This post is inspired by a couple of comments that I received on my blog recently. The first requested me to write about investment plans for people who may be earning in the range of 5 to 8 lacs per year, not having the ability to invest in a large amount of SIP or otherwise every month. The second was telling me that my plans, while they made sense for me, would not work for others who did not have similar resources as they had not been in careers where they got to be CEO etc.
The larger point to be addressed here is this – is the investment plan linked to the situation in life you are in or to the amount of resources that you bring to the table? At a basic level the aspirations that we have must be grounded to the situation we are in. If my net worth is 2 crores, I obviously cannot aspire to stay in a villa worth 2 crores today. So my aspirations must be aligned to my situation both in life as well as financially. However, the investment plan is a different issue altogether. I am convinced that the investment plan must remain the same, though the dimensions and scale of it will change based on the resources that you can bring to the table.
Let me look at a person just starting his career after graduation. We will assume that he gets a salary of 4 lacs annually, which is quite realistic in today’s context. I have deliberately taken a person who is graduating from a mid level college with a fairly low salary. How should he go about his investments, assuming he is 22 when he starts working? Here is what I would like him to do:-
- Assuming he is able to save only 10000 for investment after his expenses, PF and insurance, he should start with either MF or a PPF account.
- For most of the next 8 years or so, his investments should continue to be in PPF and MF. If you take a growth of 9% annually in his salary ( quite conservative ), he will be getting about 8 lacs when he is 30.
- While his expenses will grow and he may need to pay some taxes ( minimal ), I expect his investment capacity per month to be 30000 now. Ideally he should maximize his PPF contribution and put the rest in MF.
- Over the next 3 decades, he should keep doing the same. Additionally, he can go in for stocks when he has some extra money. Remember that after the initial stable job, he can also look at additional qualifications as well as a job change.
- The investment constraint that he has in the initial 15 years or so due to his limited income and starting off a family etc, will go off by the time he is 40 or so. This is the time he can maximize his investments and put money in stocks etc.
- Having started PPF account earlier, albeit not being able to contribute fully in the starting years, he can have a reasonable amount there when his children’s college education is there. Of course, if the market is doing well then he should redeem his MF investments, the PPF is just a hedge. For the girl child an SSY account is a must.
- PF is strictly for retirement, not to be touched for any other purpose.
- The scale of investment can change quite drastically if he makes some strategic job changes and gets into the higher paying bracket.
Now assume the same person is from an IIT / IIM kind of college. He will then probably start at a salary of at least 10-12 lacs annually. Does this change the strategy? Not at all – he will still invest in the same manner, though his scale will be quite different. Now if he is able to invest 3 lacs a year, he will probably maximize his PPF contribution and buy ELSS schemes for the remaining money.
Investment strategy through the 3 portfolios will remain the same for every investor – the proportion you put in each of the 3 portfolios and the amounts that you invest over the years is a function of your life situation and your investment capability. Have a solid debt portfolio for stability and possible hedging, an MF portfolio for your goals and a stock portfolio for the creation of significant wealth you may need towards the end of your life.
Keep your investment plan simple with this framework and tweak only the dimensions and scale. You will be quite all right.