Last year, if you had Rs1 lakh that you could invest as you pleased, you would probably have gone straight to the stock market. In difficult times, however, you need to evaluate your investment decisions a little better. If you have Rs1 lakh to invest today, this is how you should look at it.
Keep some cash
First of all, make sure you have 3-6 months of living expenses saved up. With inflation at almost 12%, and looking to stay high, you will have higher outflows in the monthly budget for your home. You have two options. One is to keep this contingency money in a savings account that is linked to a fixed deposit. This way, you will earn a slightly higher rate of interest as well as have penalty-free easy access to your funds should you need them.
The other option is to invest this money in fixed maturity plans (FMP) of short durations. FMPs are closed-end, debt-based funds with fixed dates of maturity. They aim to generate returns that are indicated at the time of the launch of the scheme. Their tenure ranges from one month to five years. These will give you a higher return than the savings bank account, and usually offer much more attractive returns after adjusting for tax when compared with fixed deposits.
Buy medical insurance
Economic slowdown is likely to affect employment. Companies will seek to cut the flab and though new jobs will be generated, you would not be as spoilt for choice as you have been in the last few years. If you only have a health insurance plan from your employer, it would be worthwhile to buy yourself a policy now. If the worst happens and you are laid off for a period of time, you do not want to risk falling ill and having to pay your medical bills as well.
Pay off your loan
This is the simplest answer. Interest rates are going up. Your EMI and your tenure may have been increased several times in the last few years. If you have some money to spare, try and pay off as much of your loan as possible. First, pay off credit card debts and personal loans, then look at home loans. For example, if you have a home loan of Rs20 lakh today, and you prepay Rs1 lakh, you will be saving Rs1,64,260 on interest costs alone.
Buy blue-chip stocks
If you do not have a loan to pay off or would rather invest that money, the stock market can be a worthy destination. In the close to 40% loss witnessed by the markets in the last six months, several stocks that were astronomically priced have come into fair valuation zones. If you do not have any immediate use for your Rs1 lakh, you can invest this in some good blue-chip stocks. Stay clear of interest-rate-sensitive sectors, look at pharmaceutical and FMCG companies (which are better options in these times).
However, if you do not want to take the risk of picking the wrong stocks, you could invest this money in an exchange-traded fund (ETF). An ETF invests in stocks in the exact proportion as the index it mirrors. If the Nifty grows 15% annually in the next five years, so will your money.
Invest in an MF
If you are not sure at all about investing all your money in a stock market that seems to be gaining and losing 1,000 points every other day, you could look at a systematic transfer plan (STP) in a mutual fund. Under this, you invest your lump sum of Rs1 lakh in a debt fund. So you get a consistent, but low return. Then you mandate the fund house to transfer a portion of this money every month to a designated equity fund. This way, if the market slips down significantly, you can take comfort in the fact that only a portion of your money is invested and if the market rises, your increased exposures will add to your wealth.
THINGS YOU CAN DO WITH Rs1 LAKH
• Keep 3-6 months’ expenses as contingency cash
• Buy medical insurance
• Pay off loan
• Invest in an ETF
• Invest through STP in a mutual fund
The views expressed on this page are not the newspaper’s opinion and are provided for information purposes only by Outlook Money. Readers are requested to do their own research. Neither Mint nor Outlook Money will be responsible for any actions and outcomes based on information provided here
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