At times, to understand what is the best way to invest money can be confusing.
For we common people, it is important to know the right ways of investing the spare money. Why? Because we often make mistakes while investing, and lose money.
Investment losses demotivates people. As a result, we end up spending money instead of investing.
The way forward should be to increase our know-how and learn the skill of wise investing.
Stopping to invest and spending money is not the solution, its like evasion of the problem.
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Lets face the issue head on.
In this article we will discuss the best way to invest money in India.
What is the best way to invest money?
For common men, need based investing is the key to success.
We must group different ways of investing money on basis of needs.
Different needs demands different investment options for its compliance.
How many of us can correlate an investment matching our needs? I suppose not lot of people can establish this correlation between need and investment.
Here we will try to do just that. Idea is to correlate way to invest money with our needs.
I believe, if common men can start need based investing, our half of problems will automatically get resolved.
Investing without clear objectives is like hoping to build a strong castle of sand. But attaching goals to our investment needs gives it more strength.
Objectives and goals (in investing) works like a binder (cement). Such investments are bound to be successful.
#Need 1 – Invest Money for child’s Future
[Time horizon – 16 Years, Wealth to be Accumulated – Rs 20 lakhs (say)]
This is one of the best exemplification of need based investing. Why I am considering it first because we all feel responsible to meet this demand diligently.
We would not like to compromise this need under any circumstance. Generally, we all take the step to invest money for child’s future very proactively.
This is a typical need of an average household Indian family.
In our example, the target is to generate Rs 20 lakhs, in 16 years. In India, the population of middle class is seeing steep growth.
Though India is becoming rich, but majority still do not have enough spare money.
Proposing best way to invest money for an Indian family who does not have enough leverage is challenging.
When a family does not have leverage, it means they cannot afford to lose their money. It means they cannot be exposed to lot of risk.
In this situation earning above average return is tough.
For an Indian middle class family who wants to invest for their child’s future shall go for a balanced portfolio.
In a balanced investment portfolio, there is a clever mix of debts and equity linked instruments. Debt is less risky and equity carries high risk.
As common man’s investment know how can be limited, hence building a balanced portfolio by self can be challenging. But there is no need to worry. The solution is simple.
For this need, investing in a balanced mutual fund is the best way to invest money.
The portfolio of balanced mutual funds consist of a clever mix of debt and equity.
A balanced mutual fund accumulates assets in their portfolio with utmost care and intelligence. Idea is to maximize the returns for investors without taking huge risks.
But care must be taken that, as balanced fund is also a equity based fund, investment horizon should be very long. Like in our example, time horizon is 16 years.
Starting to invest Rs 5,000 per month as SIP, for next 16 years in a balanced mutual @ 8.5% per annum return, will help generate Rs.20 lakhs.
SIP in balanced fund will ensure minimum risk and maximum returns.
#Need 2 – Invest money for retirement
[Time Horizon – 20 Years, Wealth to be Accumulated – Rs 1.0 crore (say)]
In this example we are considering that one has 20 more years to retire. Twenty years is a good time to accumulate wealth. But such long duration of time also has its bad side effect.
The bad effect is due to inflation. With passage of time, the purchasing power of our Rupee erodes.
This is the reason why, while planning for retirement we must consider the negative effect of inflation on our money.
Assuming that in next 20 years, the average inflation in India will be 5% per annum.
What Rs 53,000 can purchase after 20 years, can be purchased by Rs 20,000 today.
This is what inflation does to our money, it decreases its purchasing power.
So future value of Rs 20,000 of today is Rs 53,000 (after 20 years).
Suppose Raj need Rs 20,000/month to manage support his current standard of living. After 20 years, to maintain same standard of living, Raj will need Rs 53,000/month.
Rupees one crore when put in fixed deposit, it will generate returns @ 6.4% per annum (post tax). Interest on Rs 1.o crore @6.4% = Rs 53,000/month.
What does it mean? It means, if Raj have retire after 20 years, he must have Rs.1.0 crore as retirement savings.
But how Raj can accumulate Rs 1.0 crore in next 2o year? What is the best way to invest money for Raj?
When we are investing for retirement we would not like to take undue risks.
But as the investing horizon is 20 years, hence one can take a calculated risk of investing in equity. But I will recommend not to invest directly in equity.
One shall use the mutual fund route for investing in equity.
Use of a index fund will be the best way to invest money. For a duration of 20 years, an index fund can easily fetch 14% per annum return.
Investing through SIP a sum of Rs 7,600 per month for next 20 years will generate Rs 1.0 crore.
