Creating a strong corpus through equity will reduce later need for debt to make big purchases.
Chinmay Athle has been investing over 50 per cent of his salary in stock markets and the public provident fund (PPF). The 25-year-old software engineer’s latest goal is to purchase a house.
Financial planner Malhar Majumdar is, however, not too convinced about Athle buying a house at this age. He feels that as Athle is still single, making a long-term commitment towards property may not be the wisest thing to do. Especially, when things (read his requirements) could change after marriage.
Setting goals is, perhaps, an important part of financial planning. Goals define the way you should invest and, more important, the instruments you should use to achieve these.
For example, if you want to purchase a house after five years, investing in equity would help. On the other hand, if you plan to travel abroad next year, a more conservative approach such as investing in debt instruments would be appropriate.
But, goal-setting is also a function of your age and means. Often, those who are single aim for the impossible – the latest car in a year, a flat in a prime area in two years and the latest gadgets – all at the same time. Financial planners have a simple advice for such people: Keep goals reasonable.
Explains Ramalingam K, director, Holistic Investment Planners, a Chennai-based financial planning firm, “The state of your finances can change drastically after marriage. Therefore, single people must be careful with their financial goals and investment decisions to ensure a seamless transition after marriage.”
Athle, for instance, has been saving Rs 15,000 for a year (his take-home salary is Rs 28,000). Of this, almost Rs 10,000 is in equity, the rest being in PPF. He now wants to invest in property and is scouting for home loans. While he intends borrowing the amount for down payment from his father, he plans to stop his investments, at least partly, for repaying his loan.
However, Majumder does not think it to be the correct goal for Athle. He feels as most home purchases are made on loans, the ability to finance a loan after marriage may not be known at this point. Also, the plans of single people tend to be uncertain, he says. For example, there may be sudden plans for higher education or shifting cities and such a liability may be difficult to shoulder.
Majumder says it is too early for Athle to take on such a huge commitment. Instead, it makes more sense to continue with the equity investments. The corpus created can be utilised for multiple goals in future, including the down payment of a house, he adds.
Besides a house, many go in for an expensive car on loan too soon. As of now, Athle should concentrate on creating a corpus that will help make these purchases in the future with as little loan as possible.
If he invests Rs 10,000 through a systematic investment plan (SIP) for the next four years, he would have accumulated as much as Rs 7.81 lakh (assuming annual return of 10 per cent). The amount can be used for the initial down payment for a residence or car.
Typically, young people should be aggressive on equity, as their risk-taking ability and time horizon is much higher than senior citizens. But, having an emergency corpus — at least six months’ salary — in debt instruments will help in troubled times. Such investments can be parked in fixed deposits or liquid debt funds.