One of the most fundamental questions of investing is actually a no-brainer. Would you want to spend (invest, in other words) your money today, in a year’s time or even later? The answer is today, now, because the first principle of finance and investment says that every rupee you receive today is worth more than the rupee you will receive in the future.
Start planning now
To accumulate wealth in the long term, start working on your investment plan now. Of course, there are risks attached to most plans, but take only those risks that are suitable at your age and for your eventual financial goals.
If you remember your class V math lessons, compounding is the ability to earn a return in the current year on not only your principal amount, but also on returns earned in the previous year. Put simply, it’s a process through which your money multiplies and you can earn returns that can go towards meeting your financial goals.
Also, it is only through investing that you can offset the damage inflation wreaks on your personal finances. The experience of other countries has shown that relying on your salary alone isn’t enough.
For instance, let’s say, you earn a salary of Rs10,000 and deposit it in your bank savings account, earning a measly 3.5% return (which could be as low as 2% after tax). This is a pittance when you consider the rising cost of living. In fact, long-term inflation in India has been around 5%. So, you are essentially earning only 2% after tax returns, but your costs are likely up by at least 5% per annum.
Investing allows you to earn returns higher than the rate of inflation, offsetting the reduction in purchasing power caused by inflation.
Investing is the activity of putting your money into securities or assets using an investment framework, backed by adequate risk management and supported by insight and research into the prospects of the company or the different assets you want to invest in. It requires an investment philosophy—a set of guiding principles that provide you with direction and discipline, irrespective of whether the markets are racing high (the bull phase) or are falling towards rock bottom (the bear phase).
Newcomers often make the mistake of putting their money on things they don’t understand. This isn’t investing, it’s speculation which is more like gambling—with you relying on chance and luck.
Investing, however, can’t be left to chance. It requires patience, especially for your investment thesis to mature, something speculators have little time or interest in.
Before investing, base your decision on the following criteria:
• Your unique situation, your risk-taking capacity.
• Why you need to generate returns for: your financial goals.
• By when you want to exit the investment: a timeline.
• How quickly you want to convert your investment into ready cash: liquidity.
• Whether the investment provides you adequate protection against inflation: capital growth or regular income.
• What kind of tax liability do you create? Taxability.
You need a thorough analysis before you, or any adviser, can choose the “best investment” plan. That’s why an investment made by those around you might not be the right investment for you—you might be at a different stage of your life with a different risk profile and financial assets and liabilities.
Understand the categories
Different investment assets offer differing returns characteristics and fulfil different purposes in portfolio. Cash, bonds, equities, real estate and commodities such as gold are some of the popular categories.
The instrument you use to invest in any of these is at your discretion. For instance, you might have a demat account through which you can buy and sell shares. Or you might not have the time or skill to do this yourself, but rather invest in an equity mutual fund. Your retirement accounts at work (such as provident fund) or pension plan, or even your unit-linked insurance policy (Ulip) might invest in a different mix of the above asset classes, depending upon the returns that have been indicated to you and the investment criteria.
• Start early: This will help you take advantage of the compounding of capital. You can even start with a small amount. Investing is not just for the wealthy.
• Invest long term: Don’t churn (frequently get in and out of investments) as this will needlessly create a tax issue and lead to high transaction costs and fees.
• Don’t borrow money to invest: If the investment falls in value, you will still have to pay the money back to the lender.
• Take measured risks: Understand that you can’t earn high returns without taking risks. Not all investments are suitable for everyone, so recognize the obvious and the hidden risks that you may be entering into.
• Be realistic: Always keep in mind that your investments can go up and down in value depending on market conditions.
Keep the long-term average as your reference point and hedge your money according to that figure. Don’t expect markets to go up 30% every year when the long-term average is more like 10-12%.
• Investing is not the same as speculating: It requires skill, discipline and patience. When you buy or sell, your counterparty might be a professional who does this for a living. Understand who has the edge—you or they.
Opt for personal accident coverage
The next time you shop for an insurance policy, don’t forget to protect yourself against the financial consequences of an accident. Opt for personal accident coverage (PA). It covers the financial losses resulting from an accident or a disability that affects your earning capacity or even loss of work arising from the mishap. Additionally, almost all such policies cover death by accident. You will pay around Rs100 per Rs1 lakh of coverage. You can buy this cover either as a rider on an existing life insurance plan or as a stand-alone policy from any general insurance company.
Pay your advance tax
If you get an income other than, or in addition to, your salary (for example, interest income from a savings account or a fixed deposit), you can pay your advance tax in three instalments: 30% of tax liability on, or before, 15 September; 60% on, or before, 15 December and 100% on, or before, 15 March of a financial year. If you fail to do so, you will have to pay penal interest on your tax liability. You can pay advance tax at any bank branch that is eligible to collect tax dues on behalf of the income-tax department or use the online gateway of the department ( https://onlineservices.tin.nsdl.com/etaxnew/Index.html ).
Negotiate for a home loan
If you are looking for a home loan, don’t just settle for the headline rate quoted by your bank or lender. If you negotiate, you can get a lower rate of interest. All lenders have discretion on the interest rate and other terms they offer. While evaluating your application, the lender might attach greater weight to your creditworthiness if you supply the additional information required for the application. Therefore, it always helps to consult others about their experience in taking home loans and the extra documents they furnished. Also, ask your adviser to negotiate on your behalf.
Opt for a construction-linked plan
If you book a property with a real estate developer, you would be paying your instalments in either a time-linked plan or a construction-linked plan. Always opt for the construction-linked plan. In this, you effectively end up paying for the progress and you are not funding the developer when no construction is taking place. In the past year, during the slowdown in the real estate sector, many developers changed their payment plans to construction-linked ones. If your developer hasn’t already done so, negotiate for these improved terms.
Dhruv Agarwala and Kartik Varma graduated from Harvard Business School and are co-founders of the New Delhi-based iTrust Financial Advisors. They can be reached at contact@iTrust.in
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