Tips to make money go longer

New Delhi: The spurt of BPOs and software companies is ensuring that pockets of young people are lined well. They sure are spending, but are they investing wisely? Tips to make money go longer.

Manasi Deshmukh is a 25-year-old HR professional, working with a BPO in Mumbai. Out of her total monthly take-home, she manages to save about Rs 15,000. Her investments largely center around 'safe' avenues such as NSC, PPF, infrastructure bonds and premiums paid to the Life Insurance Corporation towards insurance policies.

"Most of my investments are made around the year-end, when its time to save tax," she confesses. This year, she was taken in by the rush of equity mutual funds IPOs and has invested around Rs 15,000 in them.

Maya Kumar is another young turk from the IT sector, who is left with around Rs 17,000 every month after she meets all her living expenses. Maya's investment comprises predominantly of PPF.

She also regularly invests Rs 5,000 every month in a bank recurring deposit. She says, "This is just to ensure that I don't keep all my investments for the year-end." Her total investments work out to about Rs 1.5 lakh per year. "The rest," she says with a smile, "remains in my bank account."

Equity rules

Their example confirms what most financial planners believe - that most young earners invest their money in low yield instruments and hence are losing good returns on that amount. Deshmukh and Kumar, for instance, hold recurring deposits.

Investment consultant Sandeep Shanbhag says, "While the recurring deposit is a good savings habit, the interest thereon may not be enough even to cover inflation."

The year-end savings of such people are mostly a picture of neglect. Commenting on this, Investment Advisor, Ajay Bagga says, "Their year end planning is more a tax minimisation plan, rather than one that would meet their financial goals in the long term."

Both Deshmukh and Kumar are significantly biased towards fixed income. The most prominent recommendation or the ideal portfolio that all experts have for this profile of people is to increase exposure to equity.

Shanbhag says: "The only time when you can take advantage of equity without sweating the risk is when you are young. Fixed income will gradually follow along with age".

Bagga also seems to agree. He says, "For someone with this profile, I would recommend a portfolio that has 90 per cent in Equity Mutual Funds, and 10% in fixed return products like PPF, Recurring Deposits, Bank Deposits".

"All investments must be made on three criteria, the investors risk appetite, time horizon and financial goals," feels Bagga. "Both these ladies are young professionals, with a long time for retirement. This is the time for them to maximise their long term returns by investing in equity assets like mutual funds," he adds.

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On the recurring deposit, while both experts agree that it is a good habit, they feel that it can be looked at purely for the purpose of diversification. "A systematic investment plan (SIP) in a diversified mutual fund scheme, which is like an RD itself would prove more beneficial," suggests Shanbhag.

Another interesting point is that both of them have parked a significantly large amount of money in their savings account. Shanbhag says, "While everybody has to keep some amount in the bank for day-to-day requirements and emergencies, the rest should be invested in short-term (money market) mutual fund schemes. In these, the returns are higher and the liquidity is great (you can get your money back in 3-4 days)."

Bagga suggests that around 6 times the monthly expenditure can be kept in a liquid asset like a bank deposit, as an emergency pool.

Do you really need insurance?

Bagga says, "I would recommend that Manasi relook her insurance coverage and see if she really has dependants whom she needs to cover, or did she buy the policy due to the agents push and to save tax only. She should try to switch to a low cost term insurance policy, which all companies offer, but which no agent sells, as the commissions are too low on these."

Shanbhag seems to mirror these views, "Deshmukh's insurance premium seems to suggest that she has bought an endowment or money back policy. If she has no dependents, then buying insurance, especially endowment, is sub optimal. In any event, she should not buy more insurance hereon."

Save tax but don't compromise on returns

Most people prefer investments by way of bonds, NSC, PPF, LIC, for tax saving. However, Equity Linked Saving Schemes (ELSS) appear to be the flavour of the moment. Says Bagga, "Stop contributing to NSC. The returns are not comparable to equity and the lock-in is long"

Shanbhag recommends, "You can invest in ELSS instruments. This way, you can kill two birds with one stone, up your exposure to equity and simultaneously save tax."

"Bonds yield very little interest and now that sectoral caps have been removed, one should invest in ELSS instruments," he adds.

Bagga does not think that infrastructure bonds are very good investments too, "The returns on infrastructure bonds have fallen to the 5-5.5 per cent levels. Their only attraction used to be the tax savings. With Sec 80 C now allowing investors the freedom to choose whichever investment they want to make freely up to Rs 1 lakh per annum, these are no longer an attractive option given the low returns and taxable interest nature of these bonds. Manasi should not invest in these in the future."

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Invest smart: tips and tricks

Are you young, earning big and want to know how to invest right? Here are five smart ways to do so.

1. Your ideal portfolio is one with 90 per cent in Equity Mutual Funds, and 10 per cent in fixed return products like PPF, Recurring Deposits, Bank Deposits

2. If you want to save on a regular basis, you could go in for a systematic investment plan (SIP) in a diversified mutual fund scheme. It is like a recurring deposit itself but is more beneficial

3. Invest in short term (money market) mutual fund schemes. The returns are higher and the liquidity is great

4. Choose a low cost term insurance policy, which is the cheapest form of insurance. An endowment or money back policy is not required when you don't have dependants

5. Go in for Equity Linked Saving Schemes (ELSS) investments. This way, your exposure to equity goes up and it also helps in tax saving. Prefer them over NSC and infrastructure bonds whose returns are very low when compared to equity.