Investors should keep in mind that the purpose of investing or parking money across different asset classes should be based on their financial objectives, time horizon, and risk appetite.
For a new investor or someone who is investing for the first time, there are certain things to take note of right at the beginning. Many investors who have burnt their fingers and lost money in the initial stages of investing often stay away from investing any further.
Right at the beginning even before you invest a single penny, there are at least three major things to stick to – Firstly, investing is a part of the financial planning process and, therefore, the latter is to be in place before you invest.
Secondly, risks such as health and life risks have to be taken care of before investing. And finally, have an emergency fund in place to tide over any financial exigencies. Only once you have a financial plan and emergency fund in place and the risks covered adequately, consider investing actively. Doing these will help you and your family members not to dip into investments earmarked for long-term goals.
Your asset allocation
You need to have an asset allocation plan in place by spreading investments across equity, debt and gold assets. How much you need to put into the mix of these asset classless will depend on your risk appetite and years to goal. “Asset allocation for every investor is different and it is based on the overall financial objectives of the person. As a beginner, it could be a good strategy to gradually increase allocation into equities. It is fine to have a higher allocation in the Liquid/Bank and debt at the initial stage. Once you get comfortable with the volatility of asset classes like equity, you can start increasing the allocation. But keep in mind that these investments in equities are for the long term. Over a period, the asset allocation should be aligned to the financial goals,” says Harshad Chetanwala Co-Founder MyWealthGrowth.com. For goals that are at least ten years away, save a higher portion into equities.
Debt Portfolio
For a salaried individual, 12 per cent of basic salary goes into the provident fund which is a debt asset. The PF balance keeps earning tax-free return till retirement depending on the interest rate declared by the government each year. One may make a higher contribution but interest earned on an amount exceeding Rs 2.5 lakh a year will be taxable from April 1, 2021.
Within the debt segment, a new investor may also open a PPF account which also earns a tax-free return. The government sets the PPF interest rate each quarter of the financial year. Being a 15-year scheme, compounding works best in PPF which also has a sovereign backing.
Other than EPF and PPF, a new investor may not require any other debt investments unless any financial goal is around three years away for which debt funds will fit the bill.
Young investors with girl child below 10 years of age may consider opening a Sukanya Samriddhi Account, which similar to PPF comes with a government guarantee and tax-free return. Both of them provides tax benefits under section 80C of the Income Tax Act.
Equity Portfolio
First-time investors in equities may start with Index funds and over time may add large-mid and small cap funds. Choosing the right equity mutual fund (MF) is an equally important task. Pick consistently performing MF schemes that have beaten their benchmark over the long term period. You need to form a core portfolio of index fund and large cap fund and then top-it up with mid-cap funds. Avoid thematic and sectoral funds in the initial years of investing. “Investors have a choice of either investing in direct equities or invest in equity-oriented mutual funds to build their equity portfolio. Equity funds can be a better route because these funds are managed by the experienced fund manager. One of the best ways to build an equity portfolio is, to begin with investing in Large Cap or Index Funds. This can create a strong platform for an investor’s equity portfolio. Once the investor gain more confidence they can increase investment and later on add some investment in Large & Mid-cap, Flexi Cap, and Mid Cap Funds as well,” says Chetanwala.
SIP approach
A better approach especially for a salaried is to keep investing regularly and ignore the short-medium term equity market movements. Making use of the SIP – Systematic investment planning – helps to inculcate a savings habit with a disciplined approach. SIP suits a salaried individual as a fixed sum goes out of monthly income towards savings on a regular basis. But for a salaried individual, a portion of income automatically goes into EPF which is a debt asset. “EPF is a good instrument to invest in within debt as it offers better return potential as well as safety. One can consider it for long-term debt savings too, as this investment, will either be available for withdrawal when the investor retires or decide to leave the job. Other debt instruments can be looked up for short to mid-term requirements” adds Chetanwala.
Retirement goal
For a new investor especially if you are young, retirement is often an ignored goal. But, a delay can cost you a lot and hence earmark funds towards retirement right from the start. The good part is that if you start investing early, you will need a lot less to accumulate a large sum at retirement. You may create a separate equity MF portfolio along with some portion of savings in NPS to save towards retirement.
Link Goals
Being a new investor, there will be several options to choose from. Put a plan in place and then start investing in MF, PPF, NPS or any other investment option. This will help you avoid making any ad-hoc investing decision. Make sure to link your investments to a goal that could be medium or long term in nature. Some long term goals could be children education, marriage, home buying and retirement and having funds earmarked towards them will make it easier to achieve them as and when they arrive.
And finally, an important piece of information from Chetanwala. “Investors should keep in mind that the purpose of investing or parking money across different asset classes should be based on their financial objectives, time horizon, and risk appetite. It is quite likely that the asset allocation of two individuals of the same age and similar risk profile would differ as one may have more short-term goals while the other may have more long-term goals. Hence, even though there are broad guidelines on asset allocation across different asset classes, it will be different for every individual based on their needs.”
