I was quite happy to receive several requests as to what investments should be made this Diwali. This has encouraged me to write the current post. Note that, investment is an ongoing process and not for a particular day. It is, therefore, important to have the basic concepts of investment in place first.
Without further ado, here are my 10 commandants of investment life:-
- Insurance is not an investment and it is best to steer clear of products that combine the two in some manner such as ULIP. You definitely need insurance, treat it as an expense incurred annually.
- Use goal based investing only to have an idea of the overall amounts needed in different times. Once you know this, invest in the 3 portfolios of Debt, MF and stocks. There is absolutely no need to map separate portfolios for each goal, it is a waste and also harmful.
- Your endeavor should be to invest as much as possible, after you have taken care of the lifestyle that you desire and can afford. Do not be constrained by your goal amounts, more money is never a problem as you can use it for a variety of good purposes.
- You can afford to invest in asset classes such as Real Estate, Commodities, Forex only if you have the requisite knowledge and can handle the required transaction logistics smoothly.
- In normal circumstances, PF and PPF should be adequate for Debt, MF portfolio should cater to all goals except retirement ( which it does partly ) and all other surplus amount should go into direct stocks. In case you are uncomfortable about stocks then you can put the money into MF.
- Buy your own home to stay in, if you are in a stable job and are likely to be in the same location. If not then renting may be a better option. When you near retirement, it is important to have your own home.
- Redemption for a goal – use stocks if you are having windfall gains in them, use MF if your XIRR from them are reasonably good and use Debt if both of these are not true and the market is going through a bad patch when you want to redeem.
- Withdrawal in retirement – make sure you use debt first unless equity markets are really on steroids for the year in question. In general, let the equity investments grow as long as possible.
- Ideally in retirement, you should have an arrangement for tax free passive income in the first 10 years. This can be achieved through PPF withdrawals, Tax free bonds, Dividend income etc. For next 10 years look at MF redemption or selling stocks depending on the market situation. For the third decade stocks are the best option.
- Longevity of life that you plan for depends on several factors and only you can decide for yourself. However, whatever your figure is, your plan should not see your corpus come to zero value at that time. For example, if you plan for 85 years, make sure you still have a reasonable corpus for another 5 years or so, just to be on the safe side.
I have not explained my rationale for some of these investment commandants, if you are interested in understanding that go through my blog for posts relating to all of these points.
Are you following these in your own investments? If not, you need to align yourself to these basic principles so that you are able to build a robust portfolio over time.
Wishing all readers a very happy and successful Diwali and Samvat 2074 where you will make considerable progress in your goal of achieving financial independence.