-1_1335.jpg) Age: 25 years Monthly income: Rs 17,000 (post-tax) Financial dependents: None |
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She is young, ambitious and earns well. In so much, 25-year-old Chandraprabha Singh represents her generation. But she doesn’t belong to the investment-savvy club of her peers featured in the last few pages. Singh does not have a financial plan. The encouraging thing is that she is very eager to build one. Our young investors have lots to teach such beginners. But we decided to formulate one strategy from scratch to explain how the investing tips of young investors can be put to use.
Singh, a 25-year-old Delhi based assistant manager draws a post-tax salary of Rs 17,000 a month. She lives with her parents and has no liabilities. One would assume that she saves a chunky portion of her pay cheque. But Singh is hardly the poster child for thrift. She uses plastic frequently and piles up bills of about Rs 4,000 every month. Telephone bills gobble up Rs 3,500, while eating out, travelling and entertainment take away another Rs 2,500.
Her monthly savings are only Rs 7,000—40% of her salary. Of this surplus, she religiously puts away Rs 3,000 into her bank account to create an emergency fund. The balance Rs 4,000 is invested in ELSS funds to save tax. Not a bad start. But certainly not enough to meet either her shortterm or long-term goals.
In another 2-3 years, Singh plans to go abroad for higher education. The estimated cost is Rs 6 lakh. For this, Singh must invest about Rs 11,000 a month in equities for three years. Singh’s savings are woefully off the mark. Assuming that her ELSS funds earn an annualised return of 15%, her investments would grow to only Rs 2.2 lakh by that time. Singh must invest with a long-term perspective in mind. Her short-term goals ought to fit into this strategy.
To make the most of the power of compounding she should regularly invest in equities. But Singh doesn’t have any surplus for that. So our first recommendation is to reduce expenses. Impulsive spending and highcost socialising combine to beat down her savings potential. Singh’s phone bills are more than 20% of her monthly salary. “I have a large circle of friends and many of them are settled abroad. Chatting with them costs a lot of money,” she laughs.
Her cell phone cost her 140% of her monthly take home. “I liked the cell phone so I used my credit card to buy it, though I now realise how such impulsive spending lands you in trouble,” she adds. We suggest Singh rejig her cash flows to generate an additional surplus of Rs 4,000 every month. She should do a daily budgeting by making a note of her expenses every day.
Singh does not require an emergency fund since her parents will be around in case of a sudden need. Instead she should club the Rs 3,000 being stashed away in a savings account with the additional surplus of Rs 4,000 and invest Rs 7,000 in balanced and equity diversified funds . Since Singh plans to take an education loan, she should continue with ELSS investments.
Part of the loan can be serviced from the SIPs that start maturing after three years. But Singh must improve her choice of funds. She invests in Franklin India Tax Shield and ICICI Prudential Tax Plan. Both have given mediocre returns in the past three years. ICICI Prudential Tax Plan is a small- and mid-cap heavy fund and thus relatively risky.
Even with the small- and mid-cap indices doing well in the recent past, the fund was not among the out performers in the category in 2007. Franklin India Tax Shield is a large-cap fund that has underperformed the category average in the past three years. Value Research suggests that Singh should shift to better performing ELSS funds (see graphic) that have done consistently well over the years.
Assuming a 15 per cent return, her SIP of Rs 4,000 will grow to Rs 6,000 on maturity after three years. Enough to take care of the EMI of a Rs 3 lakh education loan taken at 10% for five years. Among equity diversified funds she can choose from HDFC Equity, Franklin Prima Plus and Reliance Vision. For balanced funds she can invest in HDFC Prudence or DSPML Opportunities. Always invest in funds which have performed consistently over the past four to five years.
Regarding insurance, Singh had made a mistake common to investors of all age groups. She picked up an endowment policy from LIC after believing the spiel of an agent. What made matters worse was that she does not require insurance. Only youngsters with dependents ought to opt for a life cover. “My father told me that I didn’t need insurance,” she says. But Singh didn’t listen to him. Her logic behind buying an endowment policy was saving taxes.
Money Today has repeatedly stressed that insurance is not a taxsaving tool. It’s foremost function is the mortality benefits. And endowment policies are meant for people with specific needs only. Thankfully, she had chosen the quarterly payment option. After Money Today explained that she did not require insurance, Singh realised her mistake and opted out. She only lost Rs 5,400 paid as the first quarter premium.
Nothing left to save at the end of the month? Five simple steps may solve the problem
Write it down: List all expenses at the end of the day.This helps identify and plug the leaks
Change equation: From Income - Expenditure = Savings change savings equation to Income - Savings = Expenditure
Leave credit cards behind: If impulse purchasing is your problem, don’t take your credit card along
Budget your expenses: Set a limit for expenditure under broad heads and stick to them
Question yourself: If you are planning a purchase, just ask yourself whether you really need it
