I know you are afraid of finance because frankly, we can never have enough money! Plus, numbers are boring and complicated. You work so hard to make your family financially secure and I think you deserve to have enough money to fulfill your dreams. Be it World Tour, education or a Retirement Home near a beach! And all of this will happen by choosing the proper investment consistent with your age.
We are going to check this..
1) 3 factors to consider before you chose an investment option.
2) Top 4 Asset Classes or Investment Categories.
3) Accoring to your age we will see how you can choose the best investment option
And towards the top , I’ll offer you a Bonus Tip in order that once you get old, you do not become as miserable as that uncle in your society who always complains.
Before you pick an investment option according to your age, here are 3 things that you must keep in mind.
1. Inflation For example, let’s assume you keep Rs.100/- in your locker today, then tomorrow that Rs.100/- in your locker will become Rs. 95/- because of inflation. Inflation reduces the ‘purchasing power’ of money because prices of flour, pulses, clothes, real-estate keep on increasing. But your cash does not increase. In Jan 2020, the inflation rate in India was 7.59%. So dreams come later, if you first want to keep receiving food and clothing then you have to beat this inflation.
2. Retirement Planning One day you will get old and that day you will need more money for medicines and operations, cost of living will increase and to make things worse, you won’t have any monthly income. Unfortunately, people start retirement planning after getting retired. And for some, their retirement planning is their children. That’s like the worst plan ever. After working for 40+ years, don’t you deserve to be free? Financially independent? So factor #2 to always keep in mind is your retirement fund.
3. Dreams/Goals This is where you and I are different and you and your brother and sister are different because all of us have different goals in life. Some want higher education, some want to travel, others want to start a business. And all of us want our ‘Own Home’. So your goals will decide what is the best investment option for you.
Now, keeping these 3 factors in mind let’s see what are the top 4 investment categories in the market. So, most of the investment options can be classified into these top 4 asset classes.
Cash is money in your hands or in your Savings Account. Low risk, very less returns. In SBI, savings account returns are just 3.25% which is not enough to beat inflation, forget retirement or dreams. But it is good to have a certain percentage of your savings as cash because it is readily available.
2. Debt Investments
We have Bonds, Debentures but the most common debt investments in India are through FDs or RDs. SBI’s FD returns are between 5% to 7%. But they come with constraints like lock-in period, missed instalment penalties. While it is good to have a certain percentage in FD for stability, it’s not wise to invest all of your money in this category.
Fine. I took a loan and bought a house because I am emotionally attached to the concept of ‘Own HOME’. But beyond one house where you reside , i do not prefer real-estate as an investment due to 3 reasons. Returns are location-specific, to maintain it you have to pay taxes/renovations and liquidity is low because taking out your money takes a year or more. So unless you are living there, you must decide whether it is worth the trouble or not.
And finally, we have equity. People who want to beat inflation, save for retirement and grow their wealth invest in equities either through Mutual Funds or Stock Market. But as you witnessed in the last few weeks, markets are volatile. So after investing, it is advised to wait for atleast 3-6 years to see their potential because equities are long-term investments.
In my opinion, 2 easiest ways of investing in equity are
1. Index Funds because you pay the least expense ratio to a fund-manager but are still tied to the growth of the economy.
2. smallcase What is smallcase? If you want to invest in stock market directly but think it is too risky to invest in one company then you can check out smallcase. They create a basket of stocks based on a certain theme like ‘Rising Rural Demand’, ‘Smart Cities’, ‘Electric Mobility’ etc.. So instead of risking it all on one company, smallcase allows you to diversify across multiple sectors and market caps. I know it sounds interesting. So don’t worry, I’ll tell you more about it later.
But for now, remember these 4 asset categories because in the next segment, we are going to see how you can divide your investments in these 4 categories depending on your age. Before I begin, know that there is no one-size fits all. Please feel free to modify the percentage of division that I am suggesting depending on your risk-taking capability. With that understanding, let’s start with your 20s.
Assuming that your monthly expenditure is ‘E’ and your age is ‘x’, then your split can be like this.. Keep 2E, i.e atleast 2-4 months of your expenditure as Cash or in your Savings Account. For equity percentage, let me offer you a formula. It is generally advised that you simply invest 100-x% in equity where ‘x’ is your age. Suppose your age is 25. Then you can put 100-25% = 75% of your savings in Equity. Your equity options are Mutual Funds, investing directly in Stock Market or through smallcase. But remember, choose each equity investment based on a long-term goal like higher education, retirement, corpus for buying a house later etc.. After you’ve invested in 100-x% in equity, invest the rest i.e x% in Debt for stability.
