The right saving and investment strategy is essential to make the most of our income and lead a stress-free life. While there is no one-size-fits-all investment strategy that will suit all individuals, it need not be too complicated either. It can be as simple as maintaining the right balance of common savings and investment instruments in our portfolio.
Here are five clutter-free ways to kickstart your financial planning journey in 2022:
1. Invest in an index-traded fund or ETFs: Every equity investor and fund manager strives to generate extra returns by beating the broader market or the benchmark indices such as BSE Sensex or NSE Nifty 50 index. And this explains the popularity of actively managed diversified and thematic equity. At the last count, there are 367 equity-oriented equity mutual funds of schemes in India, all trying to beat the benchmark. In addition, 140 hybrid schemes are doing the same.
But as an investor, you should ask whether a desire to beat the benchmark indices is worth the extra cost and the risk involved? The additional returns from actively managed funds come at the expense of a much higher management fee or expense ratio that can eat away a large part of additional returns. Besides there is no guarantee that additional returns or the alpha can be generated the next year and the year after and so on. This means you will have to spend time and money to monitor the fund actively and rebalance your portfolio at regular intervals. Actively managed funds also expose investors to key-person (read fund-manager) risk and strategy or portfolio surprises.
For example, the median expense ratio for actively managed diversified equity funds is 2 percent, compared to 0.40 percent on average for the Sensex of Nifty 50 index funds. Besides, ETF investors no longer have to bother about the fund manager or the fund portfolio as ETF composition changes automatically with the changes in the underlying index.
Given all the extra cost and the fact that if a stock turns out to be great, sooner or later it will get included in the benchmark index means that most retail investors are better off investing in a low-cost ETF. Start with top-ranked equity ETFs based on the Sensex or Nifty50.
2. Open a public provident fund (PPF) account or join the new pension scheme (NPS): All of us wish to retire in comfort but only a few plan for it especially when we are young and optimistic about our chances in life. This may not be a concern for those working in the government sector or the organised sector that offer the perks of employee provident fund (EPF) and retirement benefits. If you have an EPF then you are passively saving for your retirement but these kinds of jobs are in minority in India.
The majority of working Indians now have to do their own retirement planning. That is where PPF and NPS come into play.
You can supplement it by opening an NPS account that offers the added benefit of equity exposure. When opening an NPS account, opt for the auto option so that your portfolio will change according to your age.
3. Buy a term life insurance plan: Just like equity mutual funds, the life insurance market is big and diversified with dozens of insurers offering hundreds of plans. The majority of life insurance plans offer a mix of savings/investment and life protection plans, but these added features come at the cost of high premium and low life cover.
Term life insurance plans do exactly this and a good term plan with a high life cover should be the first life insurance product in your portfolio. As a general rule, the life cover provided by the term plan should be at least 10 times that of your income. So if your gross salary or income is around Rs 10 lakh per annum, you should buy a term plan with a life cover of at least Rs 10 million or Rs 1 crore.
4. Create an emergency fund. One of the many enduring lessons from the Covid-19 pandemic and the economic crisis that it created in 2020 is that its pays have a pool of savings to dip into at times like these.
The economic lockdown imposed by the government to slow down the spread of the virus resulted in income loss and job losses for millions of Indians. This pushed many to rely on their savings or family and friends to survive the crisis. While the worst of the post-pandemic dip in economic activity is behind us, the economic environment remains fluid and there is no guarantee there won’t be another downturn in future.
So it’s best to create a war chest to fend off economic emergencies in future. As a thumb rule, the emergency fund should be equivalent to at least six months of your living expenses including rent and utility bills. The best way to create an emergency fund is to start a recurring deposit (RD) at a bank or post office.
If you are lucky, the fund that you have created will grow over time and help you retire in comfort.
5. Buy some Gold. This may seem counterintuitive at a time when the yellow metal has grossly underperformed every other asset class – be it equities, industrial metals, cryptocurrencies and even real estate in many markets. But it should be an essential part of every savings and investment portfolio given that it does well when all other asset classes start tumbling like in the second half of 2019 and the first half of the 2020 calendar year.
Gold has also proved to be a great hedge against inflation and holds its purchasing power in times of sharp rise in prices.
In the Indian context, gold also provides a hedge against depreciation in the value of the rupee against major currencies such as the US dollar or Euro. Currency depreciation is like inflation and it erodes the purchasing power of your savings and investment. For example, between 2010 and 2020, gold prices rose at an annualised rate of 3.75 percent in US dollar terms; in India gold prices rose at an annualised rate of 8.9 percent. The additional 5.14 percent return in rupees was very similar to rupee depreciation against the US dollar during the period.
Also Read: How to invest in gold for maximum returns
As you would have noticed I have suggested five saving and investment options but you need not do these things at once. You can start with a PPF/NPS account, then open a bank RD to create an emergency fund, then buy term insurance plans and finally invest in equity ETFs and gold.
Also Read: Ten best mutual funds for 2022