PERSONAL FINANCE - How to Invest Money for Consistent and Optimum Returns

Money can't buy happiness, but happiness can't buy food & shelter either. Of course, money is not everything, but it is an essential means to make a living, to get a good education and to live comfortably. It is almost impossible to achieve your materialistic desires or goals without money. For example, if you wish to pursue a higher education, money is an essential input.

In today’s world of consumerism, there is a tendency for people to spend more than their means allow. With the passage of time, their expenses grow disproportionate to their increase in income – this is a consequence of inflation, increased expenses in supporting children’s education, mortgage, family needs & change in lifestyle. Due to lack of awareness & planning, they do not save or invest for the future, and this leads to financial crisis. Hence, Personal Financial Planning plays a vital role in one’s life.

Following are the key lessons that I have learnt in Personal Finance:  

1. Financial Literacy: We are not taught about managing money in our school curriculum, hence end up making financial mistakes as we grow up – such as overspending, not having proper insight into savings, insurance, or investment, and end up creating liabilities instead of assets. Hence, we should impart financial literacy to children at a young age and educate ourselves from time to time and stay updated regarding investment & financial management.
2. Build your Savings: It is important to save more during initial stage of your life to meet any emergency, which cannot be foreseen or planned. Save first and then spend.
3. Insure Yourself: First investment you should do is to get insured such as take Term Insurance for covering risk to your life, and Health Insurance for protection against any illness or accident. There are many new age & lifestyle diseases, and medical treatment is very expensive & sometimes unaffordable without insurance. If you are covered by your company / employer through some health insurance, it is still advisable to take one more heath cover above the insurance limit of your company, known as Super Top-up Plan for whole family, which is quite cheap. Do not go for any insurance linked investment plans like ULIPs, Money Back Policies etc. They are not meant for investment or wealth building.
4. Avoid Liabilities: In the initial stage, when you just start earning, never burden yourself with capital-intensive expenditure, unaffordable & expensive lifestyle items, buying house or real estate, wherein most of your income would go in paying EMIs. You are hardly left with anything for supporting important family needs, good education for children, saving or investing for the future. First achieve Financial Freedom, then start acquiring luxuries that you may desire.
5. Goal Setting: Any investment should be based on your long-term goals like housing, children’s education, marriage, retirement etc. Another important factor is Asset Allocation as per your risk profile.
6. Power of Compounding: Saving and investment should start right from the day you start earning ideally. The investment time horizon makes a big difference in your financial journey, hence compounding makes it possible to achieve big goals early. 
7. Dollar Cost Averaging: Investment should be done in instalments (SIP/STP) as it is more affordable, reduces impact of market volatility and get the advantage of Cost Averaging. You should automate it to ensure continuity. 
8. Recommended Investments: In order to optimise return on your investments keeping in view inflation and taxation, following Investment Planning  is recommended:
• Investing through Mutual Funds is the best way to invest in equity, which are well diversified, especially low-cost Index Funds are the best choice requiring no extra efforts, research, or monitoring.
• Few Active Funds may also be used to take benefit of well-managed funds. Investing in an ELSS Fund is a good choice if it is for long term, to get equity returns as well as tax benefit. ELSS funds have the least lock-in period of 3 years.
• For short term liquidity requirements (1-2 year), invest some funds in Liquid/ Debt funds. Liquid funds are also useful as temporary storage for making STPs in other equity funds of the same fund house, so as to automate investment in Mutual Funds.
• Fixed Return Investments: You should also have fixed income investments like PPF, SSY, SCSS, NPS as applicable for assured and decent returns in the long term.
• Direct stocks and good IPOs are also good option for investing a portion of your savings provided you have reasonable knowledge of stock market. Invest small amounts in consistently well-performing Large Cap company shares, especially during every dip in the stock market. For stocks and IPO, you need to have a Demat account, which could be opened on any online platform such as Zerodha.
• As per the rules of asset allocation, you should also have some investment in gold through SGB - Sovereign Gold Bonds, issued by the govt. so as to have a balanced portfolio. It is recommended this is not more than 10% of your overall investment.
• For immediate use, say within a month or two, keep some money in your Savings Bank account.

9. Financial Consultation/Advisory: In order to optimise returns, get the required knowledge on investment, and do it yourself. If you do not find time, consult a Registered Investment Advisor (RIA) and invest in Direct Mode only. You still need to have a fair understanding of the investments suggested or advised by RIA. As Warren Buffett says, “Only invest in things you are sure you understand.”
10. Software Tools: Investments have been made very easy by the development of various automated tools available online, which are very efficient, secured, no brokerage and freely available like Zerodha, Kuvera, Groww, CAMS etc. These Apps provide an easy access to manage all your investments on a single platform, and a lot of features in terms of monitoring, ease of buy and sell, switch, SIP/STP, accounting, and direct mode of investing in MF.

In summary, start financial planning, save early, insure yourself and your family, invest consistently in tax-efficient, low-cost and inflation-proof instruments for a peaceful and happy future, and also educate your children regarding financial literacy.

To have more understanding of specific terms & concepts used in this article, please go through the details on this page: Financial Definitions, Concepts and Description of Various Investment Plans

• You may go through the topic “Lessons Learnt from the Stock Market” in the  detail link above to have a better understanding of investment in the share market.
• In the detail page, I have also provided an example of a Typical Portfolio with asset allocation using a balanced approach. Hope this approach is useful to get started on your investment journey & provides a means to achieving your financial freedom.

 

References:

• The Psychology of Money by Morgan Housel
• Money: Master the Game by Tony Robbins
• Guide to Getting Rich by Michael Yardney
• Personal Investing by Edwin Lim, Kaiwen Leong and Edward H. Choi)
• Rich Dad Poor Dad by Robert T. Kiyosaki
• Money Magazine
• Value Research
• Dept. of Financial Services website
• Other credible online sources for financial information