This post is about a simple solution to setup your investments. I call it “The 88% Solution”. Why 88%? Because it works for 88% people. It works 88% of the time! This is the third and the final part.
Part 1: The Background & Part 2: The thought process.
There are more than 300 life insurance schemes, numerous health insurance schemes, over 1000 Mutual Fund schemes, 2500+ stock scrips to choose from. Then there are 100+ deposit schemes with Banks, Corporates and the Government itself.
Wouldn’t it be a good idea to bring down the choice galore to a maximum of 20 products to choose from? Can’t this group of 20 products be the best in class and stands validated through a reasonable thought process?
The answer, to my mind, is yes! Read the following 7 points that gives you the a set of 20 products to choose from for your investments.
Before we go on to investing our money, it’s a good idea to take a bit of cover. Let’s start with the emergency fund.
1. Emergency Fund: Keep an amount of three times your monthly expenses in your Bank in a Savings Account.
2. Insurance: Many of you who are just started having an income, are single wouldn’t really need insurance now. But some of you who have started a family need to get a cover. Trying to find how much insurance do you need from the internet will throw multiple calculations and options. Each one of them have their own logic. A simple thumb rule for me is to get insurance worth 60 times your monthly expenses. Not 60 times your gross monthly salary, mind you. Insurance is for taking cover, not profiting out of it. Two products that I would recommend choosing from is LIC’s Anmol Jeevan and Religare’s iTerm. The first one a trusted name in Insurance and the other one is the cheapest one available.
You also need to get health insurance. A group health insurance privided by your company should be enough. If not, start with a mediclaim policy with one of the General Insurers.
To start investing, you need to first exhaust your tax planning options.
3. Tax Savers: Apart from the PF that might be deducted from your salary, getting a PPF account is a good idea. Plus you might go for equity linked tax saver Mutual Fund schemes. HDFC Tax Saver, SBI Magnum Taxgain, Sundaram BNP Paribas Tax Saver, Franklin India Tax shield and Sahara Tax Gain have given a return of 20%+ over the last 5 years.
From the money left after taking a cover and exhausting your tax planning options is available for investment.
4. New Pension Scheme (NPS): NPS is THE best & effective tool that covers capital protection and also provides growth for your retirement plans. With its lowest charges, it also is the cheapest way to get an exposure to the market. Despite being such a fabulous product, there’s not much sales to boast. This is because there’s no commission for an agent there.
Infact getting a PRAN (Permanent Retirement Account Number) under NPS is not easy. I’ll do a detailed post later.
5. ETFs: This Pdf will tell you why ETFs are the best. Nifty Index ETFs which benchmark the Nifty that are available in India are NiftyBEES, KotakNifty, UTISunder, .QNifty
6. Debt Index/ Balanced Mutual Funds At a young age, you can take more risks and I will not ask you to invest in debt funds. But to get a bit of diversification in your portfolio, I will recommend investing in a few balanced funds. Balanced funds have exposure to both equity and debt and their fund managers take a call on when to focus on equity or debt. HDFC Prudence, DSP Blackrock Balanced, Birla Sunlife 95, Tata Balanced are balanced funds which have done well. In fact some of them are at par with Equity Funds!
7. Gold ETF: Gold has been outperforming the equities for the last decade!. Looks like it’s on a dream run. For diversification purpose, investing 5-10% of your money in Gold ETF isn’t a bad idea. Gold ETF is seeing the highest turnover these days and there are a lot of players which are offering Gold ETF these days.
So the 88% solution has shortlisted a set of 20 odd products out of 5000+ financial products. Does it help you get started?
Advantages of the 88% solution:
It tunes out the noise of the market place which is worse than the fish market.
It takes care of Diversification, Rupee Cost Averaging, Asset Allocation principles, Magic of Compounding and all principles and theory of investing.
It also gets you real bang for every Rupee at a very low cost.
And once you set it up, you can forget about it and focus your life on more happening things!
Disadvantages: It’s boring and non-happening. More like a Cricket Test match when it’s the age of Twenty-20.
But the question is, do you need an audience for your finances? Or do you need to perform infront/for the benefit of others? Remember, it’s “personal” finance.
I’ll wait for your questions and your views on the 88% solution. Thanks.