry about. This can cause you to track them almost every day and even panic when you see a dip. The amount invested every month should be something which you can easily afford and view as a very long-term investment — try just forgetting about it. This holds true for point 1 also.

3) Take a high cover Term Insurance Plan

Term insurance policies cover pure risk — that means in the event of the policyholder’s death, the nominee gets the sum assured. We very often ignore this or are heavily under-insured.

We tend to live with a false sense of security that nothing can happen to us. We all hope this is true but why leave anything to chance and risk the future of loved ones who are dependent on your income. We think we have a good income and savings which will grow as income rises — but what if income stops all of a sudden? Can your family live the rest of their lives out of the bank balance that you currently have? In most cases, the answer is a sad NO.

So don’t take a chance — take maximum term insurance cover. And the earlier you take it, the cheaper it would be for you.

This is also important from a peace-of-mind perspective when it comes to the investments you make.

4) Build an emergency cash pool

This emergency cash pool does not have to be too large. If you have adequate health and life insurance cover, it could be equal to six months of your salary. Just in case there is a temporary job loss or inability to work due to some accident, it should not put all your plans on hold. So keep this small kitty in some fixed deposit and maybe a small part in your savings account. Use a sweeping facility in your savings account where surplus from a particular level goes into a fixed deposit automatically.

5) Ensure your family has adequate Health Insurance Cover

This is more important from your parents’ point of view. Chances are they have retired or are close to retirement. It is during these periods that medical bills also go up and if they do not have a cover, it would be constantly playing on your mind.

A lot of insurance companies have a maximum entry age for health insurance policies, so it would not be very easy to get a policy for them. Also, most health insurance policies cover only two adults in a family floater policy, so if you are covering your spouse, chances are that your parents would need a separate policy. There are some insurance companies which have health insurance policies for senior citizens — ensure that you take them for your parents.

Also, don’t forget to take one for your immediate family — spouse and children. Medical costs have gone through the roof in the last few years and it can take a toll on finances in case of an unplanned surgery or in case of a freak accident. Even if your company provides a group health insurance policy, it is advisable to buy a plan yourself.

It is a small amount you pay every year — so why take chances. Imagine getting a great job offer and you meeting with an accident on your way back after putting in your papers. You might even lose the new job if you are hospitalised for a couple of weeks. Is it worth it for a few thousand rupees a year?

Conclusion

There are other financially savvy things that can be done in addition to the ones mentioned above. Buying a house and hence taking a home loan could be one of them and this could affect some of the things given above. Well, buying a house can be a very personal call and it is surely a desirable and advisable proposition. My only advice would be — do not stretch yourself, thinking of cashing out and making money through an increase in property prices.

Yes, your neighbour may have made some handsome profits and it would sound tempting — but do it only if you have an adequate amount of liquidity and risk-taking appetite. If the purpose of buying a house is for staying in it yourself, things can be much simpler and you probably should go ahead.

Why I have not mentioned “buying a house” as one of the five things you should do before turning 30 is because you leverage yourself substantially when buying a house. This point can be debated endlessly though.

I hope you liked these simple thoughts. I am sure there would be more things that can be done — please feel free to share your thoughts. Happy investing and planning ahead.

(Write to the author at deepak@myinsuranceclub.com )

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