You can chose FDs or even Liquid Funds that can act as your Emergency Fund for a rainy day. With age, your risk taking capacity decreases and this formula ensures that as you keep getting older, you start shifting from equity to debt.Which is why 20s are considered a great age to invest in equity because even though you have less money, you have the advantage of time. Coming to your 30s. As you grow older, your responsibilities increase.
Assuming you will be married and plan to have children, I am not saying you should but incase you do then you need to plan for children’s education for sure but also plan to enjoy your breaks with your spouse by taking holidays or occasional international travels. Unfortunately, post-marriage couples immediately take home loans, car loans, personal loans and for a long time keep servicing these loans. But it’s always better to first save and build a decent corpus which is why the split is.. 100-x% for equity. Even if you’ve missed investing in your 20s, 30s are still a good time to start a SIP. Debt is still x%.
But since you are investing more in debt in your 30s, plan to do short-term investments in Liquid Funds for vacations or to build a corpus before you take a home loan. Now 40s is a good time because salaries of both husband and wife increases. At this time it is important to keep a check on your expenses and invest the additional salary by topping up your SIPs from time to time to meet you goals faster. So, equity are often between 50 to 60% after doing that 100-x% calculation. If you’ve not invested any amount in equity till now then it is time to get serious and talk to a Financial Advisor immediately.
Retirement savings should be your priority but also plan for children’s education, supporting parents etc.. And stay away from schemes that sound too good to be true because more often than not, they have high risk associated with them. Coming to Debt… Atleast 3 to 7 months of your salary should be saved as Emergency Fund because more responsibilities you have, more stability you need. Btw, here’s a Pro Tip.
In your 30s or 40s.. you have a family to take care of. So, investing in a life insurance policy at this time is a wise decision. But at all ages, you must have a health insurance policy because incase of an emergency or an accident, a health insurance saves you from loans and when you don’t have loans will you have any money to put in the rest of the investments. Coming to 50 and beyond.. I am sure your parents fall into this category. So you can show them this article, talk to them and you can help them plan their investments by doing this.. Equity: 20 to 40% Even if you invest in equity, pick large-cap companies that have less risk or choose the ‘All Weather Investing’ smallcase. I’ll show you what it is in a minute. Now in Debt, atleast have 6 to 12 months of your salary as Emergency Fund at this age.
So, as you just saw.. when you start your career you have more appetite for taking risks and slowly as you reach retirement.. you will have no monthly income and less risk appetitie. So it is important that you are prepared for this transition. As I mentioned earlier, equities help you generate long term wealth and hence prepare you for retirement and beat inflation. But it is important that you dont lose money in equity due to greed, fear or lack of knowledge. And one thing that can help you with that is smallcase. This is bought to you by them because single stocks can be risky but smallcase helps you diversify your equity investment across multiple sectors and market caps. This is how it works.
You can login to smallcase through one of these stock brokers. I’ll login using my Zerodha credentials and after logging in, I can explore and chose to buy an entire portfolio of stocks. As you can see, there are different themes and you can choose the theme that you like the most. For ex: if you think that electric vehicles will do well in the future then you can check out the Electric Mobility smallcase. If you think that due to the present condition, the Pharma Industry will benefit then you’ll inspect the Pharma tracker. Let’s assume that I want to invest in the low-risk smallcase called ‘All Weather Investing’.
For each smallcase, you can see, how much percentage is being split among which companies or segments. Now when you click on ‘Buy’, you can either buy it as a one-time investment or apply for a monthly SIP. Remember, smallcase has best stocks in the basket picked by professionals for you. Ultimately, you will buy these stocks through your Stock Broker. So, to buy a smallcase you need to do these 2 things:
Step 1 is to open a DEMAT account with a stock broker. I am using Zerodha because it doesn’t charge any brokerage for equity investment.
Step 2 is simple. After getting your Zerodha login details, you can use the same to login to smallcase using the link below and buy any smallcase that you like. Remember, smallcase (through Zerodha) has transaction charges of between Rs. 50/- to Rs. 100/- which is frankly very less when compared to the brokerage charges you’ll have to pay otherwise. But always remember, equities investment are subject to market risk. So, always research about the companies before you invest.
But please don’t worry if you haven’t started any investments! As a Chinese proverb says the best time to plant a tree was 20 years ago and therefore the second best time is NOW. It’s exactly the same with investments. So today’s Bonus Tip is this… ‘Start Learning Now!’ Talk to people, read more, learn more.. Comment below and ask your questions! It is going to take effort to ‘learn’ about investments but I promise, the benefits are going to be worth it.