Top 7 things to do as you start to invest

Welcome to the wonderful world of investments!

1. Nominate, Nominate, Nominate: It's presumed that you have an investible surplus either in the form of cash lying idle in the bank account, via salary payments, or you’ve come into money. Either way, the first thing to do is to ensure that you have a nominee in place in your bank account, insurance policy, trading-cum-demat account, Employee Provident Fund account (with your employer) and the Public Provident Fund (with the government).

You may or may not have all of these investment avenues, but the ones that you have require a nominee and its best to review the nominee’s name once you get married and later, have a child. Better still, make a will.

2.Pay-Off Debt: You should be assuming as little debt as possible, and paying off outstanding credit card bills is of paramount importance. The amount of penal interest that credit card companies charge puts even seasoned money lenders to shame. Have NIL outstanding balance on your credit card.

3.Get Term Insurance: If you have dependents, then do ensure that they have at least two years’ worth of expenses to pay for in case something untoward happens to you. Calculate 24 months’ worth of expenses, add 20 percent to them and get a term cover for that amount. Keep adding to your term cover every two years as both your salary and certainly your expenses rise each year. Remember not to confuse insurance with investment. If your advisor tries to lure you into a ULIP or a monthly SIP, from an insurance company, masquerading as a Life cover, then you should abandon that advisor immediately.

4.Get Medical Insurance: In addition to the one that your employer offers. Often, people leave an organization in a huff, only to
realise that they and their family are bereft of any medical insurance. The same happens when there are sudden job losses announced by companies. Hence, it is always best to have a parallel medical insurance paid for by yourself. In any case you get a tax benefit in your annual income tax returns.

In addition, keep money worth 5-6 months of expenses in a money market liquid fund so that if you have an unforeseen run-in with your boss, or you decide to go your own way then at least half-year’s worth of expenses are arranged for. Welcome to investing now that most risks are taken care of.

5.Public Provident Fund: The government pays you 8.5 percent compounded interest on your PPF investments. They also help you save tax. Investments worth 100,000 rupees a year are allowed. These funds are locked in for at least five years and the government allows only a certain amount of money to be withdrawn from the account as it is meant for your old age, when income will dwindle but expenses will keep on rising.

There is a lot of debate among investment advisors whether PPF should be maintained or not considering that the rate of interest often falls below the rate of inflation. However, its best to have some sort of fixed interest bearing income in your investment portfolio and this should be encouraged.

6.Equity Funds: Just run a simple monthly Systematic Investment Plan into a well-diversified equity fund at the start of your professional life. Increase the SIP by 5-10 percent each year as that is what your average annual increment will be. And don’t look at that money till you retire. The best time to start your SIP is today! Do not go into sector specific funds, no matter what your broker tells you.

7. Buying a House: If you can afford one, certainly do so. But do not invest into multiple homes across many cities. It’s a waste of investible surplus, its tax-inefficient, it is relatively ill-liquid and the average returns via rentals over years are much below those earned from equities.

Lots of people feel investing is a very difficult thing to master and hence, prefer to keep money in fixed deposits. While FDs ensure that your capital remains protected, the returns via interest income are taxed, beyond a certain amount of interest earned, and in any case the rate of interest is below inflation rate. It’s a non-efficient way of utilising your money.

If you take these 7 steps then you are cruising on the investment highway!

(Image credits: Indiatimes)