After 20 years one can redeem this amount and put in fixed deposit.
This way one is ready to draw Rs 53,000 per month.
#Need 3 – Investing the retirement corpus
(Amount to be invested Rs 1.0 Crore, Objective: Income Generation of > Rs 50 thousand per month)
A retired person shall have his portfolio widely diversified. The money should be evenly spread between mutual funds, deposits, savings account etc.
Best way to invest money after retirement shall ensure stable & predictable income.
Mutual fund companies provides an excellent option for retired investors. These options are meant to generate regular income.
#3.1 Monthly Income Plans (MIP):
A monthly income plan can give decent return of ~7.5% per annum.
Investing Rs 25 Lakhs in mutual fund’s MIP will generate > Rs 15,000 per month.
The advantage of investing in MIP is that they follow a conservative investment approach.
MIP’s does not invest more than 30% of the fund in equity. Balance 70% is invested in debt instruments hence returns are stable and predictable.
#3.2 Dividend yielding funds:
After MIP’s another way to invest money after retirement is in dividend yielding mutual funds.
I am talking about those mutual funds that give regular payouts to its investors in form of dividends.
The income from dividend is distributed by mutual funds to unit holders.
One can invest another Rs 25 Lakhs in such dividend yielding fund.
These mutual fund companies focuses on blue chip companies that has high dividend payouts and yields.
Dividend income from blue chip companies are very predictable.
A dividend fund can yield dividends @ 6% per annum. But the best part of dividend yield is that it continues to grow over a period of time.
If we are buying a fund that is yielding 5% dividend, over a period of five years the yield will grow. At rate of 5% per annum Rs.25 lakhs will yield dividend > Rs 12,500 per month.
#3.3 Fixed Deposits:
One of the more used way to invest money after retirement is fixed deposit.
If one can invest Rs.30 Lakhs in fixed deposits, it will yield return of 6.5% per annum.
Fixed deposit has an option of interest withdrawal on monthly basis.
If one will invest Rs 30 Lakhs in banks fixed deposits, then it will generate a return of > Rs 16,000 per month.
#3.4 Savings Account:
The balance Rs 20 Lakhs shall be safely parked in banks savings account that will give a regular interest income of 3.5% per annum.
Regular quarterly income that can generated from savings account is Rs 6,500 per month.
This way the portfolio of Rs 1.0 Crore will generate regular income of Rs 50,000 per month.
The average return generated by investing Rs 1.0 crore in above ways is 6% per annum.
#Need 4 – Invest money for wealth creation
(Investing time horizon – 30 Years, Wealth to be Accumulated – Rs 5.0 Crores)
Young professionals in India earn well these days. Hence it becomes even more important for them to know the best way to invest their savings.
If you are one of the above individuals and you are born in India etc then you can consider yourself as fortunate.
The growth of these countries will allow you to cash good long term returns.
I know these young professionals do not have time to devote to stock research before investing. But the advantage that they have is the long time horizon ahead of them.
They can use this extended time horizon to gain maximum benefits from investment.
They can invest fearlessly in equity linked mutual fund schemes.
I will suggest them to expose themselves to 100% equity, till they get married and start a family.
Sustained and consistent investment in equity linked mutual funds can easily give returns of 15% per annum.
#4.1 First 8 years:
If we are investing Rs 10,000 per month, through SIP, in a diversified equity fund, then in 8 years the accumulated fund will be Rs 18.5 Lakh rupees.
#4.2 Next 22 Years:
I am assuming that after the first 8 years of working life, the individual is go the family way. Hence this bifurcation of 30 years time horizon (8 years + 22 years).
In first 8 years, the person has done SIP of Rs.10,000/month. This way he/she built a corpus of Rs.18.5 lakhs.
After 8 years, the individual can let the corpus of Rs.18.5 lakhs in this diversified equity fund for next 22 years.
Under such a long time horizon, the person can safely expect returns of 16%+.
This way after 22 years, the corpus of Rs.18.5 lakhs will become Rs.5 crore.
Often younger individuals gives too much emphasis on investing money and forget to get themselves properly insured.
Creating emergency savings funds is step one before one start investing.
Then make sure that you have medical insurance your life in insured.
Always keep your vehicle insurance updated.
But above all, a young professional must ensure that they are contributing full to income tax saving schemes.
These are some steps that are like preconditions to investing money.
One cannot miss these steps and start invest money in stocks, mutual funds etc.
So if one has not completed these steps already, it means they are not ready for investment.