In the last three months or so, ever since the lockdown has been enforced all across the world, the household savings rate has gone up substantially despite an increase in unemployment/loss of income. No outdoor eating /parties/movies, no shopping other than necessities, no travel are the main contributors.

Why do we have to save money? 

Money has only one language, you save me today I will save you tomorrow!

We need to save money to cater to our future requirements which may be far exceeding our income. It may be our children’s education, their marriages, our retirement corpus, or buying a house, to name a few. Let’s call these requirements as financial goals.

Is saving money sufficient to achieve our future financial goals? No certainly, not.

We need to invest the saved money to not only beat the inflation (losing purchasing value of money over time) but to make it work for us  24×7, 365 days                   
(https://letsinvestwisely.com/make-your-money-work-for-you/) to be able to achieve our financial goals in a given time frame.

So the next logical question comes to mind is how should we go ahead investing our saved money?

Before we explore investment options, let’s try and understand Asset allocation.

Assets can be defined under two categories, physical and financial. Physical assets are tangible assets that can be touched and felt good like gold, real estate etc and the financial assets are intangible assets that can not be touched and felt like money lying in the bank account, mutual fund investments, etc.

Asset allocation plays a very important role in deciding the investment portfolio of a person.  Risk appetite, time available to achieve the financial goal(s), and expected return on investments are the three main factors that help in deciding the Asset allocation.

Once done with the Asset allocation, we are now ready to create an investment portfolio. Let’s explore the investment options available to us:
  • Bank Savings Account. Most of the time our money keeps lying in the savings account accruing just 2.75% annualised returns, that too taxable (interest income of more than Rs 10,000 is taxable)
  • Bank Fixed Deposits. With RBI reducing repo rate (the rate at which banks borrow money from RBI) to just 4%, interest on fixed deposits has come down drastically in the last quarter or so. Two years FD gets you approx 5.25% annualized returns, that too fully taxable with tax deducted at source(TDS) on a quarterly basis. Mind you this is when CPI inflation is hovering around 6.5%. So we are actually losing our money over time.

  • Provident Fund. The rate of interest on PF has been drastically brought down from 7.9 to 7.1% wef Apr 20. There is no tax liability in this investment but has a lock-in period of 15 years. Maximum investment can be Rs 1,50,000/- per annum which can be deducted from income towards tax exemption under sec 80 C 
  • Senior Citizen Saving Scheme(SCSS) & Post office (MIS). These two investment options are available to retired people at the time of superannuation and offering 7.3% and 6.7% RoI respectively and are fully taxable.
  • Real Estate. Somehow we are emotionally attached to creating real estate assets. It gives us the feeling of the mental comfort of owning a secured asset that appreciates with time and provides a source of alternate income in the form of rent. Buying a house for living abinitio, may be a good option in present circumstances but for investment purposes, that too with the home loan, may not be a wise decision with low rental yield and depreciating value of the asset. 
  • Gold. Gold is a commodity and the price fluctuates based on demand and supply. It’s treated as a hedge against the economic crisis. When the economy is in turmoil, gold prices appreciate. During the last six months or so when the world economy has taken a big hit due to Covid 19, gold prices have zoomed 25%  year to date. If one has to invest in gold, a better way would be to invest in paper form rather than physical purchase to avoid quality issues, making charges, and Govt taxes. The performance of gold over the last 10 years is depicted below.
  • Investment in Equity, Debt through Mutual Funds. A mutual fund is an investment vehicle through which we can invest in equity, debt instruments, or a combination of both. These are called equity mutual funds, debt mutual funds, and hybrid or balanced mutual funds respectively. Historically, equity has been the most outperforming asset class (Nifty 50 benchmark index has given 11.5% CAGR over the last 25 years) and is a preferred investment option for a long investment horizon (typically 7-10 years). 

  • Performance of equity, debt, and combination of both over the last 20 years is graphically represented below

Recommendations

  • On average we should be able to save approx 35-40% of our net income post-tax deduction
  • Invest as per asset allocation based on our risk profile, time available to achieve financial goals and expected return on investments.
  • Link financial goals with investments; there would be better chances to navigate through difficult and volatile market conditions (https://letsinvestwisely.com/why-should-we-go-for-goal-based-investments/)

Any queries on this or anything related to personal finance, please feel free to call me or book a no-charge consultation with me on this link. (https://calendly.com/rakeshgoyal

Disclaimer: These are not any investment recommendations and only meant for information.



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