Additional savings should be converted to investments

Based on your needs you can invest this additional amount


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I plan to start working as a freelancer in another year. How should I plan towards saving a corpus? At present, I earn Rs.1.2 lakh per month and monthly expenses come up to Rs.30,000. I also invest Rs.25,000 monthly in mutual funds through systematic investment plans. I don’t have insurance. I am 38 years old, married and have one child.

—Nandita Rane

You have a year to ensure that you put your savings in order and create a corpus for yourself.

Also, as you want to work as a freelancer you need to define your short-term goals. These goals include providing for your day-to-day expenditure for the initial period. How much you will earn will depend on the kind of work you get. It could be that you start earning right from the first day.

Further, any other goals that can have a financial impact are to be provided for, i.e., the corpus for these needs has to be invested in such a manner that the money is available at call without being subject to market risks. Hence, for short-term goals, your investments need to be made keeping in mind high liquidity, low risk, and moderate returns.

You already have an SIP book running for Rs.25, 000 a month; so there is already an existing corpus. You need to review your SIPs on a regular basis and ensure the schemes are in order. In case of any underperformance on a continuous basis, you need to change the investments.

You also have a surplus of income over expenses. This surplus is quite substantial even after counting for your SIP. This additional savings should be put to good use, i.e., savings should be converted to investments. Based on your needs you can invest this additional amount. So, if any corpus is required in the short term, you may start an SIP in a liquid fund, or a short-term fund.

Another critical aspect is to review your risk profile—risk appetite and risk capacity. Your risk profile can change with shifting financials. You may see your risk appetite as well as capacity to take risk going down with age, or under certain circumstances. If that happens, you may need to align you investments and SIPs accordingly. So, instead of a mid-cap fund you may like to consider a large-cap fund or even a balanced fund. Once you achieve stability in your work, you may go back to your original asset allocation.

Also, you need to ensure your insurances are in order. Life insurance should be 7-8 times of your current annual income. It is also good to have life insurance in place as soon as you can because getting yourself a policy after one year would become difficult as insurance providers will ask for current income, which you may or may not be in a position to provide.

Further, it is also strongly recommended to have health insurance for both yourself and your child. This will ensure peace of mind and you will be able to concentrate better on your new assignment.

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