Seven ways to save and grow your money

There is once again an upheaval in the job market. The crisis started with the tech sector and start-ups. But now, other companies have also begun to rationalize their headcount to align with the slowdown in demand and revenues. This has once again highlighted the issue of creating a savings and investment portfolio that professionals can dip into in times like these. This means setting aside a small portion of your salary and income during ‘good days’ to take care of your essential expenses during a period of economic hardships.

But you can’t do this by simply accumulating money in your savings account. You need to plan and create a portfolio that beats inflation and grows over a period of time. And if you are lucky, the fund that you create now could also help you retire in comfort. Here are some simple rules to save, invest and grow your money.

1. Don’t over-invest in savings accounts. If you have decided to create a fund you will also have to work on building a portfolio. This means deciding where to invest or park your funds. Keeping money in your savings account is the easiest and laziest way to save. Banks give easy and immediate access to your funds but this convenience comes with very low returns or yields. 

At current interest rates of 2.75 to 4 percent, depending on the bank, interest on savings deposits doesn’t even cover retail inflation which is currently hovering at around 6 percent. 

This means that the money in your savings accounts loses its purchasing power at an annualised rate of nearly 3 percent. At this rate in 10 years, your savings would lose nearly 30 percent of their purchasing power. This is wealth destruction on a slow burn and should be avoided at all costs.

2. Beat inflation and gain from the power of compounding. The most important rule in savings and investment is to stay ahead of inflation. Then you should try to gain from the power of compounding where gains for the current year become the base for the next year's growth and so on. 

This means you should invest in assets and financial instruments that offer yields that at least match the underlying rate of inflation in the economy. For this, you may have to look for off-beat instruments such as corporate fixed deposits, deposit schemes by non-banking finance companies and high dividend yield stocks.

Also Read: Five financial planning tips for the self-employed

3. Diversify away the risk. A good way to balance out the risk and reward in your portfolio is to invest in a diverse set of relatively stable and liquid assets such as bank FDs, debt mutual funds, exchange-traded equity mutual funds, large-cap stocks, top-rated corporate fixed deposits and some bit of gold. 

This way your corpus will never be over-exposed to a particular asset class and it will earn a reasonable return without taking undue risks. However, there’s no one size fits all diversification formula. If you talk to a financial planner they will devise a proper diversification matrix for you based on age, income profile, risk appetite, investment duration and likely spending pattern.

4. Start young and earn higher returns. As a thumb rule, a younger person can take greater risks with her money which means that they can theoretically generate higher returns on their portfolio. They can achieve this by allocating a greater share of the corpus to riskier instruments such as equity, bond funds and lower-rated corporate deposits. As one  moves closer to the retirement age, one should increase allocation to safer but low-yield instruments such as bank FD, post office deposits and bond funds.

5. Fixed income to Equity Ratio. As a general rule, the share of fixed instruments should be equivalent to your age. 

In other words, if you are in your late 20s or early 30s, fixed-income instruments should not be more than 25 to 30 percent of your portfolio.

Direct equity and equity mutual funds should be 50-60 percent of your portfolio and the rest should be divided among gold, silver and liquid assets such as bank saving accounts and cash. For example, if you save Rs 20000 per month, around Rs 4000-5000 should go towards bank or post FDs, debt mutual funds and bond funds; Rs 10,000- 12000 should be invested in equity either through mutual funds or directly; and the balance should be invested in gold, silver and bank savings account.

6. Start in a safe mode. If you are new to the world of saving and investment, then start with a simple recurring deposit in your existing bank or post office. 

Start investing in other assets one at a time when you have accumulated enough funds and feel comfortable and confident to take risks. 

Start with equity mutual funds or an ETF and then go for direct equity and gold and so on. You can even make a one-shot investment once a year in any of these assets and achieve your diversification goal over a period of 4 to 5 years. The strategy however requires some discipline but it’s safe and low risk. However, you should avoid the temptation to spend the money accumulated at the end of 12 or 24 months. This must be strictly invested in the assets that fit your risk and return profile.

Also Read: Five ways to maximize gains while investing in gold jewellery

7. Stay with large-cap and high-dividend-yield stocks. Investment in equity has been a popular way to diversify your portfolio and generate returns higher than inflation. However, no two stocks are the same and a wrong selection of stocks can wipe off years of investments in a matter of weeks as happened in February and March this year. 

Given this, it pays to stick to high-quality stocks that may grow slowly but are likely to fall the least in market crashes thanks to their superior balance sheet. 

Alongside, don’t overlook high dividend yield stocks. Investment in high dividend yield stocks is a good way to earn capital appreciation as well as annual recurring cash flows in the form of equity dividends. There are dozens of large and mid-cap companies that are consistent dividend payers and if you hold on to them for a long period, say five years or more, an annual recurring dividend could become a good source of cash flows. 

This annual income can then be invested in safer assets such as bank or post office RD that will further de-risk your portfolio. This offers the best of both worlds – higher equity-linked returns and risk-free returns from fixed income.

Happy Investing!

(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).

Also Read: Five simple ways to invest & grow your money in 2022

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