Investment for salaried individuals in India is more important than self-employed or business person because they have a natural tendency of investing in one own’s business.
Investing for a salaried individual should be a top priority and I will start with one of my all time favourite quote from Warren Buffet:
Don’t save what is left after spending; spend what is left after saving.
So true and yet very easily neglected. It is more so for a salaried individual than self-employed or business person because they have a natural tendency of investing in one own’s business over time to make it grow.
So the question is how and where one should begin investing as a salaried individual.
Insurance is not an investment
Salaried individuals have a very high tendency of avoiding investing and even if they invest, often the first investment will be an insurance policy.
It happened to me and I am sure it has happened to most of us who have just embarked the new role in their life of being an employee.
Such an insurance cum investment is neither an insurance nor an investment. On top of that you are more likely to have paid 20% as fees to the person who sold you the policy and if you want to break-even with your investment you will be stuck for at least 7 years to get back the total capital invested. Give and take few months here and there.
Consider Tax as an Expense
Tax is an expense that should be taken care off by the salaried individuals.
If your salary is high, your PF (provident fund) contribution may be enough for the total tax you can save but if you have any amount left that can be invested to save tax, you should definitely do it.
My personal choice of saving tax is through ELSS (Equity linked saving scheme) based mutual funds. If you are young and can remain invested for few years, you should definitely consider these best tax saving ELSS mutual funds because other means of investing to save tax doesn’t provide any returns after adjusting for inflation. Equity as an asset class is the only option where you can save tax and make decent returns on the invested capital.
Emergency Fund – What’s that?
We Indians neglect emergency fund like hell but the fact of the matter is once your ememrgencies are covered, you will be much better managing the finances.
You should focus on making sure you have some money kept for emergency and it can be as little as your minimum balance for your account to few times that money. It should be used as only in an emergency.
If you have an emergency fund set aside, you can invest with much more conviction but more importantly, you can avoid those high-interest credit card debts that are often taken in case of an emergency and are quite hard to pay early due to a high penalty for pre-payment.
The Investment Avenues
I am always biased towards equity investment but if you can invest for a rental income, go with a commercial property as an investment. The idea is not to consider the appreciation in the price of the property but the focus is to generate a regular monthly income with rent.
If you are considering equity, you don’t need to be investing in stocks and you can do everything without investing in stocks and only with mutual funds. The idea is to make more money and stocks only make sense if you are able to beat the returns from the best performing mutual funds. If you can’t just invest with them.
Make Investment a Habit
The important aspect isn’t about investing big but start investing early. You should consider investing a habit. If you are one of those guys who don’t understand diversification or mumbo-jumbo of investing, it is all good. There is ample time that it can be look at later stage.
The start is the most important aspect of investing. It isn’t about how much you are investing and what returns may be generating but you have to start investing and do it on a consistent basis to make the investment a habit.
SIP is best thing that has ever happened for salaried individuals in India and instead of focusing too much on the anything else, start a SIP in one of the best performing mutual funds and decide on diversification and asset allocation after couple of years of investing. Even if you make subpar returns, you will be better off than majority of people who has lost money doing futures and options trading or margin trading.
Save Taxes on Investment Returns
If returns aren’t taxed after a stipulated amount of time, remain invested for a slightly longer period and save the tax.
A penny saved is a penny earned.
As an example, if you are investing in equity mutual funds, the return on investment after 1 year is slightly less. For debt mutual funds, the return on investment is tax-free (lesser tax after indexation for some debt funds) after 3 years. If you are investing in Gold ETFs, the return on investments is tax-free after 1 year where as an investment in physical gold the tenure is 3 years and you also need to the pay GST. Similarly, you can save some short term capital gain tax based on indexation on a sale of the residential property if you keep them for 3 years or more.
So knowing when the returns are taxable for your investment can help you save a considerable amount of tax.