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Got a question about your money? What you should or should not do with it?

Our expert Devang Shah has the answers.

I am 29 with a monthly take home of around Rs 25,000. I have two dependents, my wife and child. 

My life insurance premiums amount to Rs 30,000 per annum. I also have an ICICI Prudential life insurance plan where contributions amount to Rs 10,000 per annum.

In addition, I have taken a home loan towards which I pay Rs 72,000 per annum.

I would like to invest in mutual funds. Where must I begin?

- Nikhil Ashar

Dear Nikhil,

It is not possible for me to judge your cover from the premium you pay.

If you are paying a premium for a unit linked product, or any other insurance product that gives you some money back while you are alive, Rs 30,000 might mean very little cover.

But if you have taken a term insurance cover, it may be quite sufficient. A plain term cover is when the person you nominate gets the insured amount if you die and you (or the person nominated) get nothing if you live.

Investing in financial markets can get a little too technical if you miss the forest for the trees.

I would like to suggest a few pointers.

1. Mutual funds are simply vehicles of investments

Your real investments are the securities these mutual funds finally invest in. The final securities can be, for simplicity's sake, divided into equity (shares), debt (fixed return) and real estate (property).

Your real and more consequential decision is whether you should invest in equity, debt or real estate.

Selecting a good mutual fund is like choosing a good car and driver to ensure you reach your destination as per your plan.

Your returns will be generated by the fund's investments. For instance, the returns on an equity fund will be determined by the stocks your fund manager invests in and the state of the stock market.

2. Be practical and realistic

As a simple principle for a beginner, it would help you if you choose where to invest. In other words, how much should you invest in debt, equity and real estate.

Make this decision on the assumption that you will get the normal returns expected from such instruments. Don't invest on the assumption that you will beat the market. Don't invest with the assumption that you will get 40% returns from equity or 18% from debt.

Be realistic. Here's a rough estimate of the returns you will get depending on the kind of investment you choose (remember to factor in inflation, which will be around 5.5%), debt -- 6%, equity -- 16%, real estate -- 8%.

3. Invest according to your time horizon

Money that can be put away for 7-10 years can be invested in equity. Property might be okay for a slightly shorter time horizon, say 7-10 years. The rest must be invested in debt. 

4. Don't jump in and out of your investments

Your investment returns are substantially determined by your behaviour. If you get in and get out at the wrong times, a good investment will be no good for you.

Start by educating yourself about mutual funds. Invest in a floating rate income fund. These funds invest in fixed return investments that have a floating rate of interest, as against a fixed rate of interest.

Some low-risk, low-return debt funds are Templeton Floating Rate Income Fund and HDFC Floating Rate Fund.

Once you are comfortable with and understand the concept of mutual funds, you could start participating in equity.

Diversified equity funds such as Prudential ICICI Discovery Fund, Templeton India Growth Fund and HDFC Equity Fund are a lower risk than sectoral funds. Diversified equity funds invest in shares of various companies of various sectors. Sector funds invest only in stocks of a particular sector.

If you decide to take financial advice, which I know at some point you will consider, please consider fee-only planners. Going to a planner who gets commissions on what he sells will result in him trying to convince you to buy products he is selling and making money on.

All the best.

Illustration: Dominic Xavier

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