Handling finances has been the one thing that I would always procrastinate, merely, because this alien world intimated me. We were never taught Personal Finance in our schools or colleges.Growing up we realise its such an important part of our existense. We had the pandemic hit in early 2020 and thousands of people lost their livelihood and jobs leaving them with no finances to bank upon. This was one of my biggest motivations for me to step into the world of Personal Finance.
In the beginning though it was tough to understand. It also felt boring but I was determined to learn and kept pushing myself. As I stand now, I want to continue learning as it an ocean of knowledge. It‘s a long journey but we will slowly get there.
It is important to make your money work for you.The best way is to have a diversified portfolio . There are a numerous investment options available but having investments in the form of stocks, mutual funds, gold/silver investment, FDs and having a reliable emergency fund should keep you in a good place.
Lets understand how to get this journey started:
I started by understanding how to open a Demat account and the various Brokers available. I came across the Youtuber Pranjal Kamra’s recently launched Select by Finology App that will help you make this decision.
The next step for me was to learn what Mutual Funds are, in what way are they different from one another. What is the amount that I should invest with the salary that I incur. As I continued research, I came to know that investing in Mutual Funds should be done as soon as possible. Because the sooner you begin, the higher the benefits you reap. Though I was quite late into this game, as they say, Better Late than Never! Be sure to do thorough research and ensure that the Fund you choose at least gives the returns that beats the inflation.
As you can tell I’m a novice at investing but whatever I have learnt, I would like to explain it to you.
MUTUAL FUNDS
Mutual Funds basically are of the types :
ELSS - This is used as a tax saver option when filing your yearly Tax returns.
Index Funds - This replicates the Sensex or Nifty Index.
Equity Funds - This type of investment is directly made into the stock market.
Debt Funds - These are funds that invest into government securities and bonds.
While starting out, I would suggest you start out small and with instruments that have a lower risk. As you gain expertise, you can branch out and increase your risk appetite.
Now let’s discuss Index Funds in a little more detail. Within this category, there are majorly two types; one that is Actively managed and the one that is Passively Managed.
Passive Index Funds
There are two popular Indices in India i.e; Sensex and Nifty. These are called Nifty Index Funds and Sensex Index Funds. This fund follows or replicates the gains of whichever Index you choose. These have a marginally low expense ratio as compared to the Active funds. It has a lower risk and therefore a safer option but the gains may not be at par with the Active funds. Examples of these include Nifty50, Index 30, Nifty- ETF, Nifty Next 50 to name a few.
Active Equity Funds
Active Funds have a Fund Manager managing the portfolio of the stocks within the mutual funds. This means that whenever a particular fund does perform as per the expectation from the portfolio of stocks, the manager can switch the stocks with the others. For this, you would need to pay a small fee in the form of an expense ratio to the Fund Manager each time you make an investment. This fee is higher as compared to the Passive fund. It is important to research about the Fund Manager’s experience before investing in one.
Active Funds there are further classified into:
Large Cap Funds that invest in top 100 companies from the Nifty Index list.
These invest in large companies which have a reputable name and are unlikely to fail. This category is less risky than the other categories.
2. Mid Cap Funds that invest in companies from 101-250
3. Small Cap Funds that invest in companies ranked below 250.
As the name suggests, Small Caps invest in very small companies and are therefore the riskiest of them all. It can either give you Multifold returns or can be the total opposite.
4. Multi- Cap or Flexi Cap Funds that are a combination of the above.
These funds have a good combination of all the above categories. As per the current rules, this fund needs to have a minimum of 25% fund distribution across the Large, Mid and Small cap category.
These funds have a good combination of all the above categories. As per the current rules, this fund needs to have a minimum of 25% fund distribution across the Large, Mid and Small cap category.
Debt Funds
These are generally called Gilt Funds and they invest in government securities. In this, the returns are more or less in a fixed range. These pose a lower risk than Equity Funds.
The other type of investment is Gold. Gold Investments are broadly of the type:
Physical Gold
Digital Gold
Sovereign Gold Bonds
While Physical gold is the most preferred investment for Indians, it may not be the best form of investment as there are losses in the form of making charges.
Digital Gold is a popular option but a good amount of research is required as there may be transaction charges while repeatedly buying and selling these.
Sovereign Gold Bonds on the other hand are issued directly by the Reserve Bank of India. It’s the purest of gold investment. These give a fixed return of 2.5% interest per year. The only downside here is that it has a lock-in period of 8 years to ensure you gain the maximum benefit out of this scheme.
It's also important to note that gold is inversely proportional to the stock market. That is, when the stock market crashes; all the mutual funds, stocks underperform and the gold prices spike, It can be therefore used as the best safety net in such times.
Emergency Fund
Now, the pandemic did make us realise the importance of an Emergency Fund. To calculate the amount of Emergency Fund you need, you will have to calculate the amount that is required to cover your basic necessities i.e; to pay your bills, rent and for your food. You would need to multiply this amount by 6 if you’re an employed person or a 12 if you’re a freelancer. This serves as a safety net for your urgent needs for a period of 6 or 12 months. Be sure to touch this until there is an actual ‘emergency’. This fund needs to be maintained in the safest instruments such as Fixed Deposits or Liquid Funds of the most reliable banks.
National Pension Scheme
In this day when most of working for private sectors most companies do not offer a pension post your retirement. So, it is best to start planning for your retirement as soon as you start working. The government offers the NPS scheme that lets you save upto Rs. 1.5 lakhs per financial year for your retirement. This can also be availed as a tax saving instrument. When you are 60, the government pays this back to you in the form of a monthly pension.
You can also choose to directly invest in the stock market but before that be sure to study the company in depth.
In conclusion, I would say any investment is better than no investment. Its absolutely necessary to start investing, have the patience to watch it grow and be a disciplined investor. You will reap the benefits of it and will be able to enjoy the fruit of its labour.
I really hope you found this article informative. I would be so happy to know your thoughts in the comments section below.
Disclaimer: I‘m a novice investor. I’m here only to share my personal thoughts.
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Great to know about investments
Very informative. Explained complicated terms very simply.